# BRIGHT HORIZONS FAMILY SOLUTIONS INC. (BFAM) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from BRIGHT HORIZONS FAMILY SOLUTIONS INC.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1437578/000143757822000007/bfam-20211231.htm
Accession: 0001437578-22-000007
Filing date: 2022-02-25
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/BFAM/
All MD&A years: /company/BFAM/mda/
Next year: /company/BFAM/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and related notes appearing in Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and generally contain words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” “anticipates” or similar expressions. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied by the forward-looking statements. Forward-looking statements are based on current expectations and assumptions and currently available data and are neither predictions nor guarantees of future events or performance. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. See “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” for a discussion of factors that could cause our actual results to differ from those expressed or implied by forward-looking statements.

Overview

We are a leading provider of high-quality early education and child care, dependent care and workforce education services that are designed to help families, employers and their employees solve the challenges of the modern workforce and thrive personally and professionally. We provide services primarily under multi-year contracts with employers who offer early education and child care, back-up care, and educational advisory and other services as part of their employee benefits packages in an effort to support employees across life and career stages and to improve recruitment, employee engagement, productivity, retention, and career advancement.

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At December 31, 2021, we operated 1,014 early education and child care centers, consisting of 650 centers in North America and 364 centers in Europe. We have the capacity to serve approximately 114,000 children and their families in the United States, the United Kingdom, the Netherlands and India. We seek to cluster centers in geographic areas to enhance operating efficiencies and to create a leading market presence. At December 31, 2021, 977, or 96%, of our early education and child care centers were open.

At December 31, 2021, we had more than 1,350 client relationships with employers across a diverse array of industries, including more than 200 Fortune 500 companies and more than 80 of Working Mother magazine’s 2021 “100 Best Companies.” At December 31, 2021, we managed child care centers on behalf of single employers in the following industries and also managed lease/consortium locations in approximately the following proportions:

[[GREPCENT_TABLE]]
[["","Percentage of Centers"],["Classification","North America","","Europe"],["Employer locations:"],["Healthcare and Pharmaceuticals","20.0","%","","2.0","%"],["Government and Higher Education","15.0","","","4.0"],["Financial Services","7.5","","","2.0"],["Consumer","7.5","","","\u2014"],["Professional Services and Other","5.0","","","\u2014"],["Technology","5.0","","","1.0"],["Industrial/Manufacturing","2.5","","","1.0"],["","62.5","","","10.0"],["Lease/consortium locations","37.5","","","90.0"],["","100.0","%","","100.0","%"]]
[[/GREPCENT_TABLE]]

Our reportable segments are comprised of (1) full service center-based child care, (2) back-up care, and (3) educational advisory and other services. Full service center-based child care includes traditional center-based early education and child care, preschool and elementary education. Back-up care includes center-based back-up child care, in-home care for children and adult/elder dependents, school age camps, virtual tutoring, and self-sourced reimbursed care. Educational advisory and other services primarily consist of tuition assistance and student loan repayment program administration, workforce education, related educational advising, college admissions advisory services, and Sittercity, an online marketplace for families and caregivers. Additional information about our operations, structure and services is included in “Business — Our Operations” in Item 1 of this Annual Report on Form 10-K. Additional segment information is included in Note 17, Segment and Geographic Information, to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

COVID-19 Pandemic and 2021 Performance Factors

Since March 2020, our global operations have been significantly impacted by the ongoing COVID-19 pandemic and the measures undertaken to prevent its spread. During the early stages of the pandemic, most of our child care centers were temporarily closed. We responded by focusing on health and safety, supporting clients and their essential frontline workers and pivoting to expand back-up care solutions for clients and employees to meet the surge in need and demand. While nearly all of our centers have subsequently re-opened, we continue to be impacted by the ongoing effects of COVID-19, including the resurgence of infections and variants of the virus, which impacted enrollment growth, as well as the challenges of managing precautionary and preventative measures such as vaccination and mask mandates, virus exposures affecting our staff and families who attend our centers, and disrupted staff availability. We have and will continue to monitor and respond to the changing conditions, challenges and disruptions resulting from the COVID-19 pandemic, including labor constraints affecting the early education and child care industry, as well as the changing needs of clients, families and children. We remain focused on our strategic priorities to deliver high quality education and care services, connect across our service lines, extend our impact on new customers and clients, and preserve our strong culture. Delays in client and business return-to-office, changing workplace trends, and increased competition for labor, particularly for teaching staff, may temporarily slow our overall recovery and impact enrollment. It remains difficult to predict the full impact of the pandemic, but we remain committed to families, clients and our employees. In 2022, we continue to focus on growing enrollment in our centers and expanding the delivery of back-up use across our network of providers.

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We remain confident in our business model, the strength and breadth of our client partnerships, the strength of our balance sheet and liquidity position, and our ability to continue to respond to changing market conditions. However, the broad effects of COVID-19, its duration and the scope of ongoing and related disruptions cannot be predicted and are affected by many interdependent variables and decisions by government authorities and our client partners, as well as demand, economic, workforce and labor market trends, the availability, adoption and effectiveness of vaccines among the public, teachers and young children, and developments in the persistence and treatment of COVID-19.

Our ability to fully return to the operating income levels at which we operated prior to COVID-19, and to continue to increase operating income in the future will depend upon our ability to continue to regain and sustain the following characteristics of our business and our strategic growth priorities:

•maintenance and incremental growth of enrollment in our mature and ramping centers, and cost management in response to changes in enrollment in our centers,

•effective pricing strategies, including annual tuition increases that correlate with expected annual increases in personnel costs, including wages and benefits, and additional pricing actions to accommodate higher operating costs and the impact of persistent inflation,

•additional growth in expanded service offerings and cross-selling of services to clients,

•successful identification and integration of acquisitions and transitions of management of centers, and

•successful management and improvement of underperforming centers.

Results of Operations

The following table sets forth statement of income data as a percentage of revenue for the three years ended December 31, 2021, 2020 and 2019:

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2021","","2020","","2019"],["","(In thousands, except percentages)"],["Revenue","$","1,755,307","","","100.0","%","","$","1,515,093","","","100.0","%","","$","2,062,017","","","100.0","%"],["Cost of services","1,340,296","","","76.4","%","","1,210,544","","","79.9","%","","1,539,081","","","74.6","%"],["Gross profit","415,011","","","23.6","%","","304,549","","","20.1","%","","522,936","","","25.4","%"],["Selling, general and administrative expenses","256,821","","","14.6","%","","219,563","","","14.5","%","","221,496","","","10.7","%"],["Amortization of intangible assets","29,172","","","1.6","%","","31,652","","","2.1","%","","33,621","","","1.7","%"],["Income from operations","129,018","","","7.4","%","","53,334","","","3.5","%","","267,819","","","13.0","%"],["Loss on extinguishment of debt","(2,571)","","","(0.2)","%","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%"],["Interest expense \u2014 net","(36,099)","","","(2.1)","%","","(37,682)","","","(2.5)","%","","(45,154)","","","(2.2)","%"],["Income before income tax","90,348","","","5.1","%","","15,652","","","1.0","%","","222,665","","","10.8","%"],["Income tax benefit (expense)","(19,889)","","","(1.1)","%","","11,340","","","0.8","%","","(42,279)","","","(2.1)","%"],["Net income","$","70,459","","","4.0","%","","$","26,992","","","1.8","%","","$","180,386","","","8.7","%"],["Adjusted EBITDA (1)","$","272,068","","","15.5","%","","$","224,396","","","14.8","%","","$","394,857","","","19.1","%"],["Adjusted income from operations (1)","$","140,178","","","8.0","%","","$","91,738","","","6.1","%","","$","268,445","","","13.0","%"],["Adjusted net income (1)","$","121,396","","","6.9","%","","$","93,549","","","6.2","%","","$","216,604","","","10.5","%"]]
[[/GREPCENT_TABLE]]

(1)Adjusted EBITDA, adjusted income from operations and adjusted net income are non-GAAP financial measures and are not determined in accordance with accounting principles generally accepted in the United States (“GAAP”). Refer to “Non-GAAP Financial Measures and Reconciliation” below for a reconciliation of these non-GAAP financial measures to their respective measures determined under GAAP.

