Bright Horizons Family Solutions(BFAM) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This part presents the unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements and their detailed notes for the periods ended June 30, 2020 and 2019 - The financial statements include Condensed Consolidated Balance Sheets, Statements of Income, Comprehensive Income (Loss), Changes in Stockholders' Equity, and Cash Flows[7][8][9][10][13][16][20][23] - The COVID-19 pandemic led to temporary closure of a significant portion of child care centers, resulting in $16.9 million impairment losses on long-lived assets for the six months ended June 30, 2020[28][29] - The Company received $39.6 million in government assistance (tax deferrals, tax credits, employee wage support) for the six months ended June 30, 2020[31] Condensed Consolidated Balance Sheets The balance sheets present the company's financial position as of June 30, 2020, and December 31, 2019, detailing key asset and liability changes | Metric (in thousands) | June 30, 2020 | December 31, 2019 | Change (vs. Dec 31, 2019) | | :-------------------------- | :------------ | :---------------- | :------------------------ | | Cash and cash equivalents | $270,442 | $27,872 | +$242,570 | | Accounts receivable — net | $221,532 | $148,855 | +$72,677 | | Total current assets | $576,921 | $228,888 | +$348,033 | | Total assets | $3,611,596 | $3,330,420 | +$281,176 | | Total current liabilities | $491,547 | $483,290 | +$8,257 | | Total liabilities | $2,413,321 | $2,359,152 | +$54,169 | | Total stockholders' equity | $1,198,275 | $971,268 | +$227,007 | Condensed Consolidated Statements of Income The income statements detail financial performance for the three and six months ended June 30, 2020 and 2019, reflecting significant declines in revenue and net income | Metric (in thousands) | 3 Months Ended Jun 30, 2020 | 3 Months Ended Jun 30, 2019 | Change (YoY) | 6 Months Ended Jun 30, 2020 | 6 Months Ended Jun 30, 2019 | Change (YoY) | | :-------------------------- | :-------------------------- | :-------------------------- | :----------- | :-------------------------- | :-------------------------- | :----------- | | Revenue | $293,772 | $528,060 | -44.3% | $800,095 | $1,029,818 | -22.3% | | Gross profit | $65,236 | $139,621 | -53.3% | $174,095 | $266,568 | -34.7% | | Income from operations | $8,114 | $74,833 | -89.2% | $51,395 | $137,743 | -62.7% | | Net income | $359 | $49,327 | -99.3% | $31,091 | $91,369 | -65.9% | | Common stock — basic EPS | $0.01 | $0.85 | -98.8% | $0.53 | $1.57 | -66.2% | | Common stock — diluted EPS | $0.01 | $0.83 | -98.8% | $0.52 | $1.55 | -66.5% | Condensed Consolidated Statements of Comprehensive Income (Loss) These statements present net income adjusted for other comprehensive income or loss, including foreign currency translation and unrealized gains/losses on hedges | Metric (in thousands) | 3 Months Ended Jun 30, 2020 | 3 Months Ended Jun 30, 2019 | 6 Months Ended Jun 30, 2020 | 6 Months Ended Jun 30, 2019 | | :-------------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income | $359 | $49,327 | $31,091 | $91,369 | | Foreign currency translation adjustments | $1,557 | $(10,796) | $(37,951) | $(3,818) | | Unrealized gain (loss) on cash flow hedges and investments, net of tax | $793 | $(4,303) | $(3,477) | $(7,170) | | Total other comprehensive income (loss) | $2,350 | $(15,099) | $(41,428) | $(10,988) | | Comprehensive income (loss) | $2,709 | $34,228 | $(10,337) | $80,381 | Condensed Consolidated Statements of Changes in Stockholders' Equity This section details changes in stockholders' equity for the three and six months ended June 30, 2020 and 2019, including stock issuances and compensation | Metric (in thousands) | Balance at Jan 1, 2020 | Issuance of common stock | Stock-based compensation expense | Shares received in net share settlement | Purchase of treasury stock | Retirement of treasury stock | Other comprehensive loss | Net income | Balance at Jun 30, 2020 | | :-------------------------------------------------- | :--------------------- | :----------------------- | :------------------------------- | :-------------------------------------- | :------------------------- | :--------------------------- | :----------------------- | :--------- | :---------------------- | | Common Stock (Amount) | $58 | $2 | — | — | — | $(1) | — | — | $60 | | Additional Paid-in