KLC 10-Q
KinderCare Learning Companies, Inc. (KLC)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
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Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of May 9, 2025, the registrant had
Table of Contents
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Page |
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PART I. |
2 |
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Item 1. |
2 |
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2 |
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Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) |
3 |
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Condensed Consolidated Statements of Shareholders' Equity (Unaudited) |
4 |
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5 |
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
7 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
20 |
Item 3. |
33 |
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Item 4. |
33 |
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PART II. |
35 |
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Item 1. |
35 |
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Item 1A. |
35 |
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Item 2. |
35 |
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Item 3. |
35 |
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Item 4. |
35 |
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Item 5. |
35 |
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Item 6. |
36 |
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37 |
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can generally identify forward-looking statements by our use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “seek,” “vision,” or “should,” or the negative thereof or other variations thereon or comparable terminology. Important factors that could cause actual results and events to differ materially from those indicated in the forward-looking statements include, among others, the following:
Any forward-looking statement that we make in this Quarterly Report on Form 10-Q speaks only as of the date of such statement. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q.
1
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
KinderCare Learning Companies, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
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March 29, 2025 |
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December 28, 2024 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net of accumulated depreciation of |
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Goodwill |
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Intangible assets, net of accumulated amortization of |
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Operating lease right-of-use assets |
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Other assets |
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Total assets |
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$ |
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$ |
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Liabilities and Shareholders' Equity |
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Current liabilities: |
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Accounts payable and accrued liabilities |
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$ |
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$ |
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Related party payables |
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Current portion of long-term debt |
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Operating lease liabilities—current |
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Deferred revenue |
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Other current liabilities |
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Total current liabilities |
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Long-term debt, net |
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Operating lease liabilities—long-term |
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Deferred income taxes, net |
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Other long-term liabilities |
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Total liabilities |
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Shareholders' equity: |
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Preferred stock, par value $ |
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Common stock, par value $ |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive (loss) income |
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Total shareholders' equity |
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Total liabilities and shareholders' equity |
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$ |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)
2
KinderCare Learning Companies, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
(In thousands, except per share data)
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Three Months Ended |
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March 29, 2025 |
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March 30, 2024 |
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Revenue |
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$ |
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$ |
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Costs and expenses: |
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(excluding depreciation and impairment) |
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Depreciation and amortization |
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Selling, general, and administrative expenses |
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Impairment losses |
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Total costs and expenses |
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Income from operations |
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Interest expense |
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Interest income |
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( |
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( |
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Other expense (income), net |
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( |
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Income before income taxes |
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Income tax expense |
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Net income (loss) |
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$ |
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$ |
( |
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Other comprehensive income, net of tax: |
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Change in net (losses) gains on cash flow hedges |
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( |
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Total comprehensive income |
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$ |
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$ |
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Net income (loss) per common share: |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
( |
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Weighted average number of common shares outstanding: |
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Basic |
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Diluted |
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See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)
3
KinderCare Learning Companies, Inc.
(In thousands)
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Three Months Ended March 30, 2024 |
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Accumulated |
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Additional |
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Other |
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Total |
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Common Stock |
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Paid-in |
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Retained |
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Comprehensive |
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Shareholders' |
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Shares |
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Amount |
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Capital |
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Earnings |
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(Loss) Income |
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Equity |
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Balance as of December 30, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Distribution to parent |
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( |
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( |
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Stock-based compensation |
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Other comprehensive income, |
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Net loss |
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( |
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( |
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Balance as of March 30, 2024 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Three Months Ended March 29, 2025 |
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Accumulated |
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Additional |
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Other |
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Total |
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Common Stock |
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Paid-in |
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Retained |
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Comprehensive |
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Shareholders' |
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Shares |
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Amount |
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Capital |
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Earnings |
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(Loss) Income |
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Equity |
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Balance as of December 28, 2024 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Issuance of common stock upon |
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— |
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— |
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— |
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Common stock withheld for taxes in |
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( |
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— |
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( |
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( |
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Stock-based compensation |
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Other comprehensive loss, |
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( |
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( |
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Net income |
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Balance as of March 29, 2025 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)
4
KinderCare Learning Companies, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
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Three Months Ended |
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March 29, 2025 |
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March 30, 2024 |
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Operating activities: |
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Net income (loss) |
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$ |
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$ |
( |
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Adjustments to reconcile net income (loss) to cash provided by operating activities: |
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Depreciation and amortization |
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Impairment losses |
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Change in deferred taxes |
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( |
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( |
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Amortization of debt issuance costs |
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Stock-based compensation |
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Realized and unrealized losses (gains) from investments held in deferred |
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( |
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Gain on disposal of property and equipment |
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( |
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( |
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Changes in assets and liabilities, net of effects of acquisitions: |
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Accounts receivable |
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( |
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Prepaid expenses and other current assets |
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( |
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( |
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Other assets |
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Accounts payable and accrued liabilities |
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Leases |
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( |
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Deferred revenue |
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Other current liabilities |
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( |
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Other long-term liabilities |
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( |
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Related party payables |
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( |
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— |
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Cash provided by operating activities |
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Investing activities: |
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Purchases of property and equipment |
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( |
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( |
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Payments for acquisitions, net of cash acquired |
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( |
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( |
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Proceeds from the disposal of property and equipment |
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Investments in deferred compensation asset trusts |
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( |
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( |
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Proceeds from deferred compensation asset trust redemptions |
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Cash used in investing activities |
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( |
) |
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( |
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Financing activities: |
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Payments of deferred offering costs |
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( |
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— |
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Distribution to parent |
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— |
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( |
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Proceeds from issuance of long-term debt |
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— |
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Principal payments of long-term debt |
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— |
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( |
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Payments of debt issuance costs |
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( |
) |
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( |
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Repayments of promissory notes |
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( |
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( |
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Payments of financing lease obligations |
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( |
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( |
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Tax payments related to net settlement of restricted stock units |
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( |
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— |
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Cash used in financing activities |
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( |
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( |
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Net change in cash, cash equivalents, and restricted cash |
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( |
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Cash, cash equivalents, and restricted cash at beginning of period |
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Cash, cash equivalents, and restricted cash at end of period |
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$ |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)
5
KinderCare Learning Companies, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
(In thousands)
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Three Months Ended |
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March 29, 2025 |
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March 30, 2024 |
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Reconciliation of cash, cash equivalents, and restricted cash to the |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash included within other assets |
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Total cash, cash equivalents, and restricted cash at end of period |
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$ |
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$ |
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Supplemental cash flow information: |
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Cash paid for interest |
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$ |
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$ |
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Cash paid for income taxes, net of refunds |
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Cash paid for amounts included in the measurement of operating lease liabilities |
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Non-cash operating activities: |
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Operating lease right-of-use assets obtained in exchange for operating |
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$ |
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$ |
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Deferred cloud computing implementation costs included in accounts payable and |
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— |
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Non-cash investing and financing activities: |
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Property and equipment additions included in accounts payable and |
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$ |
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$ |
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Finance lease right-of-use assets obtained in exchange for finance |
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— |
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Reductions to finance lease right-of-use assets resulting from reductions to |
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— |
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Contingent consideration payable for acquisitions |
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— |
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See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)
6
KinderCare Learning Companies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Organization—KinderCare Learning Companies, Inc. (the “Company”) offers early childhood education and care programs to children ranging from six weeks through 12 years of age. Founded in 1969, the services provided include infant, toddler, preschool, kindergarten, and before- and after-school programs. The Company provides childhood education and care programs within the following categories:
Community-Based and Employer-Sponsored Early Childhood Education and Care—The Company provides early childhood education and care services, as well as back-up care, primarily marketed under the names KinderCare Learning Centers and Crème School (formerly Crème de la Crème). Additionally, the Company partners with employer sponsors under a variety of arrangements such as discounted rent, enrollment guarantees, or an arrangement whereby the center is managed by the Company in return for a management fee. As of March 29, 2025, the Company provided community-based and employer-sponsored early childhood education and care services through
Before- and After-School Educational Services—The Company provides before- and after-school educational services for preschool and school-age children under the name Champions. As of March 29, 2025, Champions offered educational services through
Initial Public Offering—On October 8, 2024, the Company’s registration statement on Form S-1, as amended (File No. 333-281971) (“Form S-1”) related to its initial public offering (“IPO”), was declared effective by the Securities and Exchange Commission (“SEC”). In connection with the IPO, the Company converted Class A and Class B common stock, both with a par value of $
Refer to Note 17, Shareholders' Equity, Member's Equity, and Equity-based Compensation, within the audited consolidated financial statements for the fiscal year ended December 28, 2024 included in the Company's Annual Report on Form 10-K for further information on events and transactions that occurred in connection with the IPO.
Basis of Presentation—The unaudited condensed consolidated interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete annual financial statements. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with GAAP, have been condensed or omitted pursuant to those rules and regulations.