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Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020

Revenue. Revenue increased by $240.2 million, or 16%, to $1.8 billion for the year ended December 31, 2021 from $1.5 billion for the prior year. The following table summarizes the revenue and percentage of total revenue for each of our segments for the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2021","","2020","","Change 2021 vs 2020"],["","(in thousands, except percentages)"],["Full service center-based child care","$","1,297,208","","","73.9","%","","$","1,032,266","","","68.2","%","","$","264,942","","","25.7","%"],["Tuition","1,145,723","","","88.3","%","","849,405","","","82.3","%","","296,318","","","34.9","%"],["Management fees and operating subsidies","151,485","","","11.7","%","","182,861","","","17.7","%","","(31,376)","","","(17.2)","%"],["Back-up care","351,103","","","20.0","%","","388,294","","","25.6","%","","(37,191)","","","(9.6)","%"],["Educational advisory and other services","106,996","","","6.1","%","","94,533","","","6.2","%","","12,463","","","13.2","%"],["Total revenue","$","1,755,307","","","100.0","%","","$","1,515,093","","","100.0","%","","$","240,214","","","15.9","%"]]
[[/GREPCENT_TABLE]]

Revenue generated by the full service center-based child care segment for the year ended December 31, 2021 increased by $264.9 million, or 26%, when compared to the prior year. Revenue growth in this segment was attributable to enrollment increases in our open centers and the re-opening of our temporarily closed centers. Tuition revenue increased by $296.3 million, or 35%, when compared to the prior year, on a 28% increase in enrollment. While enrollment in our centers continues to improve, our centers are operating below pre-COVID-19 enrollment levels as the ongoing disruption of the pandemic and labor market challenges have slowed the recovery. We expect continued revenue improvement throughout 2022. Higher foreign currency exchange rates for our United Kingdom and Netherlands operations also contributed to our revenue growth, which increased 2021 tuition revenue by approximately 2%, or $16.7 million. Management fees and operating subsidies from employer sponsors decreased $31.4 million, or 17%, due to lower operating subsidies required to support center operations as a result of the increase in enrollment and the associated tuition revenue, and due to the funding received from government support programs that reduced certain operating costs, which impacted the related operating subsidies.

Revenue generated by back-up care services in the year ended December 31, 2021 decreased by $37.2 million, or 10%, when compared to the prior year. While we had gains from expanded sales to new clients, increased utilization from existing clients, and increases in traditional in-center and in-home use in 2021, back-up care revenue decreased compared to the prior year as 2020 benefited from significant demand for back-up care services (primarily for self-sourced reimbursed care) during the early stages of the pandemic when other care alternatives were not available. We expect traditional in-center and in-home use to continue to improve throughout 2022. An acquisition completed in 2021 contributed $10.3 million to this segment during the year.

Revenue generated by educational advisory and other services in the year ended December 31, 2021 increased by $12.5 million, or 13%, when compared to the prior year. Revenue growth in this segment was primarily attributable to contributions from sales to new clients and increased utilization from existing clients. An acquisition completed in 2020 contributed $6.9 million to the growth of this segment in 2021.

Cost of Services. Cost of services increased $129.8 million, or 11%, to $1.3 billion for the year ended December 31, 2021 from $1.2 billion for the prior year.

Cost of services in the full service center-based child care segment increased by $99.6 million, or 10%, to $1.1 billion in the year ended December 31, 2021, when compared to the prior year. The increase in cost of services is primarily associated with the enrollment increase in our centers and the re-opening of our temporarily closed centers. Funding from government support programs reduced certain payroll and other operating expenses in 2021 by a total of $50.9 million, partially offset by impairment costs of $10.6 million related to long-lived assets. Cost of services in 2020 included a reduction in certain payroll and operating expenses of $83.5 million associated with funding from government support programs, partially offset by impairment costs of $26.2 million related to long-lived assets and center closure costs of $6.6 million associated with the permanent closure of certain centers, including related severance and facilities costs.

Cost of services in the back-up care segment increased by $24.9 million, or 17%, to $170.0 million in the year ended December 31, 2021, when compared to the prior year. Cost of services in 2020 included impairment costs of $2.1 million related to an equity investment. After taking these charges into account, cost of services increased by $27.0 million, or 19%, in the year ended December 31, 2021, primarily associated with the effects of a change in the revenue mix and the return to higher levels of traditional in-center and in-home care in 2021 compared to more significant self-sourced reimbursed care in the prior year. Included in cost of services for 2021 were increased care provider fees generated by the increase in utilization levels of traditional in-center and in-home care over the prior year, and continued investment in personnel, marketing and technology to support our customer user experience and service delivery.

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Cost of services in the educational advisory and other services segment increased by $5.2 million, or 12%, to $49.6 million in 2021 due to costs related to delivering services to the expanding customer base and continued investments in personnel, marketing and technology.

Gross Profit. Gross profit increased by $110.5 million, or 36%, to $415.0 million for the year ended December 31, 2021 from $304.5 million for the prior year. Gross profit margin was 24% of revenue for the year ended December 31, 2021, an increase of approximately 4% compared to the year ended December 31, 2020. The increase was primarily due to improved margins in the full service center-based child care segment from enrollment increases at open centers and the re-opening of temporarily closed centers, partially offset by reduced contributions from our back-up care services as a result of the shift in the service delivery mix back towards pre-COVID-19 levels and margins, with increasing utilization of traditional in-home and center-based care and a decrease in self-sourced reimbursed care.

Selling, General and Administrative Expenses (“SGA”). SGA increased $37.2 million, or 16.9%, to $256.8 million for the year ended December 31, 2021 from $219.6 million for the year ended December 31, 2020, in order to support the business throughout the pandemic and as it re-ramps, and due to incremental overhead associated with acquired businesses. SGA was 15% of revenue for the year ended December 31, 2021, consistent with 2020.

Amortization of Intangible Assets. Amortization expense on intangible assets was $29.2 million for the year ended December 31, 2021, a decrease from $31.7 million in the prior year, due to the use of the accelerated method of amortization for certain intangibles and decreases from intangible assets becoming fully amortized during the period, partially offset by increases from the acquisitions completed in 2020 and 2021. Refer to Note 6, Goodwill and Intangible Assets, to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional details.

Income from Operations. Income from operations increased by $75.7 million, or 142%, to $129.0 million for the year ended December 31, 2021 when compared to the prior year. The following table summarizes income (loss) from operations and percentage of revenue for each of our segments for the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2021","","2020","","Change 2021 vs 2020"],["","(In thousands, except percentages)"],["Full service center-based child care","$","(8,431)","","","(0.6)","%","","$","(155,382)","","","(15.1)","%","","$","146,951","","","94.6","%"],["Back-up care","115,173","","","32.8","%","","182,938","","","47.1","%","","(67,765)","","","(37.0)","%"],["Educational advisory and other services","22,276","","","20.8","%","","25,778","","","27.3","%","","(3,502)","","","(13.6)","%"],["Income from operations","$","129,018","","","7.4","%","","$","53,334","","","3.5","%","","$","75,684","","","141.9","%"]]
[[/GREPCENT_TABLE]]

The increase in income from operations was due to the following:

•Income from operations for the full service center-based child care segment increased $147.0 million, or 95%, for the year ended December 31, 2021, when compared to the same period in 2020 primarily due to increases in tuition revenue from enrollment growth in our open centers and the re-opening of temporarily closed centers.