Capital | $648,031 | $249,788 | $9,438 | $(7,715) | — | $(32,207) | — | — | $885,373 | | Accumulated Other Comprehensive Income (Loss) | $(50,331) | — | — | — | — | — | $(41,428) | — | $(91,759) | | Retained Earnings | $373,510 | — | — | — | — | — | — | $31,091 | $404,601 | | Total Stockholders' Equity | $971,268 | $249,790 | $9,438 | $(7,715) | $(32,208) | — | $(41,428) | $31,091 | $1,198,275 | Condensed Consolidated Statements of Cash Flows The cash flow statements show a significant increase in cash from financing activities in H1 2020, primarily due to common stock issuance | Metric (in thousands) | 6 Months Ended Jun 30, 2020 | 6 Months Ended Jun 30, 2019 | Change (YoY) | | :-------------------------------------------------- | :-------------------------- | :-------------------------- | :----------- | | Net cash provided by operating activities | $51,260 | $190,611 | -73.1% | | Net cash used in investing activities | $(28,275) | $(90,899) | +68.9% | | Net cash provided by (used in) financing activities | $221,470 | $(112,378) | +297.1% | | Net increase (decrease) in cash, cash equivalents and restricted cash | $243,547 | $(12,252) | N/A | | Cash, cash equivalents and restricted cash — end of period | $274,739 | $26,226 | +948.3% | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the financial statements, covering accounting policies and the COVID-19 pandemic's impact 1. Organization and Basis of Presentation This note details the company's business, geographical presence, accounting principles, and the COVID-19 pandemic's impact on liquidity - Bright Horizons provides center-based child care and early education, back-up child and adult/elder care, tuition assistance, student loan repayment program administration, and educational advisory services in the US, UK, Netherlands, Puerto Rico, Canada, and India[25] - The COVID-19 pandemic caused temporary closure of a significant portion of child care centers in March 2020; over 400 centers were operating as of June 30, 2020, with phased re-opening continuing[28] - In response to COVID-19, the Company implemented cost management and liquidity measures including employee furloughs, reduced discretionary spending, temporary executive compensation reductions, government assistance, renegotiated lease terms, increased revolving credit facility to $400 million, and raised $249.8 million from common stock issuance[29] - The allowance for credit losses increased from $1.226 million at January 1, 2020, to $8.351 million at June 30, 2020, due to increased demand for back-up care services and a deteriorating economic environment[32][33] 2. Revenue Recognition This note explains revenue streams from child care, back-up care, and educational advisory services, disaggregating revenue by segment and region - Revenue is comprised of full service center-based child care, back-up care (including self-sourced reimbursed care), and educational advisory services[36] - Revenue growth in the back-up care segment for the three months ended June 30, 2020, was primarily attributable to increased utilization for self-sourced reimbursed care due to the acute need for child care during temporary school and center closures[36] Disaggregated Revenue (3 Months Ended June 30, in thousands) | Segment | 2020 Revenue | 2019 Revenue | Change (YoY) | | :------------------------------ | :----------- | :----------- | :----------- | | Center-based child care | $137,306 | $438,580 | -68.7% | | Back-up care | $135,904 | $70,049 | +94.0% | | Educational advisory services | $20,562 | $19,431 | +5.8% | | Total | $293,772 | $528,060 | -44.3% | Disaggregated Revenue (6 Months Ended June 30, in thousands) | Segment | 2020 Revenue | 2019 Revenue | Change (YoY) | | :------------------------------ | :----------- | :----------- | :----------- | | Center-based child care | $548,697 | $856,900 | -35.9% | | Back-up care | $210,071 | $134,743 | +55.9% | | Educational advisory services | $41,327 | $38,175 | +8.2% | | Total | $800,095 | $1,029,818 | -22.3% | 3. Leases This note outlines operating lease arrangements, expenses, and liability maturity, including COVID-19's impact on lease payment renegotiations - The Company primarily has operating leases for child care centers, corporate offices, call centers, and office equipment; it does not have any finance leases[41] Lease Expense (in thousands) | Expense Type | 3 Months Ended Jun 30, 