The unaudited condensed consolidated interim financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to fairly state the Company’s financial position, results of operations, and cash flows for the periods presented. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the three months ended March 29, 2025 are not necessarily indicative of the results to be expected for the fiscal year ending January 3, 2026 or for any other future annual or interim period.
These unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 28, 2024 included in the Company's Annual Report on Form 10-K filed with the SEC on March 21, 2025. Capitalized terms not defined herein shall have the meaning set forth in the audited consolidated financial statements and notes thereto.
There have been no changes to the significant accounting policies described in the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended December 28, 2024 included in the Company's Annual Report on Form 10-K.
7
Recently Issued Accounting Pronouncements—In November 2024, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40), and in January 2025, the FASB issued ASU 2025-01, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date, which requires a public business entity to disclose specific information about certain costs and expenses in the notes to the financial statements for interim and annual reporting periods. ASU 2024-03, as clarified by ASU 2025-01, is effective for annual reporting periods beginning after December 15, 2026 and interim periods within annual reporting periods beginning after December 15, 2027, and may be applied prospectively or retrospectively. The Company is in the process of determining the impact this rule will have on the consolidated financial statements.
In March 2024, the SEC adopted the final rule under SEC Release No. 33-11275, The Enhancement and Standardization of Climate Related Disclosures for Investors, which requires registrants to disclose climate-related information in registration statements and annual reports. The new rules would be effective for annual reporting periods beginning after December 31, 2024. However, in April 2024, the SEC exercised its discretion to stay these rules pending the completion of judicial review of certain consolidated petitions with the United States Court of Appeals for the Eighth Circuit in connection with these rules. The Company is in the process of determining the impact this rule will have on the consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740)—Improvements to Income Tax Disclosures, which provides more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. The guidance is effective for annual periods beginning after December 15, 2024 and may be applied prospectively or retrospectively. The adoption of ASU 2023-09 will result in modifications to the Company’s income tax disclosures beginning with the fiscal year ended January 3, 2026, however, the Company does not expect a material impact to the consolidated financial statements.
The Company receives government assistance from various governmental entities to support the operations of its early childhood education and care centers and before- and after-school sites, which is comprised of both assistance relating to income (“Income Grants”) and capital projects. Income Grants consist primarily of funds received for reimbursement of food costs, teacher compensation, and classroom supplies, and in certain cases, as incremental revenue. Refer to Note 1, Organization and Summary of Significant Accounting Policies, and Note 2, Government Assistance, within the audited consolidated financial statements for the fiscal year ended December 28, 2024 included in the Company's Annual Report on Form 10-K for further information regarding the Company's government assistance policy and disclosures related to all forms of government assistance received.
A portion of the Company's food costs are reimbursed through the federal Child and Adult Care Food Program. The program is operated by states to partially or fully offset the cost of food for children that meet certain criteria. The Company recognized food subsidies of $
The Company receives grant funding for teacher compensation, classroom supplies, and other center operating costs by applying to various governmental grant programs and agencies. Grants of $
The Company records grants receivable for grants that have met the Company's recognition criteria but have not yet been received as well as deferred grants for amounts received from government assistance that do not yet meet the Company’s recognition criteria. As of March 29, 2025 and December 28, 2024, the Company recorded $
COVID-19 Related Stimulus
The federal government passed multiple stimulus packages since the onset of the coronavirus disease 2019 (“COVID-19”) pandemic to stabilize the child care industry, including without limitation, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), the Consolidated Appropriations Act, and the American Rescue Plan Act. “COVID-19 Related Stimulus”
8
refers to grants arising from governmental acts relating to the COVID-19 pandemic and are accounted for in accordance with the Company's government assistance policy.
COVID-19 Related Stimulus is recognized as revenue or as cost reimbursements based on stipulations within each specific grant. The Company recognized $
The Employee Retention Credit (“ERC”), established by the CARES Act and extended and expanded by several subsequent governmental acts, allows eligible businesses to claim a per employee payroll tax credit based on a percentage of qualified wages, including health care expenses, paid during calendar year 2020 through September 2021. During the fiscal year ended December 31, 2022, the Company applied for ERC for qualified wages and benefits paid throughout the fiscal years ended January 1, 2022 and January 2, 2021. Reimbursements of $
The Company's growth strategy includes expanding and diversifying service offerings through acquiring high quality early childhood education centers.
2025 Acquisitions—During the three months ended March 29, 2025, the Company acquired five early childhood education centers in five separate business acquisitions which were each accounted for as business combinations. The centers were acquired for cash consideration of $
The fair value of the contingent consideration is based on the probability and timing of the continuation of the lease of the related acquired center. The amounts are payable to
2024 Acquisitions—During the three months ended March 30, 2024, the Company acquired six early childhood education centers in three separate business acquisitions which were each accounted for as business combinations. The centers were acquired for cash consideration of $
Contract Balances
The Company records deferred revenue when payments are received or due in advance of the Company’s performance under the contract, which is recognized as revenue as the performance obligation is satisfied. Payment from parents for tuition is typically received in advance on a weekly or monthly basis, in which case the revenue is deferred and recognized as the performance obligation is satisfied. The Company has the unconditional right to consideration as it satisfies the performance obligations,
9
therefore no contract assets are recognized. During the three months ended March 29, 2025, $
The Company applied the practical expedient of expensing costs incurred to obtain a contract if the amortization period of the asset is one year or less. Sales commissions are expensed as incurred in selling, general, and administrative expenses in the unaudited condensed consolidated statements of operations and comprehensive income.
Disaggregation of Revenue
The following table disaggregates total revenue between education centers and school sites (in thousands):
|
|
Three Months Ended |
|
|||||
|
|
March 29, 2025 |
|
|
March 30, 2024 |
|
||
Early childhood education centers |
|
$ |
|
|
$ |
|
||
Before- and after-school sites |
|
|
|
|
|
|
||
Total revenue |
|
$ |
|
|
$ |
|
||
A portion of revenue is generated from families whose tuition is subsidized by amounts received from government agencies. Subsidy revenue was $
Performance Obligations
The transaction price allocated to the remaining performance obligations relates to services that are paid or invoiced in advance. The Company does not disclose the transaction price allocated to unsatisfied performance obligations for contracts with an original contractual period of one year or less, or for variable consideration allocated entirely to wholly unsatisfied promises that form part of a series of services. The Company’s remaining performance obligations not subject to the practical expedients are not material.
The changes in the carrying amount of goodwill are as follows (in thousands):
Balance as of December 28, 2024 |
|
$ |
|
|
Additions from acquisitions |
|
|
|
|
Balance as of March 29, 2025 |
|
$ |
|
Right-of-use (“ROU”) assets and lease liabilities balances were as follows (in thousands):
|
|
March 29, 2025 |
|
|
December 28, 2024 |
|
||
Assets: |
|
|
|
|
|
|
||
Operating lease right-of-use assets |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|||
Total lease right-of-use assets |
|
$ |
|
|
$ |
|
||
Liabilities—current: |
|
|
|
|
|
|
||
Operating lease liabilities |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|||
Total current lease liabilities |
|
|
|
|
|
|
||
Liabilities—long-term: |
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|
|
|
|
|
||
Operating lease liabilities |
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
Total long-term lease liabilities |
|
|
|
|
|
|
||
Total lease liabilities |
|
$ |
|
|
$ |
|
||
10
Finance lease ROU assets are included in other assets and finance lease liabilities are included in other current liabilities and other long-term liabilities on the unaudited condensed consolidated balance sheets. Refer to Note 7, Fair Value Measurements, for information regarding impairment of ROU assets.
Lease Expense
The components of lease expense were as follows (in thousands):
|
|
Three Months Ended |
|
|||||
|
|
March 29, 2025 |
|
|
March 30, 2024 |
|
||
Lease expense: |
|
|
|
|
|
|
||
Operating lease expense |
|
$ |
|
|
$ |
|
||
Finance lease expense: |
|
|
|
|
|
|
||
Amortization of right-of-use assets |
|
|
|
|
|
|
||
Interest on lease liabilities |
|
|
|
|
|
|
||
Short-term lease expense |
|
|
|
|
|
|
||
Variable lease expense |
|
|
|
|
|
|
||
Total lease expense |
|
$ |
|
|
$ |
|
||
Other Information
The weighted average remaining lease term and the weighted average discount rate as of March 29, 2025 and December 28, 2024 were as follows:
|
|
March 29, 2025 |
|
|
December 28, 2024 |
|
||
Weighted average remaining lease term (in years) (Operating) |
|
|
|
|
|
|
||
Weighted average remaining lease term (in years) (Finance) |
|
|
|
|
|
|
||
Weighted average discount rate (Operating) |
|
|
% |
|
|
% |
||
Weighted average discount rate (Finance) |
|
|
% |
|
|
% |
||
Maturity of Lease Liabilities
The following table summarizes the maturity of lease liabilities as of March 29, 2025 (in thousands):
|
|
Finance Leases |
|
|
Operating Leases |
|
|
Total Leases |
|
|||
Remainder of 2025 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
2026 |
|
|
|
|
|
|
|
|
|
|||
2027 |
|
|
|
|
|
|
|
|
|
|||
2028 |
|
|
|
|
|
|
|
|
|
|||
2029 |
|
|
|
|
|
|
|
|
|
|||
Thereafter |
|
|
|
|
|
|
|
|
|
|||
Total lease payments |
|
|
|
|
|
|
|
|
|
|||
Less imputed interest |
|
|
|
|
|
|
|
|
|
|||
Present value of lease liabilities |
|
|
|
|
|
|
|
|
|
|||
Less current portion of lease liabilities |
|
|
|
|
|
|
|
|
|
|||
Long-term lease liabilities |
|
$ |
|
|
$ |
|
|
$ |
|
|||
As of March 29, 2025, the Company had entered into additional operating leases that have not yet commenced with total fixed payment obligations of $
The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The rates are established based on the Company’s first lien term loan.