•Income from operations for the back-up care segment decreased $67.8 million, or 37%, in the year ended December 31, 2021 when compared to the same period in 2020 as the service delivery mix continues to shift back towards pre-COVID-19 levels, with increasing utilization of traditional in-home and center-based care and a decrease in self-sourced reimbursed care compared to the prior year, which benefited from increased demand during the early stages of the pandemic.

•Income from operations for the educational advisory and other services segment decreased $3.5 million, or 14%, in the year ended December 31, 2021 when compared to the same period in 2020 due to investments in personnel, marketing and technology to support the growth of the segment.

Loss on Extinguishment of Debt. A loss on the extinguishment of debt of $2.6 million was recorded in the year ended December 31, 2021, related to the unamortized original issue cost and deferred financing fees that were written off in connection with the November 2021 debt refinancing. Refer to Note 11, Credit Arrangements and Debt Obligations, to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional details.

Net Interest Expense. Net interest expense decreased to $36.1 million for the year ended December 31, 2021 from $37.7 million for the year ended December 31, 2020, due to decreased borrowings under our revolving credit facility as well as decreases in the interest rates applicable to our debt. Including the effects of the interest rate swap arrangements, which matured October 31, 2021, the weighted average interest rates for the term loans and revolving credit facility were 2.98% and 3.23% for the years ended December 31, 2021 and 2020, respectively.

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Income Tax Expense. We recorded an income tax expense of $19.9 million during the year ended December 31, 2021, at an effective income tax rate of 22.0%, compared to income tax benefit of $11.3 million, at an effective income tax rate of (72.5)%, during the prior year. The difference between the effective income tax rates as compared to the statutory income tax rates was primarily due to the effects of excess tax benefits associated with the exercise of stock options and vesting of restricted stock, which had a proportionately greater effect in 2020 due to the significantly lower income before income tax and greater amount of deductions received. The excess tax benefits reduced income tax expense by $7.8 million in 2021, compared to $16.2 million in 2020, due to lower volume of equity transactions and lower excess tax benefits realized on each transaction. Refer to Note 14, Stockholders’ Equity and Stock-based Compensation, to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional details. The effective income tax rate would have approximated 29% and 28% for the years ended December 31, 2021 and 2020, respectively, prior to the inclusion of the excess tax benefit from stock-based compensation and other discrete items.

Adjusted EBITDA and Adjusted Income from Operations. Adjusted EBITDA and adjusted income from operations increased $47.7 million, or 21%, and $48.4 million, or 53%, respectively, for the year ended December 31, 2021 over the comparable period in 2020 primarily as a result of the increase in gross profit in the full service center-based child care segment, partially offset by reduced contributions from back-up care services.

Adjusted Net Income. Adjusted net income increased $27.8 million, or 30%, for the year ended December 31, 2021 when compared to the same period in 2020 primarily due to the increase in income from operations, partially offset by a higher effective tax rate.

Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019

Revenue. Revenue decreased $546.9 million, or 27%, to $1.5 billion for the year ended December 31, 2020 from $2.1 billion for the prior year. The following table summarizes the revenue and percentage of total revenue for each of our segments for the years ended December 31, 2020 and 2019:

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2020","","2019","","Change 2020 vs 2019"],["","(In thousands, except percentages)"],["Full service center-based child care","$","1,032,266","","","68.2","%","","$","1,684,006","","","81.6","%","","$","(651,740)","","","(38.7)","%"],["Tuition","849,405","","","82.3","%","","1,551,433","","","92.1","%","","(702,028)","","","(45.3)","%"],["Management fees and operating subsidies","182,861","","","17.7","%","","132,573","","","7.9","%","","50,288","","","37.9","%"],["Back-up care","388,294","","","25.6","%","","296,330","","","14.4","%","","91,964","","","31.0","%"],["Educational advisory services","94,533","","","6.2","%","","81,681","","","4.0","%","","12,852","","","15.7","%"],["Total revenue","$","1,515,093","","","100.0","%","","$","2,062,017","","","100.0","%","","$","(546,924)","","","(26.5)","%"]]
[[/GREPCENT_TABLE]]

Revenue generated by the full-service center-based child care segment for the year ended December 31, 2020 decreased by $651.7 million, or 39%, when compared to the prior year. The decrease was attributable to the temporary and permanent closure of our centers during the year in response to the COVID-19 pandemic, and reduced enrollment in the centers that re-opened. Tuition revenue decreased by $702.0 million, or 45%, when compared to the prior year, on a 43% decrease in enrollment. We had 910 early education and child care centers open as of December 31, 2020, of the 1,014 centers we operated at that date, compared to 1,084 open early education and child care centers as of December 31, 2019. During 2020, we opened 18 new centers and permanently closed 88 center locations where demand and economic trends had shifted. While the large majority of our centers were open to serve children and families as of December 31, 2020, we remained in the re-ramp phase and enrollment was well below pre-COVID-19 levels. Management fees and operating subsidies from employer sponsors increased $50.3 million, or 38%, due to additional operating subsidies received to support center operations in connection with the decrease in tuition revenue from the temporary center closures.

Revenue generated by back-up care services in the year ended December 31, 2020 increased by $92.0 million, or 31%, when compared to the prior year. Revenue growth in this segment was primarily attributable to expanded sales to new clients and increased utilization by existing customers due to unprecedented demand for our back-up care services (in particular, for the use of self-sourced reimbursed care during the second quarter, which is recorded on a net basis) as clients and families pursued additional coverage and supports as a result of continued business and school closures. Although self-sourced reimbursed care offered an important alternative to clients and families during the early stages of the pandemic, demand for back-up care started to shift toward more traditional in-center and in-home service delivery in the third and fourth quarters as more centers resumed operations, and as businesses and schools re-opened, but traditional in-center and in-home use remained below pre-COVID-19 levels as of December 31, 2020.

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Revenue generated by educational advisory and other services in the year ended December 31, 2020 increased by $12.9 million, or 16%, when compared to the prior year. Revenue growth in this segment is primarily attributable to contributions from acquisitions, increased utilization by existing customers, and, to a lesser extent, sales to new clients. Acquisitions completed in 2019 and 2020 contributed $9.8 million to the growth of this segment in 2020.

Cost of Services. Cost of services decreased $328.5 million, or 21%, to $1.2 billion for the year ended December 31, 2020 from $1.5 billion for the prior year.

Cost of services in the full-service center-based child care segment decreased by $310.4 million, or 23%, to $1.0 billion when compared to the prior year. The decrease is primarily due to reductions in personnel costs, which decreased 25%, and program supplies and materials, which decreased 15%, in connection with the reduced enrollment associated with the temporary center closures, and contributions from government support programs that reduced certain payroll and other operating expenses by a total of $83.5 million. These reductions in costs were partially offset by impairment costs of $26.2 million for long-lived assets incurred in connection with the impact of COVID-19 on our operations, costs associated with the permanent closure of certain centers of $6.6 million, including related severance and facilities costs, and incremental occupancy costs associated with new centers added since December 31, 2019.