2020 | 3 Months Ended Jun 30, 2019 | Change (YoY) | 6 Months Ended Jun 30, 2020 | 6 Months Ended Jun 30, 2019 | Change (YoY) | | :------------------------ | :-------------------------- | :-------------------------- | :----------- | :-------------------------- | :-------------------------- | :----------- | | Operating lease expense | $38,667 | $30,429 | +27.1% | $72,528 | $61,389 | +18.1% | | Variable lease expense | $6,120 | $8,653 | -29.3% | $15,353 | $16,986 | -9.6% | | Total lease expense | $44,787 | $39,082 | +14.6% | $87,881 | $78,375 | +12.1% | - Operating lease expense for the three and six months ended June 30, 2020, includes an impairment loss on operating lease right-of-use assets of $5.2 million[43] - As of June 30, 2020, the Company had deferred lease payments of $11.7 million due to COVID-19, with the majority payable over the next 1.5 years[45] 4. Acquisitions This note details acquisition activities for 2020 and 2019, including centers acquired, cash consideration, and goodwill allocation - During the six months ended June 30, 2020, the Company acquired two centers in the United States for cash consideration of $4.3 million, recording $2.1 million in goodwill to the full service center-based child care segment[47] - During the year ended December 31, 2019, the Company acquired eight businesses (three centers and a tuition program management division in the US, four centers in the Netherlands, and one back-up care provider in the UK) for $53.3 million cash (net of cash acquired)[48] - Goodwill recorded from 2019 acquisitions included $25.4 million for back-up care, $14.0 million for educational advisory services, and $15.2 million for full service center-based child care[48] 5. Goodwill and Intangible Assets This note breaks down goodwill by segment and details intangible assets, including definite and indefinite-lived assets, with amortization schedules Goodwill Balance (in thousands) | Segment | Jan 1, 2019 | Dec 31, 2019 | Jun 30, 2020 | | :------------------------------ | :---------- | :----------- | :----------- | | Full service center-based child care | $1,155,705 | $1,181,230 | $1,161,873 | | Back-up care | $168,105 | $193,842 | $192,101 | | Educational advisory services | $23,801 | $37,801 | $37,676 | | Total Goodwill | $1,347,611 | $1,412,873 | $1,391,650 | Intangible Assets (June 30, 2020, in thousands) | Asset Type | Weighted Average Amortization Period | Cost | Accumulated Amortization | Net Carrying Amount | | :------------------------------ | :----------------------------------- | :-------- | :----------------------- | :------------------ | | Customer relationships | 14 years | $402,243 | $(297,036) | $105,207 | | Trade names (definite-lived) | 6 years | $10,154 | $(8,490) | $1,664 | | Trade names (indefinite-lived) | N/A | $180,618 | — | $180,618 | | Total Intangible Assets | | $593,015 | $(305,526) | $287,489 | Estimated Amortization Expense (in thousands) | Period | Estimated Amortization Expense | | :-------------- | :----------------------------- | | Remainder of 2020 | $15,332 | | 2021 | $28,083 | | 2022 | $25,774 | | 2023 | $24,905 | | 2024 | $11,051 | 6. Credit Arrangements and Debt Obligations This note details senior secured credit facilities, including term loans, revolving credit, interest rates, covenants, and derivative hedging instruments - The Company's senior secured credit facilities consist of a secured term loan facility (maturing November 7, 2023) and a multi-currency revolving credit facility[53] - The revolving credit facility's borrowing capacity was increased from $225 million to $400 million in April and May 2020, maturing on July 31, 2022, with no outstanding borrowings at June 30, 2020[53] Term Loans Outstanding (in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :--------------------------------------- | :------------ | :---------------- | | Term loans | $1,040,063 | $1,045,438 | | Deferred financing costs and original issue discount | $(4,512) | $(6,639) | | Total debt | $1,035,551 | $1,038,799 | - The Company uses variable-to-fixed interest rate swap agreements ($500 million notional, maturing October 31, 2021) and interest rate cap agreements ($800 million total notional, effective June 2020 and October 2021, expiring October 2023) to mitigate interest rate risk[57] 7. Earnings Per Share This note provides the computation of basic and diluted earnings per share using