Fair value guidance defines fair value as the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on
11
the measurement date. The Company uses a three-level hierarchy established by the FASB that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach).
The levels of the fair value hierarchy are described below:
Investments held for the Deferred Compensation Plan—The Company records the fair value of the investments and cash and cash equivalents held for the deferred compensation plan in other assets on the unaudited condensed consolidated balance sheets. The carrying value of cash and cash equivalents held in the fund approximates fair value, and the amounts were not material as of March 29, 2025 and December 28, 2024. The investments held in the plan consist of mutual funds and money market funds with fair values that can be corroborated by prices for identical assets and therefore are classified as Level 1 investments under the fair value hierarchy.
|
|
Fair Value Measurements Using |
|
|||||||||||||
|
|
Balance as of |
|
|
Quoted Price |
|
|
Significant |
|
|
Significant |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money Market Funds |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Mutual Funds |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
Fair Value Measurements Using |
|
|||||||||||||
|
|
Balance as of |
|
|
Quoted Price |
|
|
Significant |
|
|
Significant |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money Market Funds |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Mutual Funds |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Contingent Consideration Payable—The Company measures contingent consideration payable at fair value based on a series of unobservable inputs, including the timing and probability of the occurrence of future events, and requires judgment from management. As such, contingent consideration payable is classified as Level 3. Significant market assumptions include a discount rate and the probability of the occurrence of specific events. Refer to Note 3, Acquisitions, for additional information related to the Company's contingent consideration payable.
The following table provides a roll forward of the fair value of recurring Level 3 fair value measurements (in thousands):
Balance at December 28, 2024 |
|
$ |
|
|
Issuance of contingent consideration |
|
|
|
|
Balance at March 29, 2025 |
|
$ |
|
Derivative Financial Instruments—The Company's derivative financial instruments include interest rate derivative contracts. The fair value of derivative financial instruments is determined using observable market inputs such as quoted prices for similar instruments, forward pricing curves, and interest rates, and considers nonperformance risk of the Company and its
12
counterparties, and as such, derivative financial instruments are classified as Level 2. The Company’s derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contracts. The Company elects to record its derivative financial instruments at net fair value on the unaudited condensed consolidated balance sheets. As of March 29, 2025 and December 28, 2024, $
Long-Term Debt—The Company records long-term debt on the unaudited condensed consolidated balance sheets at adjusted cost, net of unamortized issuance costs. The estimated fair value of first lien term loans was $
Other Financial Instruments—The carrying value of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable and accrued liabilities approximates fair value due to the short-term nature of these assets and liabilities.
There were no transfers between levels within the fair value hierarchy during any of the periods presented.
Nonrecurring Fair Value Estimates—The estimated fair value of the Company's long-lived assets are calculated using the discounted cash flow (“DCF”) method of the income approach to fair value. The DCF method for property and equipment incorporates unobservable inputs (Level 3) which include future cash flow projections and discount rate assumptions. For ROU assets, the DCF method incorporates market-based inputs (Level 3) which include the as-is market rents and discount rates.
The following table presents the amount of impairment expense of long-lived assets (in thousands):
|
|
Three Months Ended |
|
|||||
|
|
March 29, 2025 |
|
|
March 30, 2024 |
|
||
Impairment of property and equipment |
|
$ |
|
|
$ |
|
||
Impairment of lease right-of-use assets |
|
|
|
|
|
|
||
Total impairment losses |
|
$ |
|
|
$ |
|
||
Refer to Note 6, Leases, for additional information regarding the Company's ROU assets.
Long-term debt included the following (in thousands):
|
|
March 29, 2025 |
|
|
December 28, 2024 |
|
||
First lien term loans |
|
$ |
|
|
$ |
|
||
Debt issuance costs, net |
|
|
( |
) |
|
|
( |
) |
Total debt |
|
|
|
|
|
|
||
Current portion of long-term debt |
|
|
( |
) |
|
|
( |
) |
Long-term debt, net |
|
$ |
|
|
$ |
|
||
Senior Secured Credit Facilities—The Company's Credit Agreement includes $
The First Lien Term Loan Facility bears interest at a variable rate equal to the Secured Overnight Financing Rate (“SOFR”) plus
13
In February 2025, the Company entered into an amendment to the Credit Agreement to increase the total commitments under the First Lien Revolving Credit Facility by a net amount of $
The Credit Agreement allows for letters of credit to be drawn against the current borrowing capacity of the First Lien Revolving Credit Facility, capped at $
All obligations under the Credit Agreement are secured by substantially all the assets of the Company and its subsidiaries. The Credit Agreement contains various financial and nonfinancial loan covenants and provisions. The Company's financial loan covenant is a quarterly maximum First Lien Term Loan Facility net leverage ratio. The First Lien Term Loan Facility net leverage ratio is required to be tested only if, on the last day of each fiscal quarter, the amount of revolving loans outstanding under the First Lien Revolving Credit Facility, excluding all letters of credit, exceeds
An annual calculation of excess cash flows determines if the Company will be required to make a mandatory prepayment on the First Lien Term Loan Facility. Mandatory prepayments would reduce future required quarterly principal payments.
The Company had
The Company capitalized original issue discount and debt issuance costs of $
The Company did
Principal payments on the First Lien Term Loan Facility are payable in arrears on the last business day of each calendar year quarter, with the final payment of the remaining principal balance due in June 2030 when the First Lien Term Loan Facility matures. Interest payments on the Senior Secured Credit Facilities are payable in arrears on the last business day of each calendar year quarter. The $
Remainder of 2025 |
|
$ |
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
2029 |
|
|
|
|
Thereafter |
|
|
|
|
|
|
$ |
|
14
Other Credit Facilities—In February 2024, the Company entered into a credit facilities agreement (the “LOC Agreement”) which allows for $
The Company is exposed to market risks, including the effect of changes in interest rates, and may use derivatives to manage financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for trading or speculative purposes. The Company may elect to designate certain derivatives as hedging instruments under ASC 815, Derivatives and Hedging. The Company formally documents all relationships between designated hedging instruments and hedged items, as well as its risk management and strategy for undertaking hedge transactions.
Cash Flow Hedges—For interest rate derivative contracts that are designated and qualify as cash flow hedges, unrealized gains or losses resulting from changes in fair value of the derivative contracts are reported as a component of other comprehensive income or loss, inclusive of the related income tax effects, within the consolidated statements of operation and comprehensive income. Gains and losses are reclassified into interest expense when realized, with the related income tax effects reclassified into income tax expense, during the same period in which interest expense is recognized on the hedged item, the First Lien Term Loan Facility. The Company classifies the cash flows at settlement from these designated cash flow hedges in the same category as the cash flows from the related hedged items within the cash provided by operations component of the unaudited condensed consolidated statements of cash flows.
In October 2022, the Company entered into an interest rate cap contract on approximately half of the variable rate debt under the senior secured credit facilities. The cap commenced on December 31, 2022 and provided protection in the form of variable payments from a counterparty in the event that the three-month increased above
In January 2024, the Company entered into a pay-fixed-receive-float interest rate swap contract with a notional amount of $
In March 2025, the Company entered into two forward starting pay-fixed-receive-float interest rate swap contracts, one with a fixed interest rate of
As of March 29, 2025, the Company's derivatives are considered highly effective. The Company estimates that $
15
The following table presents the amounts affecting the unaudited condensed consolidated statements of operations and comprehensive income (in thousands):
|
Derivatives Designated as Cash Flow Hedging Instruments |
|
|||||||||
|
(Loss) Gain |
|
|
(Gain) Loss |
|
|
Total Effect on |
|
|||
Three Months Ended March 29, 2025 |
|
|
|
|
|
|
|
|
|||
Interest rate derivative contracts |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Income tax effect |
|
|
|
|
|
|
|
|
|||
Net of income taxes |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|||
Three Months Ended March 30, 2024 |
|
|
|
|
|
|
|
|
|||
Interest rate derivative contracts (1) |
$ |
|
|
$ |
|
|
$ |
|
|||
Income tax effect |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net of income taxes |
$ |
|
|
$ |
|
|
$ |
|
|||
Credit Risk—The Company is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with at or above investment grade credit ratings. This does not eliminate the Company’s exposure to credit risk with these institutions; however, the Company’s risk is limited to the fair value of the instruments. The Company is not aware of any circumstance or condition that would preclude a counterparty from complying with the terms of the derivative contracts and will continuously monitor the credit worthiness of all its derivative counterparties for any significant adverse changes.