Cost of services in the back-up care segment decreased by $24.2 million, or 14%, to $145.1 million when compared to the prior year. The decrease is primarily due to reductions in personnel costs and care provider fees, which represented approximately 65% of total costs of services for this segment in 2020 as compared to approximately 75% in 2019, as traditional utilization levels were lower than the prior year. This reduction was offset by technology and marketing spending to support and enhance our customer user experience and service delivery, and impairment costs of $2.1 million in relation to the decrease in fair value of an equity investment.

Cost of services in the educational advisory and other services segment increased by $6.1 million, or 16%, to $44.4 million when compared to the prior year, which is broadly consistent with revenue growth. The increase is due to personnel costs related to delivering services to the expanding customer base.

Gross Profit. Gross profit decreased by $218.4 million, or 42%, to $304.5 million for the year ended December 31, 2020 from $522.9 million for the prior year. Gross profit margin was 20% of revenue for the year ended December 31, 2020, a decrease of approximately 5% compared to the year ended December 31, 2019. The decrease in gross profit is primarily due to reduced margins in the full-service center-based child care segment from the temporary closure of centers, reduced enrollment in the centers that have re-opened, and related impairment charges on long-lived assets, partially offset by increases in gross profit from expanded back-up care, and educational advisory and other services.

Selling, General and Administrative Expenses. SGA of $219.6 million for the year ended December 31, 2020 was relatively consistent with the same period in 2019, in order to support the business throughout the pandemic and as it re-ramps. SGA was 15% of revenue for the year ended December 31, 2020, compared to 11% for the same period in 2019 due to the lower revenue base.

Amortization of Intangible Assets. Amortization expense on intangible assets was $31.7 million for the year ended December 31, 2020, a decrease from $33.6 million in the prior year, due to the use of the accelerated method of amortization for certain intangibles and decreases from intangible assets becoming fully amortized during the period, partially offset by increases from the acquisitions completed in 2019 and 2020. Refer to Note 6, Goodwill and Intangible Assets, to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional details.

Income from Operations. Income from operations decreased by $214.5 million, or 80%, to $53.3 million for the year ended December 31, 2020 when compared to the prior year. The following table summarizes income (loss) from operations and percentage of revenue for each of our segments for the years ended December 31, 2020 and 2019:

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2020","","2019","","Change 2020 vs 2019"],["","(In thousands, except percentages)"],["Full service center-based child care","$","(155,382)","","","(15.1)","%","","$","166,011","","","9.9","%","","$","(321,393)","","","(193.6)","%"],["Back-up care","182,938","","","47.1","%","","80,394","","","27.1","%","","102,544","","","127.6","%"],["Educational advisory services","25,778","","","27.3","%","","21,414","","","26.2","%","","4,364","","","20.4","%"],["Income from operations","$","53,334","","","3.5","%","","$","267,819","","","13.0","%","","$","(214,485)","","","(80.1)","%"]]
[[/GREPCENT_TABLE]]

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The decrease in income from operations was due to the following:

•Income from operations for the full-service center-based child care segment decreased $321.4 million, or 194%, for the year ended December 31, 2020, when compared to the same period in 2019 due to reduced tuition revenue from temporary and permanent center closures and reduced enrollment in the centers that have re-opened, as well as related impairment charges on long-lived assets of $26.2 million and costs associated with the permanent closure of certain centers of $6.6 million, partially offset by contributions of $83.5 million from government support programs that reduced certain payroll and operating expenses, of which $14.6 million reduced the operating subsidies paid by employers.

•Income from operations for the back-up care segment increased $102.5 million to $182.9 million for the year ended December 31, 2020, or 128%, when compared to the same period in 2019 due to the expanding revenue base from increased sales and utilization of our back-up care services (in particular, for self-sourced reimbursed care during the second quarter) as clients and families pursued additional supports as a result of business and school closures, and reduced care provider fees associated with decreased utilization of traditional care options in relation to the prior year, partially offset by investments in technology to support our customer user experience and service delivery.

•Income from operations for the educational advisory and other services segment increased $4.4 million to $25.8 million for the year ended December 31, 2020, or 20%, when compared to the same period in 2019 due to contributions from the expanding revenue base.

Net Interest Expense. Net interest expense decreased to $37.7 million for the year ended December 31, 2020 from $45.2 million for the year ended December 31, 2019, due to decreased borrowings under our revolving credit facility as well as decreases in the interest rates applicable to our debt. Including the effects of the interest rate swap arrangements, the weighted average interest rates for the term loans and revolving credit facility were 3.23% and 3.89% for the years ended December 31, 2020 and 2019, respectively.

Income Tax Expense. We recorded an income tax benefit of $11.3 million during the year ended December 31, 2020, at an effective income tax rate of (72.5)%, compared to income tax expense of $42.3 million, at an effective income tax rate of 19%, during the prior year. The difference between the effective income tax rates as compared to the statutory income tax rates is primarily due to the effects of excess tax benefits associated with the exercise of stock options and vesting of restricted stock, which have a proportionately greater effect in 2020 due to the significantly lower income before income tax. The excess tax benefits reduced income tax expense by $16.2 million in 2020, compared to $13.9 million in the same 2019 period, due to higher volume of equity transactions. The effective income tax rate would have approximated 28% and 25% for the years ended December 31, 2020 and 2019, respectively, prior to the inclusion of the excess tax benefit from stock-based compensation and other discrete items.

Adjusted EBITDA and Adjusted Income from Operations. Adjusted EBITDA and adjusted income from operations decreased $170.5 million, or 43%, and $176.7 million, or 66%, respectively, for the year ended December 31, 2020 over the comparable period in 2019 primarily as a result of the decrease in gross profit in the full-service center-based child care segment, partially offset by growth in the back-up care and educational advisory and other services segments.

Adjusted Net Income. Adjusted net income decreased $123.1 million, or 57%, for the year ended December 31, 2020 when compared to the same period in 2019 primarily due to the decrease in income from operations, partially offset by a lower effective tax rate.

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Non-GAAP Financial Measures and Reconciliation

In our quarterly and annual reports, earnings press releases and conference calls, we discuss key financial measures that are not calculated in accordance with GAAP to supplement our consolidated financial statements presented on a GAAP basis. These non-GAAP financial measures of adjusted EBITDA, adjusted income from operations, adjusted net income and diluted adjusted earnings per common share are reconciled from their respective measures determined under GAAP as follows:

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2021","","2020","","2019"],["","(In thousands, except share data)"],["Net income","$","70,459","","","$","26,992","","","$","180,386"],["Interest expense \u2014 net","36,099","","","37,682","","","45,154"],["Income tax expense (benefit)","19,889","","","(11,340)","","","42,279"],["Depreciation","79,658","","","80,010","","","74,648"],["Amortization of intangible assets (a)","29,172","","","31,652","","","33,621"],["EBITDA","235,277","","","164,996","","","376,088"],["Additional adjustments:"],["COVID-19 related costs (b)","10,582","","","34,918","","","\u2014"],["Stock-based compensation expense (c)","23,060","","","20,996","","","17,283"],["Loss on extinguishment of debt","2,571","","","\u2014","","","\u2014"],["Other costs (d)","578","","","3,486","","","626"],["Non-cash operating lease expense (e)","\u2014","","","\u2014","","","860"],["Total adjustments","36,791","","","59,400","","","18,769"],["Adjusted EBITDA","$","272,068","","","$","224,396","","","$","394,857"],["Income from operations","$","129,018","","","$","53,334","","","$","267,819"],["COVID-19 related costs (b)","10,582","","","34,918","","","\u2014"],["Other costs (d)","578","","","3,486","","","626"],["Adjusted income from operations","$","140,178","","","$","91,738","","","$","268,445"],["Net income","$","70,459","","","$","26,992","","","$","180,386"],["Income tax expense (benefit)","19,889","","","(11,340)","","","42,279"],["Income before income tax","90,348","","","15,652","","","222,665"],["Amortization of intangible assets (a)","29,172","","","31,652","","","33,621"],["COVID-19 related costs (b)","10,582","","","34,918","","","\u2014"],["Stock-based compensation expense (c)","23,060","","","20,996","","","17,283"],["Loss on extinguishment of debt","2,571","","","\u2014","","","\u2014"],["Other costs (d)","578","","","3,486","","","626"],["Adjusted income before income tax","156,311","","","106,704","","","274,195"],["Adjusted income tax expense (f)","(34,915)","","","(13,155)","","","(57,591)"],["Adjusted net income","$","121,396","","","$","93,549","","","$","216,604"],["Weighted average common shares outstanding \u2014 diluted","60,871,399","","","60,309,985","","","58,947,240"],["Diluted adjusted earnings per common share","$","1.99","","","$","1.55","","","$","3.67"]]
[[/GREPCENT_TABLE]]

(a)Represents amortization of intangible assets, including annual amortization expense of approximately $20.0 million associated with intangible assets recorded in connection with our going private transaction in May 2008.

(b)COVID-19 related costs represent impairment costs for investments and long-lived assets as a result of center closures and decreases in the fair values for certain centers that are open or temporarily closed, and other costs incurred as a result of the impact of COVID-19 on our operations and related management actions. For the year ended December 31, 2021, impairment costs totaled $10.6 million related to the full service center-based child care segment. For the year ended December 31, 2020, impairment costs totaled $28.3 million, of which $26.2 million related to the full service center-based child care segment and $2.1 million related to the back-up care segment. Other COVID-19 related costs totaled $6.6 million for the year ended December 31, 2020 and were primarily associated with the closure of centers, including severance and facilities costs.

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(c)Represents non-cash stock-based compensation expense in accordance with Accounting Standards Codification Topic 718, Compensation-Stock Compensation.

(d)Other costs in the year ended December 31, 2021 represent transaction costs incurred in connection with completed acquisitions. Other costs in the year ended December 31, 2020 relate to occupancy costs incurred for our new corporate headquarters during the construction period, which represented duplicative office costs in 2020 while we also continued to carry the costs for our previous corporate headquarters. Other costs in the year ended December 31, 2019 represent transaction costs incurred in connection with completed acquisitions.

(e)Represents the excess of lease expense over cash lease expense (for periods prior to 2020).

(f)Represents income tax expense calculated on adjusted income before income tax at an effective tax rate of approximately 22%, 12% and 21% for the years ended December 31, 2021, 2020 and 2019, respectively. The effective tax rates represent a tax rate of approximately 28% for both 2021 and 2020 and approximately 26% for 2019, applied to the adjusted income before income tax, less the effect of excess tax benefits related to equity transactions.

Adjusted EBITDA, adjusted income from operations, adjusted net income and diluted adjusted earnings per common share (collectively referred to as the “non-GAAP financial measures”) are not presentations made in accordance with GAAP, and the use of the terms adjusted EBITDA, adjusted income from operations, adjusted net income and diluted adjusted earnings per common share may differ from similar measures reported by other companies and may not be comparable to other similarly titled measures. We believe the non-GAAP financial measures provide investors with useful information with respect to our historical operations. We present the non-GAAP financial measures as supplemental performance measures because we believe they facilitate a comparative assessment of our operating performance relative to our performance based on our results under GAAP, while isolating the effects of some items that vary from period to period. Specifically, adjusted EBITDA allows for an assessment of our operating performance and of our ability to service or incur indebtedness without the effect of non-cash charges, such as depreciation, amortization, the excess of lease expense over cash lease expense (prior to fiscal 2020), stock-based compensation expense, impairment costs and other costs incurred due to the impact of COVID-19, including center closing costs, transaction costs and other nonrecurring costs, such as expenses related to acquisitions, and duplicative corporate office costs. In addition, adjusted income from operations, adjusted net income and diluted adjusted earnings per common share allow us to assess our performance without the impact of the specifically identified items that we believe do not directly reflect our core operations. These non-GAAP financial measures also function as key performance indicators used to evaluate our operating performance internally, and they are used in connection with the determination of incentive compensation for management, including executive officers. Adjusted EBITDA is also used in connection with the determination of certain ratio requirements under our credit agreement. Adjusted EBITDA, adjusted income from operations, adjusted net income and diluted adjusted earnings per common share are not measurements of our financial performance under GAAP and should not be considered in isolation or as an alternative to income before taxes, net income, diluted earnings per common share, net cash provided by (used in) operating, investing or financing activities or any other financial statement data presented as indicators of financial performance or liquidity, each as presented in accordance with GAAP. Consequently, our non-GAAP financial measures should be considered together with our consolidated financial statements, which are prepared in accordance with GAAP and included in Item 8 of this Annual Report on Form 10-K. We understand that although adjusted EBITDA, adjusted income from operations, adjusted net income and diluted adjusted earnings per common share are frequently used by securities analysts, lenders and others in their evaluation of companies, they have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

•adjusted EBITDA, adjusted income from operations and adjusted net income do not fully reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;

•adjusted EBITDA, adjusted income from operations and adjusted net income do not reflect changes in, or cash requirements for, our working capital needs;

•adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on debt; and

•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future; and adjusted EBITDA, adjusted income from operations and adjusted net income do not reflect any cash requirements for such replacements.

Because of these limitations, adjusted EBITDA, adjusted income from operations, and adjusted net income should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet our obligations.

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Liquidity and Capital Resources

Our primary cash requirements are for the ongoing operations of our existing early education and child care centers, back-up care, educational advisory and other services, the addition of new centers through development or acquisitions, and debt financing obligations. Our primary sources of liquidity are our existing cash, cash flows from operations, and borrowings available under our revolving credit facility. We had $261.0 million in cash ($265.3 million including restricted cash) at December 31, 2021, of which $25.8 million was held in foreign jurisdictions, compared to $384.3 million in cash ($388.5 million including restricted cash) at December 31, 2020, of which $43.6 million was held in foreign jurisdictions. Operations outside of North America accounted for 26% and 23% of our consolidated revenue for the years ended December 31, 2021 and 2020, respectively. The net impact on our liquidity from changes in foreign currency exchange rates was not material for the years ended December 31, 2021 and 2020.

On April 21, 2020, the Company completed the issuance and sale of 2,138,580 shares of common stock to Durable Capital Master Fund LP at a price of $116.90 per share. The Company received net proceeds from the offering of $249.8 million, which strengthened our liquidity and financial position, and increased our cash and cash equivalents.

Our revolving credit facility is part of our senior secured credit facilities, which consist of secured term loans and a $400 million revolving credit facility. There were no borrowings outstanding on our revolving credit facility at December 31, 2021 and 2020. On November 23, 2021, the Company amended its existing senior secured credit facilities to refinance the existing secured term loan facility with a new term loan B facility of $600 million and a new term loan A facility of $400 million. Proceeds of $1 billion from the new term loans, together with cash on hand, were used to repay $1.03 billion in outstanding term loans and related fees and expenses. Refer to Note 11, Credit Arrangements and Debt Obligations, to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional information on our senior secured credit facilities.