the two-class method for the periods ended June 30, 2020 and 2019 Basic Earnings Per Common Share (in thousands, except per share amounts) | Metric (in thousands, except per share) | 3 Months Ended Jun 30, 2020 | 3 Months Ended Jun 30, 2019 | 6 Months Ended Jun 30, 2020 | 6 Months Ended Jun 30, 2019 | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income | $359 | $49,327 | $31,091 | $91,369 | | Common stock — basic EPS | $0.01 | $0.85 | $0.53 | $1.57 | | Weighted average common shares outstanding — basic | 59,631,428 | 57,847,630 | 58,781,169 | 57,763,335 | Diluted Earnings Per Common Share (in thousands, except per share amounts) | Metric (in thousands, except per share) | 3 Months Ended Jun 30, 2020 | 3 Months Ended Jun 30, 2019 | 6 Months Ended Jun 30, 2020 | 6 Months Ended Jun 30, 2019 | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Earnings allocated to common stock | $358 | $49,093 | $30,947 | $90,942 | | Common stock — diluted EPS | $0.01 | $0.83 | $0.52 | $1.55 | | Weighted average common shares outstanding — diluted | 60,266,102 | 58,939,763 | 59,572,444 | 58,846,073 | 8. Income Taxes This note discusses effective income tax rates, impacted by income changes and stock-based compensation benefits, and details unrecognized tax benefits Effective Income Tax Rates | Period | 3 Months Ended Jun 30, 2020 | 3 Months Ended Jun 30, 2019 | 6 Months Ended Jun 30, 2020 | 6 Months Ended Jun 30, 2019 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Effective Tax Rate | (135.4)% | 21.8% | 3.0% | 19.9% | | Effective Tax Rate (pre-excess tax benefit) | ~29% | ~26% | ~29% | ~26% | - Excess tax benefits from stock-based compensation expense decreased tax expense by $1.7 million for the three months and $8.6 million for the six months ended June 30, 2020[68] - Unrecognized tax benefits were $3.7 million at June 30, 2020, with an expected change of $0 to $0.3 million over the next twelve months[68] 9. Fair Value Measurements This note explains the fair value measurement hierarchy and provides details for financial instruments, including debt, derivatives, and contingent consideration - Fair value measurements are classified using a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[69] - Long-term debt had a carrying value of $1.04 billion and an estimated fair value of $1.01 billion at June 30, 2020, classified as Level 1[72] - Derivative financial instruments (interest rate swaps and caps) are classified as Level 2, with interest rate swaps as a $7.6 million liability and interest rate caps as a $1.2 million asset at June 30, 2020[73] - Liabilities for contingent consideration, measured at $14.277 million at June 30, 2020, are classified as Level 3 due to the use of unobservable inputs in the valuation model[75][77] - Nonrecurring impairment losses of $16.9 million on fixed assets and operating lease right-of-use assets, and $2.1 million on an equity investment, were recognized for the six months ended June 30, 2020, and classified as Level 3 fair value measurements[77] 10. Accumulated Other Comprehensive Income (Loss) This note details components of accumulated other comprehensive income or loss, including foreign currency translation and unrealized gains/losses on hedges - Accumulated other comprehensive income (loss) is comprised of foreign currency translation adjustments and unrealized gains (losses) on cash flow hedges and investments, net of tax[81] Changes in Accumulated Other Comprehensive Income (Loss) by Component (Six months ended June 30, 2020, in thousands) | Component | Balance at Jan 1, 2020 | Net other comprehensive income (loss) | Balance at Jun 30, 2020 | | :------------------------------------------ | :--------------------- | :------------------------------------ | :---------------------- | | Foreign currency translation adjustments | $(47,835) | $(37,951) | $(85,786) | | Unrealized gain (loss) on interest rate swaps | $(2,566) | $(3,457) | $(6,023) | | Unrealized gain (loss) on interest rate caps | — | $(111) | $(111) | | Unrealized gain (loss) on investments | $70 | $91 | $161 | | Total | $(50,331) | $(41,428) | $(91,759) | 11. Segment Information This note provides disaggregated revenue and income from operations for the three reportable segments, highlighting COVID-19's impact on child care - The Company's three operating and reportable segments are full service center-based child care, back-up care, and