The changes in accumulated other comprehensive (loss) income, net of tax, are comprised of unrealized gains and losses on cash flow hedging instruments, and were as follows (in thousands):
Balance as of December 30, 2023 |
|
$ |
( |
) |
Other comprehensive gains before reclassifications |
|
|
|
|
Reclassifications to net income (loss) of previously deferred losses |
|
|
|
|
Balance as of March 30, 2024 |
|
$ |
|
Balance as of December 28, 2024 |
|
$ |
|
|
Other comprehensive losses before reclassifications |
|
|
( |
) |
Reclassifications to net income (loss) of previously deferred gains |
|
|
( |
) |
Balance as of March 29, 2025 |
|
$ |
( |
) |
2022 Incentive Award Plan—
The Company granted
16
exercise. RSUs granted to the Company's board of directors (the “Board”) during the three months ended March 29, 2025 have a service-based vesting condition for which the awards vest in June 2025.
Stock-based Compensation Expense—Total stock-based compensation expense for all stock-based compensation awards was $
The reconciliations of basic and diluted net income (loss) per common share for the three months ended March 29, 2025 and March 30, 2024 are set forth in the table below (in thousands, except per share data):
|
|
Three Months Ended |
|
|||||
|
|
March 29, 2025 |
|
|
March 30, 2024 |
|
||
Net income (loss) available to common shareholders, basic and diluted |
|
$ |
|
|
$ |
( |
) |
|
Weighted average number of common shares outstanding, basic (1) |
|
|
|
|
|
|
||
Effect of dilutive securities (1) |
|
|
|
|
|
— |
|
|
Weighted average number of common shares outstanding, diluted (1) |
|
|
|
|
|
|
||
Net income (loss) per common share: |
|
|
|
|
|
|
||
Basic (1) |
|
$ |
|
|
$ |
( |
) |
|
Diluted (1) |
|
$ |
|
|
$ |
( |
) |
|
During the three months ended March 29, 2025,
The Company’s effective tax rates were
The Company considers all available positive and negative evidence when assessing the carrying amount of its deferred tax assets. Evidence includes the anticipated impact on future taxable income arising from the reversal of temporary differences,
17
actual operating results for the trailing twelve quarters, the ongoing assessment of financial performance, and available tax planning strategies, if any, that management considers prudent and feasible.
The Company is no longer subject to examination by tax authorities for years before 2012.
Litigation—The Company is subject to claims and litigation arising in the ordinary course of business. The Company believes the accruals recorded in the unaudited condensed consolidated interim financial statements are adequate in light of the probable and estimable liabilities. The Company believes that none of the claims or litigation of which it is aware will materially affect the unaudited condensed consolidated interim financial statements, although assurance cannot be given with respect to the ultimate outcome of any such claims or actions.
Management Services Agreement—In August 2015, the Company entered into a management services agreement with Partners Group (USA), Inc. (“Partners Group”), a related party of the Company’s former ultimate parent, pursuant to which Partners Group agreed to provide certain management and advisory services to the Company on an ongoing basis for an annual management fee of $
KC Parent—KC Parent, LP (“KC Parent”) was the Company’s direct parent prior to the Company's IPO. In connection with the Company's IPO, all shares of the Company’s common stock held by KC Parent were distributed to unitholders of KC Parent in proportion to their interests in KC Parent.
In March 2024, the Company made a $
Lease Agreements—The Company is the lessee in several lease agreements in which a former limited partner of KC Parent has ownership interest in the lessor entities. Following the distribution of KC Parent's shares of the Company's common stock in October 2024, the former limited partner of KC Parent is not considered a related party and rent expense associated with these lessor entities no longer represents a related party transaction. Rent expense is included in cost of services (excluding depreciation and impairment) and selling, general, and administrative expenses in the unaudited condensed consolidated statements of operations and comprehensive income.
As of March 29, 2025, there were
During the three months ended March 29, 2025, the Company had
The Company uses the “management approach” in determining its operating segments. The management approach considers the internal organization and reporting used by the Company’s Chief Operating Decision Maker (“CODM”) for making strategic decisions, assessing performance, and allocating resources. The Company’s has been identified as the Chief Executive Officer of the Company.
The Company determined it operates as
18
19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by reference to, our unaudited condensed consolidated financial statements and notes thereto for the three months ended March 29, 2025 and March 30, 2024 included elsewhere in this Quarterly Report on Form 10-Q and audited consolidated financial statements and notes thereto for the fiscal year ended December 28, 2024 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 21, 2025. Some of the information included in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” sections of this Quarterly Report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Our Company
KinderCare Learning Companies, Inc. (“the Company,” “we,” “us,” and “our”) is a leading provider of high-quality early childhood education (“ECE”) in the United States. We are a mission-driven organization, rooted in a commitment to providing all children with the very best start in life. We serve children ranging from six weeks to 12 years of age across our market-leading footprint of 1,582 early childhood education centers with center capacity for 211,767 children and 1,038 before- and after-school sites located in 41 states and the District of Columbia as of March 29, 2025.
On October 8, 2024, our registration statement on Form S-1, as amended (File No. 333-281971) (“Form S-1”) related to our initial public offering (“IPO”), was declared effective by the SEC, and our IPO was completed on October 10, 2024. In connection with our IPO, the Company converted Class A and Class B common stock, both with a par value of $0.0001 per share, to common stock, with a par value of $0.01 per share, at a ratio of 8.375 shares of Class A and Class B common stock to one share of common stock, which became effective immediately following the effectiveness of our registration statement on Form S-1 for our IPO (“Common Stock Conversion”). As a result, prior periods presented in our unaudited condensed consolidated financial statements and notes thereto as of and for the three months ended March 29, 2025 have been adjusted to retrospectively reflect the Common Stock Conversion. Refer to Note 1 within the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and Note 17 within the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2024 for further information.
Factors Affecting Results of Operations
The following factors, among others described herein, have been important to our business and we expect them to impact our results of operations and financial condition in future periods:
Occupancy improvement: We aim to improve occupancy rates across our portfolio. Historically, we increased our average occupancy through a combination of strategic investments in technology and talent, as well as implementing best practices at our centers. We invest significant resources into our technology infrastructure to support our center and site operations and interactions with families. As our occupancy grows, we have an opportunity to gain further operating leverage and improve profitability as we allocate fixed costs over more enrollments.
Pricing model designed for continued growth: We expect to implement regular price increases to support center re-investment and enhance our operational performance. Tuition increases are standard across the industry, and we view them as a reliable component of our business model. Additionally, while we expect rates to increase each year, the out-of-pocket costs paid by parents with children who continue to enroll in our programs decline on an annual basis as tuition costs decrease as children age-up (e.g., three-year olds have lower tuition costs than two-year olds). Assuming consistent enrollment across ages, tuition increases have an immediate positive impact to revenue.
20
Key Performance Metrics
Total centers and sites
We measure and track the number of centers and sites because, as our number of centers and sites grow, it highlights our geographic expansion and potential growth in revenue. We believe this information is useful to investors as an indicator of revenue growth and operational expansion and can be used to measure and track our performance over time. We define the number of centers as the number of centers at the beginning of the period plus openings and acquisitions, minus any permanent closures for the period. A permanently closed center is a center that has ceased operations as of the end of the reporting period and management does not intend on reopening the center. We define the number of sites as total sites that were operational in the last month of the period.
|
|
March 29, |
|
|
December 28, |
|
|
March 30, |
|
|
December 30, |
|
||||
|
|
2025 |
|
|
2024 |
|
|
2024 |
|
|
2023 |
|
||||
Early childhood education centers |
|
|
1,582 |
|
|
|
1,574 |
|
|
|
1,563 |
|
|
|
1,557 |
|
Before- and after-school sites |
|
|
1,038 |
|
|
|
1,025 |
|
|
|
950 |
|
|
|
948 |
|
Total centers and sites |
|
|
2,620 |
|
|
|
2,599 |
|
|
|
2,513 |
|
|
|
2,505 |
|
As of March 29, 2025, we operated 1,582 early childhood education centers with a center capacity for 211,767 children as compared to 1,563 early childhood education centers as of March 30, 2024, with a center capacity for 210,012 children. During the three months ended March 29, 2025, total centers increased by eight due to acquiring five centers and opening five centers, partially offset by two permanent center closures. During the three months ended March 30, 2024, total centers increased by six due to acquiring six centers and opening four centers, partially offset by four permanent center closures.