We had a working capital deficit of $81.9 million at December 31, 2021 and working capital of $93.4 million at December 31, 2020. Our working capital deficit in 2021 has primarily arisen from using cash to make long-term investments in fixed assets and acquisitions, and from share repurchases. We anticipate that our cash flows from operating activities will continue to be impacted while our center operating performance ramps enrollment. During this re-enrollment phase, cash flows from operating activities will be supported by our existing cash, as well as borrowings available under our revolving credit facility, as needed. As we focus on the enrollment and ramping of centers, we continue to prioritize investments that support current operations and strategic opportunities, as well as the principal and interest payments on our debt.

We have participated in certain government support programs, including certain grants, tax deferrals and tax credits allowed pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the Consolidated Appropriations Act, 2021 (“CAA”), and the American Rescue Plan Act of 2021 (“ARPA”) 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. During the years ended December 31, 2021 and 2020, $50.9 million and $83.5 million, respectively, was recorded as a reduction to cost of services in relation to these benefits, of which $16.0 million and $14.6 million, respectively, reduced the operating subsidies paid by employers for the related child care centers. As of December 31, 2021 and 2020, $3.3 million and $8.4 million, respectively, was recorded in prepaid expenses and other current assets on the consolidated balance sheet for amounts due from government support programs, and as of December 31, 2021, $3.9 million was recorded to other current liabilities related to government support received related to future periods. As of December 31, 2021, payroll tax deferrals of $7.0 million were recorded in accounts payable and accrued expenses on the consolidated balance sheet and as of December 31, 2020, payroll tax deferrals were $20.4 million, of which $10.2 million was included in accounts payable and accrued expenses and $10.2 million was included in other long-term liabilities. There is no assurance that these government support programs will continue in the future at current levels, or at all.

As of December 31, 2021, we had $791.3 million in lease liabilities, $87.3 million of which is short term in nature. Refer to Note 4, Leases, to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional information on leases, including the maturity of the contractual obligations related to our lease liabilities.

The board of directors authorized a share repurchase program of up to $400 million of our outstanding common stock, effective December 16, 2021. The share repurchase program has no expiration date and replaced the prior June 2018 authorization, of which $0.2 million remained available thereunder. During the year ended December 31, 2021, we repurchased 1.6 million shares for $214.1 million, and at December 31, 2021, $380.6 million remained available under the repurchase program. During the year ended December 31, 2020, we repurchased 0.2 million shares for $32.2 million. All repurchased shares have been retired.

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We believe that funds provided by operations, our existing cash balances and borrowings available under our revolving credit facility will be adequate to fund all obligations and liquidity requirements for at least the next twelve months. However, continued disruption from COVID-19 or if we were to undertake any significant acquisitions or make investments in the purchase of facilities for new or existing centers, we could require financing beyond our existing cash and borrowing capacity, and it could be necessary for us to obtain additional debt or equity financing. We may not be able to obtain such financing on reasonable terms, or at all.

[[GREPCENT_TABLE]]
[["Cash Flows","Years Ended December 31,"],["","2021","","2020","","2019"],["","(In thousands)"],["Net cash provided by operating activities","$","227,253","","","$","209,572","","","$","330,353"],["Net cash used in investing activities","$","(117,389)","","","$","(83,825)","","","$","(189,070)"],["Net cash provided by (used in) financing activities","$","(230,030)","","","$","228,996","","","$","(149,128)"],["Cash, cash equivalents and restricted cash \u2014 beginning of year","$","388,465","","","$","31,192","","","$","38,478"],["Cash, cash equivalents and restricted cash \u2014 end of year","$","265,281","","","$","388,465","","","$","31,192"]]
[[/GREPCENT_TABLE]]

Cash Provided by Operating Activities

Cash provided by operating activities was $227.3 million for the year ended December 31, 2021, compared to $209.6 million for 2020. The increase in cash provided by operating activities primarily resulted from the $43.5 million increase in net income from the prior year, and increases associated with growth in the full service center-based child care segment and the related increase in tuition fees collected in advance as children re-enroll in our centers, offset by changes in working capital arising from the timing of billings and payments when compared to the prior year.

Cash provided by operating activities was $209.6 million for the year ended December 31, 2020, compared to $330.4 million for the same period in 2019. The decrease in cash provided by operating activities primarily resulted from the $153.4 million decrease in net income from the prior year, and from changes in working capital arising from the timing of billings and payments when compared to 2019, including increases in accounts receivable associated with slower collections, and an increase in other current assets for amounts receivable from government support programs which were not present in 2019. The decrease in cash provided by operating activities was partially offset by client deposits, and the effects of payroll tax and rent payment deferrals during the period.

Cash Used in Investing Activities

Cash used in investing activities was $117.4 million for the year ended December 31, 2021 compared to $83.8 million for the prior year, and was related to fixed asset additions, acquisitions, and other investments. The increase in cash used in investing activities in 2021 was primarily related to acquisitions, partially offset by lower fixed asset additions. During the year ended December 31, 2021, we invested $53.9 million in five acquisitions, and to a lesser extent, for settlements of prior year acquisitions, compared to $8.3 million used for three acquisitions in 2020. During the year ended December 31, 2021, we invested $57.7 million, net of proceeds from the sale of fixed assets, in fixed asset purchases for new child care centers, and maintenance and refurbishments in our existing centers, compared to a net investment of $72.8 million during the same period in 2020.

Cash used in investing activities was $83.8 million for the year ended December 31, 2020 compared to $189.1 million for the same period in 2019, and was related to fixed asset additions, acquisitions, and other investments. The decrease in cash used in investing activities was primarily related to a lower volume of fixed asset additions and acquisitions in 2020 as we prioritized investments to the most critical operating areas in response to the COVID-19 pandemic. During the year ended December 31, 2020, we invested $8.3 million for three acquisitions, and to a lesser extent, for settlements of prior year acquisitions, compared to $53.4 million used for eight acquisitions in 2019. During the year ended December 31, 2020, we invested $72.8 million, net of proceeds from the sale of fixed assets, in fixed asset purchases for new child care centers, and maintenance and refurbishments in our existing centers, compared to a net investment of $104.8 million during the same period in 2019. Additionally, during the year ended December 31, 2019, we invested $25.0 million in debt securities and other investments, $24.7 million of which were net purchases by our wholly-owned captive insurance company using restricted cash, and invested $5.9 million for a 20% interest in a provider of full service center-based child care and back-up care services in Germany, compared to net investments in debt securities of $2.7 million in 2020.

We estimate that in 2022 we will continue to spend on fixed asset additions related to new child care centers, maintenance and refurbishments in our existing centers, and continued investments in technology and equipment. As part of our growth strategy, we also expect to continue to make selective acquisitions.

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Cash Provided by (Used in) Financing Activities

Cash used in financing activities was $230.0 million for the year ended December 31, 2021 compared to cash provided by financing activities of $229.0 million in 2020. The change in financing activities was primarily related to an increase in share repurchases in 2021, which were $213.8 million in the year ended December 31, 2021 compared to $32.7 million in 2020, and capital raised in the year ended December 31, 2020 of $249.8 million from the issuance and sale of common stock. Cash used in financing activities was $149.1 million in the year ended December 31, 2019 and consisted primarily of repayments on the revolving credit facility of $117.9 million, net of borrowings.

Debt

Our senior secured credit facilities consist of a term loan B facility, term loan A facility, and a $400 million multi-currency revolving credit facility.