educational advisory services[83] Revenue and Income (Loss) from Operations (3 Months Ended June 30, 2020, in thousands) | Segment | Revenue | Income (Loss) from Operations | | :------------------------------ | :--------- | :---------------------------- | | Full service center-based child care | $137,306 | $(71,842) | | Back-up care | $135,904 | $75,121 | | Educational advisory services | $20,562 | $4,835 | | Total | $293,772 | $8,114 | Revenue and Income (Loss) from Operations (6 Months Ended June 30, 2020, in thousands) | Segment | Revenue | Income (Loss) from Operations | | :------------------------------ | :--------- | :---------------------------- | | Full service center-based child care | $548,697 | $(55,095) | | Back-up care | $210,071 | $97,360 | | Educational advisory services | $41,327 | $9,130 | | Total | $800,095 | $51,395 | - For the six months ended June 30, 2020, the full service center-based child care segment's income (loss) from operations included $19.0 million in impairment costs and $4.4 million in center closure costs due to the COVID-19 pandemic[85] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial performance, condition, liquidity, and cash flows, focusing on the COVID-19 pandemic's impact - The report contains forward-looking statements that involve risks and uncertainties, particularly those related to the COVID-19 pandemic[87] - The Company is a leading provider of child care, early education, back-up care, and workforce education services, primarily under multi-year contracts with employers[89] - The COVID-19 pandemic substantially disrupted global operations, leading to temporary center closures; a phased re-opening commenced, with over 400 centers operating by June 30, 2020, and an expectation of over 85% re-opening by September 30, 2020[89] - Back-up care services, especially self-sourced reimbursed care, saw unprecedented demand and expansion, supporting the business's economics during the second quarter[89] - Measures implemented to manage costs and improve liquidity include employee furloughs, reduced discretionary spending, temporary executive compensation reductions, participation in government assistance programs, renegotiating lease terms, increasing the revolving credit facility, and raising $249.8 million from common stock issuance[91] Introduction, Overview and COVID-19 Update This section overviews the business, the COVID-19 pandemic's impact on global operations, including center closures and back-up care expansion, and mitigation measures - As of June 30, 2020, the Company managed 1,076 child care and early education centers, with over 400 operating after temporary closures due to COVID-19[89] - The Company expects to have more than 85% of its centers open by September 30, 2020, with re-opening guided by government requirements, client demand, and medical expert directives[89][91] - Back-up care and educational advisory services remained fully operational, with expanded back-up care services (especially self-sourced reimbursed care) meeting acute demand during the pandemic[89] - Cost management and liquidity measures include furloughing employees, reducing discretionary spending, temporary executive compensation reductions, participating in government assistance, renegotiating lease terms, increasing the revolving credit facility to $400 million, and raising $249.8 million from common stock issuance[91] Results of Operations This section analyzes revenue, costs, and net income for the three and six months ended June 30, 2020, highlighting COVID-19's adverse impact Financial Performance Summary (3 Months Ended June 30, in thousands) | Metric | 2020 | 2019 | Change (YoY) | | :-------------------------- | :---------- | :---------- | :----------- | | Revenue | $293,772 | $528,060 | -44.3% | | Cost of services | $228,536 | $388,439 | -41.2% | | Gross profit | $65,236 | $139,621 | -53.3% | | Selling, general and administrative expenses | $49,247 | $56,491 | -12.8% | | Income from operations | $8,114 | $74,833 | -89.2% | | Net income | $359 | $49,327 | -99.3% | Financial Performance Summary (6 Months Ended June 30, in thousands) | Metric | 2020 | 2019 | Change (YoY) | | :-------------------------- | :---------- | :---------- | :----------- | | Revenue | $800,095 | $1,029,818 | -22.3% | | Cost of services | $626,000 | $763,250 | -17.9% | | Gross profit | $174,095 | $266,568 | -34.7% | | Selling, general and administrative expenses | $106,616 | $112,366 | -5.1% | | Income from operations | $51,395 | $137,743 | -62.7% | | Net income | $31,091 | $91,369 | -65.9% | Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019 This sub-section compares Q2 2020 financial results to Q2 2019, highlighting child care revenue decline, back-up care growth, and the impact of impairment and cost reductions - Revenue decreased by $234.3 million (44%) to $293.8 million; full service child care revenue decreased by $301.3 million (69%), while back-up care revenue increased by $65.9 million (94%) due to unprecedented demand for self-sourced reimbursed care[95] - Cost of services decreased by $159.9 million (41%) to $228.5 million, primarily due to temporary center closures, furloughs, and government assistance, partially offset by $11.9 million in impairment costs and $4.4 million in center closure costs[96] - Income from operations decreased by $66.7 million (89%) to $8.1 million; the full service child care segment's income from operations decreased by $123.7 million (239%), while the back-up care segment's income from operations increased by $56.7 million (308%)[101] - Net interest expense decreased to $9.1 million from $11.7 million due to decreased borrowings and lower interest rates[102] - The Company recorded an income tax benefit of $1.4 million at an effective rate of (135%), compared to an expense of $13.8 million at 22% in the prior year, influenced by changes in income (loss) before tax and excess tax benefits[103] Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019 This sub-section compares H1 2020 financial results to H1 2019, showing similar trends to quarterly results with a broader impact - Revenue decreased by $229.7 million (22%) to $0.8 billion; full service child care revenue decreased by $308.2 million (36%), while back-up care revenue increased by $75.3 million (56%)[107] - Cost of services decreased by $137.3 million (18%) to $0.6 billion, driven by temporary center closures, furloughs, and government assistance, partially offset by $16.9 million in impairment costs and $4.4 million in center closure costs[108] - Income from operations decreased by $86.3 million (63%) to $51.4 million; the full service child care segment's income from operations decreased by $148.5 million (159%), while the back-up care segment's income from operations increased by $61.8 million (174%)[112] - Net interest expense decreased to $19.3 million from $23.7 million due to decreased borrowings[113] - The Company recorded an income tax expense of $1.0 million at an effective rate of 3.0%, compared to an expense of $22.7 million at 20% in the prior year, influenced by changes in income (loss) before tax and excess tax benefits[114] Non-GAAP Financial Measures and Reconciliation This section defines and reconciles non-GAAP financial measures to GAAP equivalents, explaining their utility and limitations - Non-GAAP financial measures include Adjusted EBITDA, Adjusted Income from Operations, Adjusted Net Income, and Diluted Adjusted Earnings per Common Share[118][121] Non-GAAP Financial Measures Reconciliation (3 Months Ended June 30, in thousands) | Metric | 2020 | 2019 | | :-------------------------- | :---------- | :---------- | | Net income (GAAP) | $359 | $49,327 | | EBITDA | $35,773 | $101,718 | | Adjusted EBITDA | $60,025 | $105,885 | | Income from operations (GAAP) | $8,114 | $74,833 | | Adjusted income from operations | $27,211 | $74,833 | | Adjusted net income | $26,445 | $58,458 | | Diluted adjusted EPS | $0.44 | $0.99 | Non-GAAP Financial Measures Reconciliation (6 Months Ended June 30, in thousands) | Metric | 2020 | 2019 | | :-------------------------- | :---------- | :---------- | | Net income (GAAP) | $31,091 | $91,369 | | EBITDA | $107,275 | $191,090 | | Adjusted EBITDA | $141,483 | $199,723 | | Income from operations (GAAP) | $51,395 | $137,743 | | Adjusted income from operations | $76,165 | $138,176 | | Adjusted net income | $70,091 | $106,270 | | Diluted adjusted EPS | $1.18 | $1.81 | - Adjustments include COVID-19 related costs (impairment, closure costs), stock-based compensation expense, other costs (new corporate headquarters occupancy), and non-cash operating lease expense[119][120] - These non-GAAP measures are used to assess operating performance, evaluate ability to service debt, and as key performance indicators