Organization and Basis of Presentation

9 Months Ended

Sep. 30, 2020

ORGANIZATION AND BASIS OF PRESENTATION

Organization — Bright Horizons Family Solutions Inc. (“Bright Horizons” or the “Company”) provides center-based child care and early education, back-up child and adult/elder care, tuition assistance and student loan repayment program administration, educational advisory services, and other support services for employers and families in the United States, the United Kingdom, the Netherlands, Puerto Rico and India. During the three months ended September 30, 2020, the Company divested its child care center business in Canada and ceased to operate its two centers in that geography. The Company provides services designed to help families, employers and their employees better integrate work and family life, primarily under multi-year contracts with employers who offer child care, dependent care, and workforce education services, as part of their employee benefits packages in an effort to support employees across life and career stages and improve employee engagement.

Basis of Presentation — The accompanying unaudited condensed consolidated balance sheet as of September 30, 2020 and the condensed consolidated statements of income (loss), comprehensive income (loss), changes in stockholders’ equity, and cash flows for the interim periods ended September 30, 2020 and 2019 have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required in accordance with U.S. GAAP for complete financial statements and should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Certain reclassifications have been made to prior period amounts within the condensed consolidated balance sheet and the operating section of the condensed consolidated statement of cash flows to conform to the current period presentation.

In the opinion of the Company’s management, the Company’s unaudited condensed consolidated balance sheet as of September 30, 2020 and the condensed consolidated statements of income (loss), comprehensive income (loss), changes in stockholders’ equity, and cash flows for the interim periods ended September 30, 2020 and 2019, reflect all adjustments (consisting only of normal and recurring adjustments) necessary to present fairly the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.

Stockholders’ Equity — The board of directors of the Company authorized a share repurchase program of up to $300 million of the Company’s outstanding common stock effective June 12, 2018. The share repurchase program has no expiration date. The shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions, under Rule 10b5-1 plans, or by other means in accordance with federal securities laws. At September 30, 2020, $194.9 million remained available under the repurchase program. The Company has temporarily suspended share repurchases due to the impact of COVID-19 as the Company prioritizes investments to the most critical operating areas.

On April 21, 2020, the Company completed the issuance and sale of 2,138,580 shares of common stock, par value $0.001 per share, to Durable Capital Master Fund LP at a price of $116.90 per share. The Company subsequently filed a registration statement to register the resale of these shares in accordance with the terms of the purchase agreement. The Company received net proceeds from the offering of $249.8 million.

COVID-19 Pandemic — In March 2020, the Company began to experience the impact of the COVID-19 pandemic on its global operations, as required business and school closures and shelter-in-place government mandates resulted in the temporary closure of a significant portion of the Company’s child care centers. The Company continued to operate critical health care client and "hub" centers to provide care and support services to the children whose parents work on the front lines of the response to the pandemic. Countries and local jurisdictions have since lifted certain restrictions, and the Company has re-opened a significant portion of the temporarily closed centers. As of September 30, 2020, the Company operated 1,026 child care and early education centers with the capacity to serve approximately 115,000 children and their families. As of September 30, 2020, approximately 900 of its child care centers (with a total capacity of approximately 100,000) were open, including approximately 540 centers in the United States, approximately 300 centers in the United Kingdom, and 62 centers in the Netherlands. The Company's centers are operating with specific COVID-19 protocols in place in order to protect the health and safety of children, families and staff, including social distancing procedures for pick-up and drop-off, daily health checks, the use of face masks by the Company’s staff, limited group sizes, and enhanced hygiene and cleaning practices. The Company is focused on the re-enrollment and ramping of open centers, while also continuing to phase the remaining center re-openings through the remainder of 2020 and into 2021, as conditions permit. As the Company continues to analyze the current environment, it may decide to close or not re-open certain centers in locations where demand and economic trends have shifted. During the three months ended September 30, 2020, the Company added five new centers and permanently closed 55 centers, for a total of 58 net center reductions in 2020. The Company’s back-up care and educational advisory services have remained fully operational to clients and their employees. Due to the acute need for child care support during this pandemic, the Company expanded back-up care services and the availability of self-sourced reimbursed care in the second quarter; during the three months ended September 30, 2020, the temporary use of self-sourced reimbursed care significantly decreased as demand for back-up care started to shift toward more traditional in-center and in-home delivery of back-up care solutions.

As a result of the economic effects of the COVID-19 pandemic, the Company considered whether these conditions indicated it was more likely than not that the Company’s $1.4 billion in goodwill and $180.9 million in indefinite-lived intangible assets were impaired. Based on the facts and circumstances as of September 30, 2020, the Company determined it was more likely than not that the fair value of its reporting units and indefinite-lived intangible assets exceeded their carrying amount and, therefore, an interim impairment analysis was not required.

In addition, the Company reviewed its long-lived assets, including operating lease right-of-use assets and amortizable intangible assets, to determine whether these conditions indicated that the carrying amount of such assets may not be recoverable. During the three and nine months ended September 30, 2020, the Company recognized a $1.7 million and $18.6 million impairment loss on long-lived assets, respectively, for certain centers that are unlikely to recover the carrying amount of their long-lived assets due to the operational disruption caused by the pandemic, including certain locations that the Company has decided to not re-open or expects not to continue operating on a long-term basis. Given the current risks and uncertainties associated with the COVID-19 pandemic and its impact on the Company's operations, additional impairment losses may occur.