As of March 29, 2025, we operated 1,038 before- and after-school sites, an increase of 88 sites from 950 before- and after-school sites as of March 30, 2024. Total before- and after-school sites increased by 13 during the three months ended March 29, 2025 due to opening 19 sites, partially offset by six site closures. Total before- and after-school sites increased by two during the three months ended March 30, 2024 as a result of opening 12 sites, partially offset by 10 site closures.
Average weekly ECE FTEs
Average weekly ECE full-time enrollment (“FTEs”) is a measure of the number of full-time children enrolled and charged tuition weekly in our centers. We calculate average weekly ECE FTEs based on weighted averages; for example, an enrolled full-time child equates to one average weekly ECE FTE, while a child enrolled for three full days equates to 0.6 average weekly ECE FTE. This
21
metric is used by management and we believe is useful to investors as it is the key driver of revenue generated and variable costs incurred in our operations.
|
|
Three Months Ended |
|
|||||
|
|
March 29, |
|
|
March 30, |
|
||
|
|
2025 |
|
|
2024 |
|
||
Average weekly ECE FTEs |
|
|
144,076 |
|
|
|
145,180 |
|
Average weekly ECE FTEs for the three months ended March 29, 2025 decreased by 1,104, or 0.8%, as compared to the three months ended March 30, 2024 primarily due to lower FTEs at same-centers and closed centers, partially offset by FTEs at new and acquired centers.
ECE same-center occupancy
ECE same-center occupancy is a measure of the utilization of center capacity. We define same-center to be centers that have been operated by us for at least 12 months as of the period end date or, in other words, centers that are starting their second year of operation. Excluded from same-centers are any closed centers at the end of the reporting period and any new or acquired centers that have not yet met the same-center criteria. We calculate ECE same-center occupancy as the average weekly ECE same-center full-time enrollment divided by the total of the ECE same-centers’ capacity during the period. Center capacity is determined by regulatory and operational parameters and can fluctuate due to changes in these parameters, such as changing center structures to meet the demands of enrollment or changes in regulatory standards. This metric is used by management and we believe is useful to investors as it measures the utilization of our centers’ capacity in generating revenue.
|
|
Three Months Ended |
|
|||||
|
|
March 29, |
|
|
March 30, |
|
||
|
|
2025 |
|
|
2024 |
|
||
ECE same-center occupancy |
|
|
69.1 |
% |
|
|
69.6 |
% |
ECE same-center occupancy decreased by 50 basis points for the three months ended March 29, 2025 as compared to the three months ended March 30, 2024 primarily due to lower enrollment at same-centers.
ECE same-center revenue
ECE same-center revenue is revenues earned from centers that have been operated by us for at least 12 months as of the period end date and is a measure used by management to attribute a portion of our revenue to mature centers as compared to new or acquired centers. This metric is used by management and we believe is useful to investors as it highlights trends in our core operating performance. The following table is in thousands.
|
|
Three Months Ended |
|
|||||
|
|
March 29, |
|
|
March 30, |
|
||
|
|
2025 |
|
|
2024 |
|
||
ECE same-center revenue |
|
$ |
606,357 |
|
|
$ |
597,746 |
|
ECE same-center revenue increased by $8.6 million, or 1.4%, for the three months ended March 29, 2025 as compared to the three months ended March 30, 2024. ECE same-center revenue growth of $4.1 million, or 0.7%, was driven by centers that were classified as same-centers as of both March 29, 2025 and March 30, 2024. The remaining $4.5 million increase in ECE same-center revenue growth was driven by the net impact of new and acquired centers not yet classified as same-centers as of March 30, 2024 and center closures as of March 29, 2025.
Components of Results of Operations
Revenue
Our revenue is derived primarily from tuition charged for providing early childhood education and care services at our centers and sites. The majority of tuition is paid by individual families and may be partially subsidized by amounts received from government
22
agencies or employer sponsors. Subsidy revenue from government agencies was $240.1 million and $215.8 million during the three months ended March 29, 2025 and March 30, 2024, respectively.
Cost of services (excluding depreciation and impairment)
Our cost of services includes the direct costs related to the operation of our centers and sites and excludes depreciation and impairment. Cost of services consists primarily of personnel costs, rent, food, costs of operating and maintaining facilities, taxes and licenses, marketing, transportation, classroom and office supplies, and insurance. Offsetting certain center operating expenses are reimbursements from federal, state, and local agencies.
Depreciation and amortization
Our depreciation and amortization includes depreciation relating to centers and sites, field management, and corporate facilities as well as amortization related to finance lease right-of-use assets and definite-lived intangibles, such as client relationships and trade names and trademarks.
Selling, general, and administrative expenses
Selling, general, and administrative expenses include costs, primarily personnel related, associated with field management, corporate oversight, support of our centers and sites, and stock-based compensation.
Impairment losses
Our impairment losses relate to property and equipment, operating right-of-use assets, and definite-lived intangible assets.
Interest expense
Interest expense includes long-term debt interest, gain or loss on interest rate derivatives, amortization of debt issuance costs, and gain or loss on extinguishment of debt.
Interest income
Interest income includes interest earned on cash held in interest-bearing accounts.
Other expense (income), net
Other expense (income), net includes sub-lease income, miscellaneous insurance proceeds, contract settlements, and realized and unrealized gains and losses related to investment trust assets.
Income tax expense
Income taxes primarily consist of an estimate of federal and state income taxes based on enacted federal and state tax rates, as adjusted for allowable credits, differences between the United States generally accepted accounting principles (“GAAP”) and tax income and deductions, and the tax effect from uncertain tax positions, as applicable.
Factors Affecting the Comparability of our Results of Operations
As a result of certain factors, our historical results of operations may not be comparable from period to period and may not be comparable to our financial results of operations in future periods. Set forth below is a brief discussion of the key factors impacting the comparability of our results of operations.
IPO and Related Transactions
In October 2024, our IPO was completed. Net proceeds from the IPO were primarily utilized to repay $608.0 million of outstanding principal on our first lien term loan (“First Lien Term Loan Facility”), which provided us the ability to enter into a repricing amendment to the credit agreement, dated as of June 12, 2023 (as subsequently amended and restated) (the “Credit Agreement”) to reduce the interest rates on our senior secured credit facilities. Additionally, we have incurred expenses during our transition to a
23
public company that we had not previously incurred as a private company, including costs associated with public company reporting requirements of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), which have impacted our results of operations.
Our IPO, as well as the transactions we entered into in connection with our IPO, have affected the comparability of our operating results for the periods presented and are expected to have an impact on the comparability of future periods. Refer to Note 13 and Note 17 within our audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2024 for further information.
COVID-19 Related Stimulus
During 2020 and 2021, the United States government approved several incremental stimulus funding programs for ECE providers in response to the coronavirus disease 2019 (“COVID-19”) pandemic, and as a result, we have received grants in the form of revenue or cost reimbursements (“COVID-19 Related Stimulus”). We recognized $0.7 million and $24.1 million during the three months ended March 29, 2025 and March 30, 2024, respectively, in funding for reimbursement of center operating expenses in cost of services (excluding depreciation and impairment). The federal programs funding the COVID-19 Related Stimulus were required to distribute all stimulus funding for stabilization of the child care industry by December 31, 2024, and we do not expect to receive a material amount of funding after that date. The variability of funding provided by COVID-19 Related Stimulus has impacted the comparability of our operating results for the periods presented, and the conclusion of the programs will have an impact on the comparability of future periods.
The Employee Retention Credit (“ERC”), established by the Coronavirus Aid, Relief and Economic Security Act and extended and expanded by several subsequent governmental acts, allows eligible businesses to claim a per employee payroll tax credit based on a percentage of qualified wages, including health care expenses, paid during calendar year 2020 through September 2021. During the fiscal year ended December 31, 2022, we applied for ERC for qualified wages and benefits paid throughout the fiscal years ended January 1, 2022 and January 2, 2021. Reimbursements of $62.0 million in cash tax refunds for ERC claimed, along with $2.3 million in interest income, were received during the fiscal year ended December 30, 2023. Due to the unprecedented nature of ERC legislation and the changing administrative guidance, not all of the ERC reimbursements received have met our recognition criteria. During the second quarter of the fiscal year ended December 28, 2024, we recognized $23.4 million of ERC in cost of services (excluding depreciation and impairment), along with $0.5 million in interest income. No ERC was recognized during the three months ended March 29, 2025 and March 30, 2024. The timing in recognition of the remaining deferred ERC liabilities will have an impact on the comparability of future periods.
24
Results of Operations
We operate as a single operating segment to reflect the way our chief operating decision maker reviews and assesses the performance of the business. Refer to Note 1 and Note 16 of our unaudited condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, and Note 1 and Note 23 of our audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2024 for additional information regarding the Company's accounting policies and segment disclosures. The period-to-period comparisons below of financial results are not necessarily indicative of future results.