for incentive compensation, but have limitations as analytical tools and should not replace GAAP measures[121] Liquidity and Capital Resources This section discusses the company's liquidity, cash requirements, and sources, including measures taken to manage liquidity during the COVID-19 pandemic - Primary cash requirements are for ongoing operations and debt financing obligations; primary liquidity sources are existing cash, cash flows from operations, and borrowings under the revolving credit facility[123] - Cash and cash equivalents (including restricted cash) increased significantly to $274.7 million at June 30, 2020, from $31.2 million at December 31, 2019, largely due to $249.8 million net proceeds from common stock issuance in April 2020[123] - Working capital improved to a positive $85.4 million at June 30, 2020, from a deficit of $254.4 million at December 31, 2019, primarily due to the capital raise[123] - The Company received $39.6 million in government assistance (tax deferrals and wage support) for the six months ended June 30, 2020, and deferred $11.7 million in lease payments[123][124] - Share repurchases were temporarily suspended due to COVID-19 after $32.2 million was repurchased in H1 2020, with $194.9 million remaining available under the program[124] - Management believes current funds, cash flows, and the revolving credit facility will be adequate for at least the next twelve months, but prolonged disruptions may necessitate additional financing[125] Cash Provided by Operating Activities This sub-section explains the decrease in cash from operating activities for H1 2020, primarily due to lower net income and working capital changes - Cash provided by operating activities decreased to $51.3 million for the six months ended June 30, 2020, from $190.6 million in the prior year[127] - The decrease was primarily due to a $60.3 million decrease in net income and changes in working capital, including significant increases in accounts receivable from the back-up care segment and an increase in other current assets for government support programs[127] Cash Used in Investing Activities This sub-section details the decrease in cash used in investing activities for H1 2020, due to lower fixed asset additions and acquisitions - Cash used in investing activities decreased to $28.3 million for the six months ended June 30, 2020, from $90.9 million in the prior year[128] - The decrease was primarily due to a lower volume of fixed asset additions ($25.0 million net investment vs. $45.0 million in H1 2019) and acquisitions ($4.3 million for two centers vs. $25.9 million for five businesses in H1 2019) as investments were prioritized due to COVID-19[128] Cash Provided by (Used in) Financing Activities This sub-section explains the shift from cash used in financing activities in H1 2019 to cash provided in H1 2020, driven by common stock issuance - Cash provided by financing activities was $221.5 million for the six months ended June 30, 2020, a significant shift from $112.4 million cash used in the prior year[129] - The increase was primarily due to $249.9 million from common stock issuance and $21.2 million from stock option exercises/restricted stock issuance, partially offset by $32.7 million for share repurchases and $7.7 million for taxes on stock settlements[129] Debt This sub-section updates on senior secured credit facilities, including term loans and revolving credit, highlighting increased capacity and hedging - Outstanding term loan borrowings were $1,040.1 million at June 30, 2020[131] - The revolving credit facility's capacity was increased to $400 million in April and May 2020, with the full line available for borrowings at June 30, 2020[131] - The Company uses $500 million notional interest rate swap agreements and $800 million notional interest rate cap agreements to manage variable interest rate exposure[131][134] - The Company was in compliance with its financial covenants under the senior secured credit facilities at June 30, 2020[131] Off-Balance Sheet Arrangements This sub-section confirms the absence of off-balance sheet arrangements as of June 30, 2020 - As of June 30, 2020, the Company had no off-balance sheet arrangements[132] Critical Accounting Policies This sub-section refers to the Annual Report on Form 10-K for critical accounting policies, noting no material changes since December 31, 2019 - There