Long term debt obligations were as follows:

[[GREPCENT_TABLE]]
[["","December 31,"],["","2021","","2020"],["","(In thousands)"],["Term loan B","$","600,000","","","$","1,034,688"],["Term loan A","400,000","","","\u2014"],["Deferred financing costs and original issue discount","(7,604)","","","(3,801)"],["Total debt","992,396","","","1,030,887"],["Less current maturities","(16,000)","","","(10,750)"],["Long-term debt","$","976,396","","","$","1,020,137"]]
[[/GREPCENT_TABLE]]

On November 23, 2021, the Company amended its existing senior secured credit facilities to refinance the existing secured term loan facility with a new term loan B facility (“term loan B”) of $600 million and a new term loan A facility (“term loan A”) of $400 million, collectively the “term loan facilities” or “term loans.” Proceeds of $1 billion from the new term loans, together with cash on hand, were used to repay $1.03 billion in outstanding term loans and related fees and expenses. The terms of the existing $400 million multi-currency revolving credit facility (“revolving credit facility”) were not modified in the November 2021 amendment.

The seven year term loan B matures on November 23, 2028 and requires quarterly principal payments equal to 1% per annum of the original aggregate principal amount of the term loan B, with the remaining principal balance due at maturity. The five year term loan A matures on November 23, 2026 and requires quarterly principal payments equal to 2.5% per annum of the original aggregate principal amount of the term loan A in each of the first three years, 5% in the fourth year, and 7.5% in the fifth year. The remaining principal balance is due at maturity.

On May 26, 2021, the Company amended its existing senior secured credit facilities to, among other changes, extend the revolving credit facility maturity date from July 31, 2022 to May 26, 2026, and reduce the interest rates applicable to borrowings outstanding on the revolving credit facility. There were no borrowings outstanding on the revolving credit facility at both December 31, 2021 and 2020, with $400 million available for borrowing.

In April and May 2020, we amended our existing senior credit facilities to, among other things, increase the borrowing capacity of our revolving credit facility from $225 million to $400 million, modify the interest rates applicable to borrowings outstanding on the revolving credit facility, and modify the terms of the applicable covenants.

Borrowings under the credit agreement are subject to variable interest. Based on the interest rates in effect as of December 31, 2021, interest payments on the outstanding principal balance of the term loans, including commitment fees on the revolving credit facility, are estimated at $23 million annually. However, actual interest paid may be different from these estimates based on changes in the market.

We mitigate our interest rate exposure with interest rate cap agreements. During December 2021, the Company entered into interest rate cap agreements with a total notional value of $900 million, designated and accounted for as cash flow hedges from inception. Interest rate cap agreements for $600 million, which have a forward starting effective date of October 31, 2023 and expire on October 31, 2025, provide the Company with interest rate protection in the event the one-month LIBOR rate increases above 2.5%. Interest rate cap agreements for $300 million, which have a forward starting effective date of October 31, 2023 and expire on October 31, 2026, provide the Company with interest rate protection in the event the one-month LIBOR rate increases above 3.0%.

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In June 2020, the Company entered into interest rate cap agreements with a total notional value of $800 million. These interest rate cap agreements, designated and accounted for as cash flow hedges, provide us with interest rate protection in the event the one-month LIBOR rate increases above 1%. Interest rate cap agreements for $300 million notional value have an effective date of June 30, 2020 and expire on October 31, 2023, while interest rate cap agreements for another $500 million notional amount have a forward starting effective date of October 29, 2021 and expire on October 31, 2023.

We entered into variable-to-fixed interest rate swap agreements on $500 million notional amount of the outstanding term loan borrowings. These swap agreements, designated and accounted for as cash flow hedges, matured on October 31, 2021. The weighted average interest rate for the term loans was 2.98%, and 3.23% for the years ended December 31, 2021 and 2020, respectively, including the impact of the interest rate swap agreements prior to its maturity.

The term loan A facility and the revolving credit facility require Bright Horizons Family Solutions LLC, the borrower, and its restricted subsidiaries to comply with a maximum first lien net leverage ratio. A breach of this covenant is subject to certain equity cure rights. We were in compliance with our financial covenant at December 31, 2021.

The credit agreement governing the senior secured credit facilities contains certain customary affirmative covenants and events of default. Refer to Note 11, Credit Arrangements and Debt Obligations, to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional information on our debt and credit arrangements, future principal payments of long-term debt, and covenant requirements.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with U.S. GAAP. Preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. The accounting policies and estimates we believe are critical in the preparation of our consolidated financial statements relate to revenue recognition and goodwill and other intangible assets. We have other significant accounting policies that are more fully described in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K. Both our critical and significant accounting policies are important to an understanding of the consolidated financial statements.

Revenue Recognition — We generate revenue from services based on the nature of the promise and the consideration specified in contracts with customers. At contract inception, we assess the services promised in the contract and identify each distinct performance obligation. The transaction price of a contract is allocated to each distinct performance obligation using the relative stand-alone selling price and recognized as revenue when, or as, control of the service is passed to the customer. The application of these policies to the services provided by each of our segments is discussed below.

Our revenue recognition policy generally does not have significant judgments or estimates that significantly affect the determination of the amount, the allocation of the transaction price to performance obligations, or timing of revenue from contracts with customers. The nature of our services does not require significant judgment or estimates to determine when control transfers to the customer. Based on past practices and customer specific circumstances, we occasionally may grant concessions that impact the total transaction price. If the transaction price may be subject to adjustment, significant judgment may be required to ensure that it is probable that significant reversal in the amount of cumulative revenue recognized will not occur. As of December 31, 2021 and 2020, there were no material estimates related to the constraint of cumulative revenue recognized.

Full-Service Center-Based Child Care

Our full-service center-based child care services include traditional center-based early education and child care, preschool, and elementary education. We provide center-based child care services under two principal business models: (1) a cost-plus model, where we are paid a fee by an employer client for managing a child care center on a cost-plus basis, and (2) a P&L model, where we assume the financial risk of operating a child care center and provide care on either an exclusive or priority enrollment basis to the employees of an employer sponsor, as well as to families in the surrounding community. In both the cost-plus and sponsor P&L models, the employer sponsor retains responsibility for the development of a new child care center (which is generally owned or leased by the sponsor), as well as ongoing maintenance and repairs. In addition, employer sponsors typically provide subsidies for the ongoing provision of child care services to their employees. Under all model types, we retain responsibility for all aspects of operating the child care center, including the hiring and paying of employees, contracting with vendors, purchasing supplies, and collecting tuition and related accounts receivable.

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Revenue generated from full-service center-based child care services is primarily comprised of monthly tuition paid by parents. Tuition is determined based on the age and developmental level of the child, the child’s attendance schedule, and geographic location of the facility. The full-service child care offering provided to parents represents a series of distinct services that are substantially the same and have the same pattern of transfer to the customer over time, which transfers daily. The tuition paid by parents is recognized on a daily basis, but for convenience is recorded on a monthly basis.

We enter into contracts with employer sponsors to manage and operate their early education and child care centers for a management fee, or to provide child care services to their employees on an exclusive or priority basis. These arrangements generally have a contractual term of three to ten years with varying terms and renewal and cancellation options, and may also include operating subsidies paid either in lieu of or to supplement parent tuition. The management fee included in contracts with employer sponsors is typically a monthly amount, and generally includes an annual escalator that is intended to reflect expected future cost increases. Annual escalators are generally stated as a percentage or as a reference to a consumer price index. The contracts also generally include a termination right with a notice period. We allocate revenue for contracts with an accounting term in excess of one year to the applicable contract year based on the rates applicable for that annual period, which is commensurate with the expected increases to the cost of providing the service, our standard pricing practices, as well as the overall allocation objective described in the guidance. Services provided to the employer sponsor represent a series of distinct services that are substantially the same and have the same pattern of transfer to the customer over time, which transfers daily. Fees paid by the employer sponsor are recognized on a daily basis, but for convenience are recorded on a monthly basis (i.e., the same monthly amount within the contract year using the time elapsed method).