The following table sets forth our results of operations including as a percentage of revenue for the three months ended March 29, 2025 and March 30, 2024 (in thousands, except where otherwise noted):
|
|
Three Months Ended |
||||||||||
|
|
March 29, 2025 |
|
March 30, 2024 |
||||||||
Revenue |
|
$ |
668,244 |
|
|
|
|
$ |
654,670 |
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
||
Cost of services (excluding depreciation and impairment) |
|
|
516,188 |
|
|
77.2% |
|
|
497,694 |
|
|
76.0% |
Depreciation and amortization |
|
|
29,977 |
|
|
4.5% |
|
|
28,540 |
|
|
4.4% |
Selling, general, and administrative expenses |
|
|
71,727 |
|
|
10.7% |
|
|
90,455 |
|
|
13.8% |
Impairment losses |
|
|
1,510 |
|
|
0.2% |
|
|
4,362 |
|
|
0.7% |
Total costs and expenses |
|
|
619,402 |
|
|
92.7% |
|
|
621,051 |
|
|
94.9% |
Income from operations |
|
|
48,842 |
|
|
7.3% |
|
|
33,619 |
|
|
5.1% |
Interest expense |
|
|
20,108 |
|
|
3.0% |
|
|
36,420 |
|
|
5.6% |
Interest income |
|
|
(659 |
) |
|
(0.1%) |
|
|
(2,108 |
) |
|
(0.3%) |
Other expense (income), net |
|
|
398 |
|
|
0.1% |
|
|
(3,284 |
) |
|
(0.5%) |
Income before income taxes |
|
|
28,995 |
|
|
4.3% |
|
|
2,591 |
|
|
0.4% |
Income tax expense |
|
|
7,838 |
|
|
1.2% |
|
|
4,342 |
|
|
0.7% |
Net income (loss) |
|
$ |
21,157 |
|
|
3.2% |
|
$ |
(1,751 |
) |
|
(0.3%) |
Net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
||
Basic |
|
$ |
0.18 |
|
|
|
|
$ |
(0.02 |
) |
|
|
Diluted |
|
$ |
0.18 |
|
|
|
|
$ |
(0.02 |
) |
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
||
Basic |
|
|
118,239 |
|
|
|
|
|
90,366 |
|
|
|
Diluted |
|
|
118,321 |
|
|
|
|
|
90,366 |
|
|
|
Comparison of the Three Months Ended March 29, 2025 and March 30, 2024
Revenue
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
|
|
March 29, 2025 |
|
|
March 30, 2024 |
|
|
Amount |
|
|
% |
|
||||
Early childhood education centers |
|
$ |
615,007 |
|
|
$ |
605,283 |
|
|
$ |
9,724 |
|
|
|
1.6 |
% |
Before- and after-school sites |
|
|
53,237 |
|
|
|
49,387 |
|
|
|
3,850 |
|
|
|
7.8 |
% |
Total revenue |
|
$ |
668,244 |
|
|
$ |
654,670 |
|
|
$ |
13,574 |
|
|
|
2.1 |
% |
Total revenue increased by $13.6 million, or 2.1%, for the three months ended March 29, 2025 as compared to the three months ended March 30, 2024.
Revenue from early childhood education centers increased by $9.7 million, or 1.6%, for the three months ended March 29, 2025 as compared to the three months ended March 30, 2024, of which approximately 2% was from higher tuition rates, partially offset by slightly lower enrollment.
The increase in revenue from early childhood education centers was primarily driven by $8.6 million higher ECE same-center revenue. Additionally, revenue from new and acquired centers not yet classified as same-centers increased by $2.0 million during the three months ended March 29, 2025, partially offset by center closures.
25
Revenue from before- and after-school sites increased by $3.9 million, or 7.8%, for the three months ended March 29, 2025 as compared to the three months ended March 30, 2024 primarily due to opening new sites.
Cost of services (excluding depreciation and impairment)
Cost of services (excluding depreciation and impairment) increased by $18.5 million, or 3.7%, for the three months ended March 29, 2025 as compared to the three months ended March 30, 2024. This increase was driven by a $10.7 million decrease in reimbursements from government assistance, primarily related to the conclusion of certain COVID-19 Related Stimulus funding. The increase was also attributable to $4.7 million higher personnel costs due to increased wage rates, partially offset by lower grant-related bonuses and labor hours. Additionally, rent expense increased by $4.0 million primarily due to new and acquired centers.
Depreciation and amortization
Depreciation and amortization increased by $1.4 million, or 5.0%, for the three months ended March 29, 2025 as compared to the three months ended March 30, 2024. This increase was primarily driven by higher depreciation expense as a result of assets placed into service from new and acquired centers as well as from capital expenditures in fiscal 2024.
Selling, general, and administrative expenses
Selling, general, and administrative expenses decreased by $18.7 million, or 20.7%, for the three months ended March 29, 2025 as compared to the three months ended March 30, 2024. This decrease was primarily driven by lower stock-based compensation expense and bonus expense of $16.9 million due to the March 2024 distribution to holders of Class B profit interest units (“PIUs”) of KC Parent, LP (“KC Parent”), our direct parent prior to our IPO, and a related bonus to holders of restricted stock units (“RSUs”) and stock options during the three months ended March 30, 2024, partially offset by expense from additional awards granted under the 2022 Incentive Award Plan in October 2024 and March 2025.
Impairment losses
Impairment losses decreased by $2.9 million, or 65.4%, for the three months ended March 29, 2025 as compared to the three months ended March 30, 2024. This decrease was driven by $2.0 million lower right-of-use asset impairment and $0.9 lower fixed asset impairment from fewer centers triggering the need for an impairment assessment during the three months ended March 29, 2025 and fewer centers impaired as a result of higher cash flow projections.
Interest expense
Interest expense decreased by $16.3 million, or 44.8%, for the three months ended March 29, 2025 as compared to the three months ended March 30, 2024. This decrease was primarily driven by lower outstanding principal and interest rates on the First Lien Term Loan Facility as a result of the October 2024 repayment and repricing amendment executed in conjunction with the IPO.
Interest income
Interest income decreased by $1.4 million, or 68.7%, for the three months ended March 29, 2025 as compared to the three months ended March 30, 2024. This decrease was primarily driven by lower cash balances in interest-bearing accounts held at lower average interest rates.
Other expense (income), net
Other expense (income), net increased by $3.7 million, or 112.1%, for the three months ended March 29, 2025 as compared to the three months ended March 30, 2024. This increase was primarily due to a $2.1 million net change in realized and unrealized holding losses on deferred compensation plan investment trust assets. The increase was also attributable to $1.5 million in gains recognized on miscellaneous insurance claims during the three months ended March 30, 2024.
Income tax expense
Income tax expense increased by $3.5 million for the three months ended March 29, 2025 as compared to the three months ended March 30, 2024. The effective tax rate was 27.0% for the three months ended March 29, 2025 as compared to 167.6% for the three months ended March 30, 2024. Compared to the statutory rate, the difference in the effective tax rate for the three months ended March 29, 2025 was primarily due to state income taxes. Compared to the statutory rate, the difference in the effective tax rate for the
26
three months ended March 30, 2024 was primarily driven by tax expense from nondeductible stock-based compensation and state income taxes.
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with the United States generally accepted accounting principles (“GAAP”), we also provide the below non-GAAP financial measures. EBIT, EBITDA, adjusted EBITDA, adjusted net income, and adjusted net income per common share (collectively referred to as the “non-GAAP financial measures”) are not presentations made in accordance with GAAP, and should not be considered as an alternative to net income or loss, income or loss from operations, or any other performance measure in accordance with GAAP, or as an alternative to cash provided by operating activities as a measure of our liquidity. Consequently, our non-GAAP financial measures should be considered together with our consolidated financial statements, which are prepared in accordance with GAAP.
We present EBIT, EBITDA, adjusted EBITDA, adjusted net income, and adjusted net income per common share because we consider them to be important supplemental measures of our performance and believe they are useful to securities analysts, investors, and other interested parties. Specifically, adjusted EBITDA and adjusted net income allow for an assessment of our operating performance without the effect of charges that do not relate to the core operations of our business.
EBIT, EBITDA, adjusted EBITDA, adjusted net income, and adjusted net income per common share have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
EBIT, EBITDA, and Adjusted EBITDA
EBIT is defined as net income (loss) adjusted for interest and income tax expense. EBITDA is defined as EBIT adjusted for depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted for impairment losses, stock-based compensation, management and advisory fee expenses, acquisition related costs, non-recurring distribution and bonus expense, COVID-19 Related Stimulus, net, and other costs because these charges do not relate to the core operations of our business. We present EBIT, EBITDA, and adjusted EBITDA because we consider them to be important supplemental measures of our performance and believe they are useful to securities analysts, investors, and other interested parties. We believe adjusted EBITDA is helpful to investors in highlighting trends in our core operating performance compared to other measures, which can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate, and capital investments.