have been no material changes to the Company's critical accounting policies since December 31, 2019[133] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses market risk exposure from interest rates and foreign currency, noting no material changes since December 31, 2019, except for COVID-19 effects and new interest rate caps - The Company is exposed to market risk from changes in interest rates and fluctuations in foreign currency exchange rates[134] - No material changes in market risk exposure since December 31, 2019, other than the broad effects of the COVID-19 pandemic[134] - In June 2020, the Company entered into interest rate cap agreements with a total notional value of $800 million to provide interest rate protection if the one-month LIBOR rate increases above 1%[134] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures and no material changes in internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2020[135] - There have been no material changes in internal control over financial reporting during the quarter ended June 30, 2020, and no material impact from the COVID-19 pandemic[136] PART II. OTHER INFORMATION This part provides other information, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section states the company is subject to ordinary course legal claims, generally covered by insurance, with no expected material adverse effect - The Company is subject to claims, suits, and matters arising in the ordinary course of business[138] - The resolution of such legal matters is not expected to have a material adverse effect on the Company's financial condition, results of operations, or cash flows[138] - There is no assurance that the Company's insurance will be adequate to cover all potential liabilities[138] Item 1A. Risk Factors This section refers to general risk factors and highlights the new material risk related to the global COVID-19 pandemic and its potential adverse impacts - The global COVID-19 pandemic has been added as a material risk factor, significantly disrupting the business and continuing to adversely impact financial condition and operating results[139] - Potential adverse impacts of COVID-19 include continued or permanent center closures, reduced enrollment, inability to maintain adequate staff, shifting demand, incremental costs for health protocols, decreased revenues from renegotiated contracts, deterioration in accounts receivable, inability to implement growth strategies, delayed re-openings, legal actions, reduced liquidity, and potential credit rating downgrades[139][140][141] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports no unregistered equity sales in Q2 2020, except for a private placement of common stock generating $249.8 million in net proceeds - No unregistered sales of equity securities occurred during the three months ended June 30, 2020, except for the private placement of 2,138,580 shares of common stock to Durable Capital Master Fund LP on April 21, 2020[142] - The Company received net proceeds of $249.8 million from the common stock offering[142] - During April 2020, 467 shares were retired in connection with tax withholding obligations for restricted stock awards, which are not part of the $300 million share repurchase program[143] - As of June 30, 2020, $194.9 million remained available under the share repurchase program, which has been temporarily suspended[143] Item 3. Defaults Upon Senior Securities This section confirms no defaults upon senior securities - There were no defaults upon senior securities[144] Item 4. Mine Safety Disclosures This section states that this item is not applicable to the company - This item is not applicable to the Company[144] Item 5. Other Information This section states no other information is reported under this item - No other information is applicable or reported under this item[144] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including various agreements and certifications - Exhibits include the Stock Purchase Agreement, Fourth and Fifth Amendments to the Credit Agreement, Principal Executive and Financial Officer Certifications (Sections 302 and 906), and Inline XBRL documents[145] SIGNATURES This section contains the signature page, confirming the report was duly authorized and signed by the Chief Financial Officer - The report was signed by Elizabeth Boland, Chief Financial Officer, on August 10, 2020[148]