The broad effects of COVID-19, its duration and scope of the ongoing disruption, including the pace of re-ramping of enrollment at centers that have re-opened, cannot be predicted and is affected by many interdependent variables and decisions by government authorities as well as the Company’s client partners, and by any continued developments in the persistence and treatment of COVID-19. The Company cannot anticipate how long it will take for re-opened centers to reach typical enrollment levels and there is no assurance that centers currently open will continue to operate. While the Company has experienced increased demand for back-up care services during the pandemic, such as in-home care and self-sourced reimbursed care, and more limited disruption to providing educational advisory services, these conditions and trends may not continue in subsequent periods. As businesses and families continue to adapt to changing conditions, the Company has seen a shift in back-up care services toward the more traditional in-center and in-home service delivery as use gradually re-ramps to pre-COVID-19 levels, while the temporary use of self-sourced reimbursed care decreased during the third quarter. Given these factors, the Company expects the effects of COVID-19 to continue to adversely impact the results of its operations for the remainder of 2020 and into 2021.

During the temporary closure of a significant portion of the Company's child care centers, the Company implemented measures to mitigate the impact on the Company's financial position and operations, as well as improve liquidity and access to financial resources. Although the Company experienced modest improvement to revenue during the three months ended September 30, 2020 compared to the second quarter of 2020, the Company continues to monitor the ongoing disruption and to deploy measures, as needed, to mitigate the impact on the Company's financial position and operations. These measures include:

•furloughing a significant portion of the Company’s employees in proportion to the number of center closures, including center personnel for temporarily closed centers and related support functions in the Company’s corporate offices;

•reducing discretionary spending and overhead costs, while prioritizing investments that support current operations and deferring to future periods nonessential investments;

•temporary voluntary reductions in compensation to certain executive officers and board members;

•participating in government assistance programs, including tax deferrals, tax credits and employee wage support;

•renegotiating payment terms with vendors and landlords;

•temporary suspension of share repurchases;

•amending the Company’s credit agreement in April 2020 and May 2020 to increase the borrowing capacity of the Company’s revolving credit facility from $225 million to $400 million; and,

•raising $249.8 million in net proceeds from the issuance and sale of common stock in April 2020.

In light of these actions and based on the Company’s assumptions about the continued impact of COVID-19 on its operations, the Company believes it has sufficient liquidity to satisfy its obligations for at least the next twelve months. Refer to Note 6, Credit Arrangements and Debt Obligations, for additional information on the amendments to the Company’s credit agreement.

Government Assistance — The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the United States, which is an economic aid package to help mitigate the impact of the pandemic. Additionally, other foreign governmental legislation that provides relief provisions has been enacted in response to the economic impact of COVID-19. The Company has participated in certain government assistance programs, including availing itself of certain tax deferrals and tax credits allowed pursuant to the CARES Act in the United States, as well as certain tax deferrals, tax credits, and employee wage support in the United Kingdom, and may continue to do so in the future. Governmental assistance received is recorded on the consolidated statement of income as a reduction to the related expenses that the assistance is intended to defray. During the three and nine months ended September 30, 2020, $20.3 million and $61.5 million was recorded as a reduction to cost of services, respectively, in relation to these benefits. As of September 30, 2020, $16.0 million was recorded in prepaid expenses and other current assets on the consolidated balance sheet for amounts due from government assistance programs. Additionally, approximately $3.0 million and $12.4 million was recorded in accounts payable and accrued expenses and other long-term liabilities, respectively, related to payroll tax deferrals.

Recently Adopted Pronouncements — On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the existing guidance on the accounting for credit losses of certain financial instruments. This guidance requires entities to recognize the expected credit loss over the lifetime of certain financial instruments and modifies the impairment model for available-for-sale debt securities. This standard is applied by recording a cumulative effect adjustment to retained earnings upon adoption. There was no impact to the Company’s consolidated financial statements upon the adoption of this guidance.

The Company generates accounts receivable from fees charged to parents and employer sponsors, which are generally billed monthly as services are rendered or in advance, and are classified as short-term. The Company monitors collections and maintains a provision for expected credit losses based on historical trends, current conditions, and relevant forecasted information, in addition to provisions established for specific collection issues that have been identified. Activity in the allowance for credit losses is as follows (in thousands):


	Nine months ended September 30, 2020
Beginning balance at January 1, 2020	$	1,226
Provision	3,625
Write-offs and recoveries	(1,024)
Ending balance at September 30, 2020	$	3,827

The Company’s investments in debt securities, which were classified as available-for-sale, are further disclosed in Note 9, Fair Value Measurements. As of September 30, 2020, the available-for-sale debt securities are not in an unrealized loss position, and therefore there is no allowance for credit losses.

Recently Issued Pronouncements — In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The standard removes certain exceptions to the general principles in Topic 740 and improves the consistent application of U.S. GAAP by clarifying and amending certain areas of the existing guidance. This ASU is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, with early adoption permitted. The Company is in the process of evaluating the impact of adoption of this standard, but does not expect it will have a material impact on the Company’s consolidated financial statements and related disclosures.