27
The following table shows EBIT, EBITDA, and adjusted EBITDA for the periods presented, and the reconciliation to its most comparable GAAP measure, net income (loss), for the periods presented (in thousands):
|
|
Three Months Ended |
|
|||||
|
|
March 29, |
|
|
March 30, |
|
||
|
|
2025 |
|
|
2024 |
|
||
Net income (loss) |
|
$ |
21,157 |
|
|
$ |
(1,751 |
) |
Add back: |
|
|
|
|
|
|
||
Interest expense |
|
|
20,108 |
|
|
|
36,420 |
|
Interest income |
|
|
(659 |
) |
|
|
(2,108 |
) |
Income tax expense |
|
|
7,838 |
|
|
|
4,342 |
|
EBIT |
|
$ |
48,444 |
|
|
$ |
36,903 |
|
Add back: |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
29,977 |
|
|
|
28,540 |
|
EBITDA |
|
$ |
78,421 |
|
|
$ |
65,443 |
|
Add back: |
|
|
|
|
|
|
||
Impairment losses (1) |
|
|
1,510 |
|
|
|
4,362 |
|
Stock-based compensation (2) |
|
|
4,073 |
|
|
|
(105 |
) |
Management and advisory fee expenses (3) |
|
|
— |
|
|
|
1,216 |
|
Acquisition related costs (4) |
|
|
— |
|
|
|
16 |
|
Non-recurring distribution and bonus expense (5) |
|
|
— |
|
|
|
19,287 |
|
COVID-19 Related Stimulus, net (6) |
|
|
(663 |
) |
|
|
(19,494 |
) |
Other costs (7) |
|
|
210 |
|
|
|
3,715 |
|
Adjusted EBITDA |
|
$ |
83,551 |
|
|
$ |
74,440 |
|
Adjusted net income and adjusted net income per common share
Adjusted net income is defined as net income (loss) adjusted for income tax expense, amortization of intangible assets, impairment losses, stock-based compensation, management and advisory fee expenses, acquisition related costs, non-recurring distribution and bonus expense, COVID-19 Related Stimulus, net, loss on extinguishment of long-term debt, net, other costs, and non-GAAP income tax expense because these charges do not relate to the core operations of our business. Adjusted net income per common share is defined as the amount of adjusted net income per weighted average number of common shares outstanding. We present adjusted net income and adjusted net income per common share because we consider them to be important measures used to evaluate our operating performance internally. We believe the use of adjusted net income and adjusted net income per common share provides investors with consistency in the evaluation of the Company as they offer a meaningful comparison of past, present, and future operating results, as well as more useful financial comparisons to our peers. We believe these supplemental measures can be used to assess the financial performance of our business without regard to certain costs that are not representative of our continuing operations.
28
The following table shows adjusted net income and adjusted net income per common share for the periods presented and the reconciliation to the most comparable GAAP measure, net income (loss) and net income (loss) per common share, respectively, for the periods presented (in thousands, except per share data):
|
|
Three Months Ended |
|
|||||
|
|
March 29, |
|
|
March 30, |
|
||
|
|
2025 |
|
|
2024 |
|
||
Net income (loss) |
|
$ |
21,157 |
|
|
$ |
(1,751 |
) |
Income tax expense |
|
|
7,838 |
|
|
|
4,342 |
|
Net income before income tax |
|
$ |
28,995 |
|
|
$ |
2,591 |
|
Add back: |
|
|
|
|
|
|
||
Amortization of intangible assets |
|
|
2,309 |
|
|
|
2,284 |
|
Impairment losses (1) |
|
|
1,510 |
|
|
|
4,362 |
|
Stock-based compensation (2) |
|
|
4,073 |
|
|
|
(105 |
) |
Management and advisory fee expenses (3) |
|
|
— |
|
|
|
1,216 |
|
Acquisition related costs (4) |
|
|
— |
|
|
|
16 |
|
Non-recurring distribution and bonus expense (5) |
|
|
— |
|
|
|
19,287 |
|
COVID-19 Related Stimulus, net (6) |
|
|
(663 |
) |
|
|
(19,494 |
) |
Other costs (7) |
|
|
210 |
|
|
|
3,715 |
|
Adjusted income before income tax |
|
|
36,434 |
|
|
|
13,872 |
|
Adjusted income tax expense (8) |
|
|
9,404 |
|
|
|
3,580 |
|
Adjusted net income |
|
$ |
27,030 |
|
|
$ |
10,292 |
|
Net income (loss) per common share: (9) |
|
|
|
|
|
|
||
Basic |
|
$ |
0.18 |
|
|
$ |
(0.02 |
) |
Diluted |
|
$ |
0.18 |
|
|
$ |
(0.02 |
) |
Adjusted net income per common share: (9) |
|
|
|
|
|
|
||
Basic |
|
$ |
0.23 |
|
|
$ |
0.11 |
|
Diluted |
|
$ |
0.23 |
|
|
$ |
0.11 |
|
Weighted average number of common shares outstanding: (9) |
|
|
|
|
|
|
||
Basic |
|
|
118,239 |
|
|
|
90,366 |
|
Diluted |
|
|
118,321 |
|
|
|
90,366 |
|
Explanation of add backs:
29
Liquidity and Capital Resources
Our primary sources of cash are cash provided by operations, current cash balances, and borrowings available under our revolving credit facility (the “First Lien Revolving Credit Facility”). Our principal uses of cash are payments of our operating expenses, such as personnel salaries and benefits, debt service, rents paid to landlords, and capital expenditures.
We expect to continue to meet our liquidity requirements for at least the next 12 months under current operating conditions with cash generated from operations, cash on hand, and to the extent necessary and available, through borrowings under the Credit Agreement. If the need arises for additional expenditures, we may seek additional funding. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under “Risk Factors.” In the future, we may attempt to raise additional capital through the sale of equity securities or debt financing arrangements. Any future indebtedness we incur may result in terms that could be unfavorable to equity investors. We cannot provide assurance that we will be able to raise additional capital in the future on favorable terms, or at all. Any inability to raise capital could adversely affect our ability to achieve our business objectives.
Debt facilities
As of March 29, 2025, our Credit Agreement consists of a $966.8 million First Lien Term Loan Facility and a $262.5 million First Lien Revolving Credit Facility.
The First Lien Term Loan Facility bears interest at a variable rate equal to the Secured Overnight Financing Rate (“SOFR”) plus 3.25% per annum. In addition, amounts drawn under the First Lien Revolving Credit Facility bear interest at SOFR plus an applicable rate between 2.50% and 3.00% per annum and the unused portion of the First Lien Revolving Credit Facility bears interest at a rate between 0.25% and 0.50% per annum, both based on a pricing grid of the Company's First Lien Term Loan Facility net leverage ratio.
In February 2025, the Company entered into an amendment to the Credit Agreement to increase the total commitments under the First Lien Revolving Credit Facility by a net amount of $22.5 million as well as reclassify and extend $5.0 million of the previously non-extended commitments, increasing the total borrowing capacity of the First Lien Revolving Credit Facility to $262.5 million. All other terms under the Credit Agreement remain unchanged as a result of the amendment.
The Credit Agreement allows for letters of credit to be drawn against the current borrowing capacity of the First Lien Revolving Credit Facility, capped at $172.5 million. The Company pays certain fees under the First Lien Revolving Credit Facility, including a fronting fee on outstanding letters of credit of 0.125% per annum. Additionally, fees on the outstanding letters of credit bear interest at a rate equal to the applicable rate for amounts drawn under the First Lien Revolving Credit Facility.
As of March 29, 2025, there were no outstanding borrowings under the First Lien Revolving Credit Facility and $55.1 million of outstanding letters of credit.
30
The interest rates effective as of March 29, 2025 were 7.54% on the First Lien Term Loan Facility, 2.50% on outstanding letters of credit as well as a 0.125% fronting fee on outstanding letters of credit, and 0.25% on the unused portion of the First Lien Revolving Credit Facility.
The weighted average interest rate during the three months ended March 29, 2025 for the First Lien Term Loan Facility was 7.64%.
All obligations under the Credit Agreement are secured by substantially all of our assets. The Credit Agreement contains various financial and nonfinancial loan covenants and provisions.
Under the Credit Agreement, the financial loan covenant is a quarterly maximum First Lien Term Loan Facility net leverage ratio (as defined in the Credit Agreement) to be tested only if, on the last day of each fiscal quarter, the amount of revolving loans outstanding on the First Lien Revolving Credit Facility (excluding all letters of credit) exceeds 35% of total revolving commitments on such date. As this threshold was not met as of March 29, 2025 the quarterly maximum First Lien Term Loan Facility net leverage ratio financial covenant was not in effect. Nonfinancial loan covenants restrict our ability to, among other things, incur additional debt; make fundamental changes to the business; make certain restricted payments, investments, acquisitions, and dispositions; or engage in certain transactions with affiliates.
An annual calculation of excess cash flows determines if the Company will be required to make a mandatory prepayment on the First Lien Term Loan Facility. Mandatory prepayments would reduce future required quarterly principal payments.
The First Lien Term Loan Facility matures in June 2030. The $252.5 million of extended commitments under the First Lien Revolving Credit Facility mature in October 2029, while the $10.0 million of non-extended commitments have a maturity date of June 2028.