Certain arrangements provide that the employer sponsor pay operating subsidies in lieu of, or to supplement, parent tuition. The employer subsidy for cost-plus managed centers, which consists of variable consideration, is typically calculated as the difference between parent tuition revenue and the operating costs for the center for each respective month and is recognized as revenue in the month the services are provided. The variable consideration relates specifically to efforts to transfer each distinct daily service and the allocation of the consideration earned to that distinct day in which those activities are performed is consistent with the overall allocation objective.

Back-Up Care Services

Back-up care services consist of center-based back-up child care, in-home child and adult/elder dependent care, school-age camps, virtual tutoring, and self-sourced reimbursed care. We provide back-up care services through our child care centers, school-age camps and in-home caregivers, as well as through the back-up care network. Our back-up care offers access to a contracted network of in-home service agencies and center-based providers in locations where we do not otherwise have in-home caregivers or centers with available capacity, and to a network of tutoring service providers. Self-sourced reimbursed care is a reimbursement program for clients to utilize in emergency-type situations to provide payments to their employees.

Back-up care revenue is primarily comprised of fixed and variable consideration paid by employer sponsors, and, to a lesser extent, co-payments collected from users at the point of service. These arrangements generally have contractual terms of three years with varying terms and renewal and cancellation options. Fees for back-up care services are typically determined based on the number of back-up uses purchased, which may be fixed based on a specified number of uses or variable fees paid per use, and are generally billed monthly as services are rendered or in advance. Revenue for back-up care services is recognized over time as the services are performed and is recognized in the month the back-up services are provided. Allocation of the consideration earned as the service is performed is consistent with the overall allocation objective. Revenue for self-sourced reimbursed care is based on a fee earned for each payment processed (i.e., on a net basis as we are acting as an agent for the payment of the self-sourced care reimbursement from clients to their employees) and is recognized in the month the payments are processed.

Educational Advisory and Other Services

Our educational advisory services consist of tuition assistance and student loan repayment program administration, workforce education, and related educational consulting services (“EdAssist Solutions”), and college admissions advisory services (“College Coach”). Educational advisory services revenue is primarily comprised of fixed and variable fees paid by employer clients for program management, coaching, and subscription of content, and, to a lesser extent, retail fees collected from users at the point of service. These arrangements generally have contractual terms of three years with varying terms and renewal and cancellation options. Fees for educational advisory services are determined based on the expected number of program participants and the services selected, and are generally billed in advance. Revenue for EdAssist Solutions is recognized on a straight-line basis using the time-elapsed method over the contract term with additional charges recognized in the month the additional services are provided consistent with the overall allocation objective. Revenue for College Coach is recognized over the contract term as college admissions advisory services are provided and customers receive the benefit.

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Other services consist of the Sittercity business, an online marketplace for families and caregivers. Revenue is primarily generated from subscriptions, comprised of fixed fees for the subscription period, and, to a lesser extent, variable transaction fees collected from users at the point of service. Subscription fees are recognized on a straight-line basis using the time-elapsed method over the contract term, and variable transaction fees earned are allocated to that distinct transaction consistent with the overall allocation objective.

Goodwill and Intangible Assets — We account for business combinations under the acquisition method of accounting. Amounts paid for an acquisition are allocated to the assets acquired and liabilities assumed based on their fair values at the date of acquisition. Goodwill is recorded when the consideration paid for an acquisition exceeds the fair value of the net tangible and identifiable intangible assets acquired. Our intangible assets principally consist of various customer relationships (including both client and parent relationships) and trade names. Identified intangible assets that have determinable useful lives are valued separately from goodwill and are amortized over the estimated period during which we derive a benefit. Intangible assets related to parent relationships are amortized using an accelerated method over their useful lives. All other intangible assets are amortized on a straight-line basis over their useful lives.

In valuing the customer relationships and trade names, we utilize variations of the income approach, which relies on historical financial and qualitative information, as well as assumptions and estimates for projected financial information. We consider the income approach the most appropriate valuation technique because the inherent value of these assets is their ability to generate current and future income. Projected financial information is subject to risk if our estimates are incorrect. The most significant estimate relates to projected revenues and profitability. If the projected revenues and profitability used in the valuation calculations are not met, then the intangible assets could be impaired. Our multi-year contracts with client customers typically result in low annual turnover, and our long-term relationships with clients make it difficult for competitors to displace us. Customer relationships are considered to be finite-lived assets, with estimated lives typically ranging from two to seventeen years. Certain trade names acquired as part of our strategy to expand by completing strategic acquisitions are considered to be finite-lived assets, with estimated lives typically ranging from two to ten years.

Goodwill and certain trade names are considered to be indefinite-lived assets. Our trade names identify us and differentiate us from competitors and, therefore, competition does not limit the useful life of these assets. Additionally, we believe that our primary trade names will continue to generate revenue for an indefinite period. Goodwill and intangible assets with indefinite lives are not subject to amortization, but are tested annually for impairment or more frequently if there are indicators of impairment. Indefinite lived intangible assets are also subject to an annual evaluation to determine whether events and circumstances continue to support an indefinite useful life.

Goodwill impairment assessments are performed at the reporting unit level, which are an operating segment or one level below the operating segment. In performing the goodwill impairment test, we may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying value. Qualitative factors may include, but are not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for the services, regulatory developments, cost factors, and entity specific factors such as overall financial performance and projected results. If an initial qualitative assessment indicates that it is more likely than not that the carrying value exceeds the fair value of a reporting unit, an additional quantitative evaluation is performed. Alternatively, we may elect to proceed directly to the quantitative impairment test. In performing the quantitative analysis, we compare the fair value of the reporting unit with its carrying amount, including goodwill. Fair value for each reporting unit is determined by estimating the present value of expected future cash flows, which are forecasted for each of the next ten years, applying a long-term growth rate to the final year, discounted using the applicable discount rate. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of the reporting unit is considered not impaired. If the carrying amount of the reporting unit exceeds its fair value, we would recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value, up to the amount of goodwill allocated to that reporting unit.

We test certain trademarks that are determined to be indefinite-lived intangible assets by comparing the fair value of the trademarks with their carrying value. Fair value is determined by estimating the total revenue attributable to each trademark, multiplied by a market-derived royalty rate, and then discounted using the applicable discount rate. The forecasts of revenue and profitability growth for use in our long-range plan and the discount rate are the key assumptions in our fair value analysis.

We review long-lived assets, including definite-lived intangible assets, for possible impairment whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. Impairment is assessed by comparing the carrying amounts of the assets to the estimated undiscounted future cash flows over the assets remaining lives. If the estimated cash flows are less than the carrying amounts of the assets, an impairment loss is recognized to reduce the carrying amounts of the assets to its estimated fair value. The estimated fair value is determined based on discounting estimated cash flows, including consideration of market rates for leased assets. The impairment is allocated to the long-lived assets on a pro rata basis using the relative carrying amounts, but only to the extent the carrying amount of an asset is above its fair value.

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During the year ended December 31, 2021, we recorded impairment charges for long-lived assets of $10.6 million related to fixed assets and operating lease right-of-use assets.