As of March 29, 2025, we were in compliance with all covenants of the Credit Agreement.
In February 2024, we entered into a credit facilities agreement, dated as of February 1, 2024, which allows for $20.0 million in letters of credit to be issued (“LOC Agreement”). We pay an interest rate of 5.95% on any outstanding balance and 0.25% on any unused portion. The LOC Agreement matures in December 2026. Upon entering into the LOC Agreement, we issued $20.0 million in letters of credit and cancelled $16.7 million of outstanding letters of credit under the First Lien Revolving Credit Facility. As of March 29, 2025 and December 28, 2024, there were $20.0 million outstanding letters of credit under the LOC Agreement.
We do not engage in off-balance sheet financing arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
Refer to Note 8 of our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further information regarding our debt facilities.
Cash flows
The following table summarizes our cash flows (in thousands) for the periods presented:
|
|
Three Months Ended |
|
|||||
|
|
March 29, 2025 |
|
|
March 30, 2024 |
|
||
Cash provided by operating activities |
|
$ |
98,444 |
|
|
$ |
64,119 |
|
Cash used in investing activities |
|
|
(28,388 |
) |
|
|
(31,387 |
) |
Cash used in financing activities |
|
|
(1,097 |
) |
|
|
(60,313 |
) |
Net change in cash, cash equivalents, and restricted cash |
|
|
68,959 |
|
|
|
(27,581 |
) |
Cash, cash equivalents, and restricted cash at beginning of period |
|
|
62,430 |
|
|
|
156,412 |
|
Cash, cash equivalents, and restricted cash at end of period |
|
$ |
131,389 |
|
|
$ |
128,831 |
|
Net cash provided by operating activities
Cash provided by operating activities increased by $34.3 million for the three months ended March 29, 2025 as compared to the three months ended March 30, 2024. Net income (loss), adjusted for non-cash items, increased by $11.3 million primarily driven by lower interest expense, partially offset by a decrease in cost reimbursements from government assistance. The net changes in operating assets and liabilities resulted in a $23.0 million increase in cash primarily due to the timing of vendor payments and receipt of tuition payments as well as being in an accrued tax position versus a prepaid position in the prior period. These increases to cash were partially offset by higher insurance premiums during the three months ended March 29, 2025.
31
Net cash used in investing activities
Cash used in investing activities decreased by $3.0 million for the three months ended March 29, 2025 as compared to the three months ended March 30, 2024. The decrease was driven by a $3.5 million change in employee deferred compensation trusts as a result of decreased deposits and increased redemptions and $0.7 million lower purchases of property and equipment. These decreases were partially offset $1.4 million lower proceeds from disposals of property and equipment.
Net cash used in financing activities
Cash used in financing activities decreased by $59.2 million for the three months ended March 29, 2025 as compared to the three months ended March 30, 2024. The decrease was primarily due to $55.7 million net cash used for the March 2024 distribution to KC Parent in the prior period as well as $4.0 million lower principal payments of long-term debt driven by the timing of fiscal quarter ends.
Cash requirements
As of March 29, 2025, we had the following obligations:
Certain agreements may have cancellation penalties for which, if we were to cancel, we would be required to pay up to approximately $4.7 million. Other cancellation penalties cannot be estimated as we cannot predict the occurrence of future agreement cancellations. Refer to Note 11 and Note 14 of our audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2024 for additional detail related to our contractual obligations.
Critical Accounting Estimates and Significant Judgments
The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and judgments that affect our consolidated financial statements and accompanying notes. Amounts recorded in our consolidated financial statements are, in some cases, estimates based on our management’s judgment and input from actuaries and other third parties and are developed from information available at the time. We evaluate the appropriateness of these estimates on an ongoing basis. Actual outcomes may vary from the estimates, and changes, if any, are reflected in current period earnings.
There have been no changes to our critical accounting policies described within Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2024. For a description of our other significant accounting policies, refer to Note 1 in both our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2024.
32
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk in the ordinary course of business. Market risk represents the risk of loss that may impact our results of operations or financial condition due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates.
Interest Rate Risk
As of March 29, 2025, we had $927.4 million of variable-rate debt, net of debt issuance costs. We estimate that had the average interest rates on our borrowings outstanding under the Credit Agreement increased by 100 basis points, our interest expense would have increased by approximately $0.4 million during the three months ended March 29, 2025, net of the effects of our interest rate derivatives.
We are exposed to interest rate risk and may use derivatives to manage variable interest rates on the First Lien Term Loan Facility and the First Lien Revolving Credit Facility. We do not hold or issue derivatives for trading or speculative purposes. We may enter into interest rate derivative contracts that are designated as cash flow hedges under ASC 815, Derivatives and Hedging, to effectively convert a portion of our variable-rate debt to a fixed-rate basis. In January 2024, we entered into a pay-fixed-receive-float interest rate swap with a notional amount of $400.0 million through its maturity and a fixed interest rate of 3.85% per annum. Additionally, in February 2024, we entered into two pay-fixed-receive-float interest rate swaps with a combined notional amount of $400.0 million through their maturity and a fixed interest rate of 3.89% per annum. These interest rate swap contracts commenced in June 2024 and will mature in December 2026. In March 2025, we entered into two forward starting pay-fixed-receive-float interest rate swap contracts with a combined notional amount of $500.0 million through their maturity, one with a fixed interest rate of 3.72% per annum and the other with a fixed interest rate of 3.74% per annum. These interest rate swap contracts will commence in December 2026, when our current swaps expire, and will mature in December 2027. The interest rate swap contracts were executed in order to hedge the interest rate risk on a portion of the variable debt under the Credit Agreement and we will receive variable amounts of interest from a counterparty at the greater of three-month SOFR or 0.50% per annum. As of March 29, 2025, the derivatives are considered highly effective.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure.
As of the end of the period covered by this Quarterly Report on Form 10-Q, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon this evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were not effective as of March 29, 2025 due to a previously-disclosed material weakness in our internal control over financial reporting as described below.
Previously Reported Material Weaknesses in Internal Control Over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
We previously identified a material weakness that continues to exist, which relates to the lack of effectively designed and maintained IT general controls for information systems that are relevant to the preparation of our consolidated financial statements. Specifically, we did not design and maintain: (i) program change management controls to ensure that program and data changes are identified, tested, authorized and implemented appropriately; (ii) user access controls to ensure appropriate segregation of duties and to adequately restrict user and privileged access to appropriate personnel; and (iii) computer operations controls to ensure that processing and transfer of data, and data backups and recovery are monitored.
This material weakness did not result in a misstatement to the consolidated financial statements, however, it could result in misstatements potentially impacting the annual or interim financial statements that would result in a material misstatement to the financial statements that would not be prevented or detected.
33
Remediation Plan for Material Weakness
We are in the process of designing and implementing controls and taking other actions to remediate the material weakness described above, including implementing an enterprise resource planning (ERP) software system. The material weakness will not be considered remediated until we complete the design and implementation of controls, the controls operate for a sufficient period of time, and management has concluded, through testing, that the controls are effective. We cannot assure you that the measures we have taken to date, and actions we may take in the future, will be sufficient to remediate the control deficiencies that led to the material weakness in our internal control over financial reporting or that they will prevent or avoid potential future material weaknesses. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business.
Changes in Internal Control Over Financial Reporting
During the first quarter of 2025, we completed the first phase of our new ERP system implementation, which impacted certain processes and procedures, resulting in changes to our internal control over financial reporting. As we continue our ERP implementation, which we expect to complete in fiscal 2025, additional changes are anticipated. We expect this implementation to strengthen our internal control over financial reporting by automating certain manual processes and standardizing business processes and reporting across our organization, and we will continue to evaluate and monitor our internal control over financial reporting as processes and procedures in the affected areas evolve.
Limitations on the Effectiveness of Controls
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
34
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we are subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. The information contained in Note 14, Commitments and Contingencies, included in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.
Item 1A. Risk Factors.
Investing in our common stock involves a high degree of risk. For a detailed discussion of the risks that affect our business, please refer to Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 28, 2024. There have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 28, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
During the three months ended March 29, 2025,
35
Item 6. Exhibits.
Exhibit Number |
|
Description |
3.1 |
|
|
3.2 |
|
|
10.1 |
|
|
31.1* |
|
|
31.2* |
|
|
32.1* |
|
|
32.2* |
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
101.SCH |
|
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Document |
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Filed herewith.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
|
|
KinderCare Learning Companies, Inc. |
||
|
|
|
|
|||
Date: May 13, 2025 |
|
|
|
By: |
|
/s/ Paul Thompson |
|
|
|
|
Name: |
|
Paul Thompson |
|
|
|
|
Title: |
|
Chief Executive Officer |
|
|
|
|
|
|
|
Date: May 13, 2025 |
|
|
|
By: |
|
/s/ Anthony Amandi |
|
|
|
|
Name: |
|
Anthony Amandi |
|
|
|
|
Title: |
|
Chief Financial Officer |
37