##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 for the quarterly period ended September 30, 2006.
 or
 o
    
    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: 0-24699
 BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
  DELAWARE
    
    62-1742957(State or other jurisdiction of 
incorporation or organization)
    
    (IRS Employer Identification No.)
 200 Talcott Avenue South
Watertown, Massachusetts 02472
 (617) 673-8000
 þ o
  þ o o
 o þ




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##### 



FORM 10-Q
INDEX
 PageNumberPART I. FINANCIAL INFORMATIONITEM 1. Financial StatementsA. Condensed Consolidated
Balance Sheets at September
30, 2006 (Unaudited) and
December 31, 2005
    
    
    3B. Condensed Consolidated
Statements of Income for the
Three and Nine Months Ended
September 30, 2006 and 2005
(Unaudited)
    
    
    4C. Condensed Consolidated
Statements of Cash Flows for
the Nine Months Ended
September 30, 2006 and 2005
(Unaudited)
    
    
    5D. Notes to Condensed
Consolidated Financial
Statements (Unaudited)
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    16ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    23ITEM 4. Controls and Procedures
    
    
    24PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    25ITEM 1A. Risk Factors
    
    
    25ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25ITEM 3. Defaults Upon Senior Securities
    
    
    25ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    25ITEM 5. Other Information
    
    
    25ITEM 6. Exhibits
    
    
    26SIGNATURE
    
    
    27Ex-31.1 Section 302 CertificationEx-31.2 Section 302 CertificationEx-32.1 Section 906 CertificationEx-32.2 Section 906 Certification
  2




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
  
   September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,629
    
    
    $
    21,650Accounts receivable, net
    
    
    38,103
    
    
    
    28,738Prepaid expenses and other current assets
    
    
    16,173
    
    
    
    14,472Current deferred tax asset
    
    
    13,372
    
    
    
    14,235Total current assets
    
    
    75,277
    
    
    
    79,095Fixed
assets, net of accumulated depreciation of $61,702 and $54,595 at
September 30, 2006 and December 31, 2005, respectively
    
    
    131,740
    
    
    
    116,462Goodwill, net
    
    
    136,372
    
    
    
    120,507Other intangibles, net
    
    
    38,752
    
    
    
    28,720Deferred tax asset, net of current portion
    
    
    8,059
    
    
    
    6,467Other assets
    
    
    3,152
    
    
    
    2,448Total assets
    
    $
    393,352
    
    
    $
    353,699LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    614
    
    
    $
    628Line of credit payable
    
    
    20,000
    
    
    
    Accounts payable and accrued expenses
    
    
    59,304
    
    
    
    54,478Current portion of deferred revenue
    
    
    45,150
    
    
    
    40,018Income tax payable
    
    
    7,010
    
    
    
    3,260Other current liabilities
    
    
    10,398
    
    
    
    5,727Total current liabilities
    
    
    142,476
    
    
    
    104,111Long-term debt, net of current portion
    
    
    3,787
    
    
    
    684Accrued rent
    
    
    9,418
    
    
    
    7,440Other long-term liabilities
    
    
    7,421
    
    
    
    5,916Deferred revenue, net of current portion
    
    
    13,974
    
    
    
    16,174Deferred income taxes
    
    
    2,673
    
    
    
    2,195Total liabilities
    
    
    179,749
    
    
    
    136,520Stockholders equity:Preferred stock: 5,000,000 shares authorized, none issued or outstandingCommon stock: $0.01 par valueAuthorized: 50,000,000 shares at both September 30, 2006 and December 31,
2005Issued: 27,826,000 and 27,462,000 shares at September 30, 2006 and
December 31, 2005, respectivelyOutstanding: 26,161,000 and 27,144,000 shares at September 30, 2006 and
December 31, 2005, respectively
    
    
    278
    
    
    
    274Additional paid-in capital
    
    
    120,656
    
    
    
    112,511Deferred compensation
    
    
    
    
    
    
    (1,231
    )Treasury stock: 1,665,000 and 318,000 shares, at cost, at September 30, 2006 and
December 31, 2005, respectively
    
    
    (58,565
    )
    
    
    (11,234
    )Cumulative translation adjustment
    
    
    6,766
    
    
    
    3,155Retained earnings
    
    
    144,468
    
    
    
    113,704Total stockholders equity
    
    
    213,603
    
    
    
    217,179Total liabilities and stockholders equity
    
    $
    393,352
    
    
    $
    353,699
  3




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Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    172,199
    
    
    $
    154,425
    
    
    $
    516,570
    
    
    $
    462,200Cost of services
    
    
    138,888
    
    
    
    126,582
    
    
    
    415,062
    
    
    
    378,716Gross profit
    
    
    33,311
    
    
    
    27,843
    
    
    
    101,508
    
    
    
    83,484Selling, general and administrative
    
    
    15,267
    
    
    
    12,668
    
    
    
    46,287
    
    
    
    37,990Amortization
    
    
    857
    
    
    
    442
    
    
    
    2,218
    
    
    
    1,202Income from operations
    
    
    17,187
    
    
    
    14,733
    
    
    
    53,003
    
    
    
    44,292Interest income
    
    
    82
    
    
    
    592
    
    
    
    372
    
    
    
    1,276Interest expense
    
    
    (239
    )
    
    
    (36
    )
    
    
    (332
    )
    
    
    (123
    )Income before taxes
    
    
    17,030
    
    
    
    15,289
    
    
    
    53,043
    
    
    
    45,445Income tax expense
    
    
    7,131
    
    
    
    6,251
    
    
    
    22,279
    
    
    
    18,587Net income
    
    $
    9,899
    
    
    $
    9,038
    
    
    $
    30,764
    
    
    $
    26,858Earnings per share:Basic
    
    $
    0.38
    
    
    $
    0.33
    
    
    $
    1.16
    
    
    $
    0.99Diluted
    
    $
    0.37
    
    
    $
    0.32
    
    
    $
    1.12
    
    
    $
    0.95Weighted average number of shares outstanding:Basic
    
    
    26,008
    
    
    
    27,279
    
    
    
    26,440
    
    
    
    27,078Diluted
    
    
    27,044
    
    
    
    28,557
    
    
    
    27,513
    
    
    
    28,380
  4




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Nine months endedSeptember 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    30,764
    
    
    $
    26,858Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    13,495
    
    
    
    10,377Non-cash revenue and other
    
    
    (740
    )
    
    
    (956
    )Loss on disposal of fixed assets
    
    
    79
    
    
    
    18Stock-based compensation
    
    
    2,625
    
    
    
    743Deferred income taxes
    
    
    (723
    )
    
    
    (368
    )Tax benefit realized from stock option exercises
    
    
    
    
    
    
    2,927Changes in assets and liabilities:Accounts receivable
    
    
    (8,569
    )
    
    
    (2,204
    )Prepaid expenses and other current assets
    
    
    (1,871
    )
    
    
    (1,525
    )Accounts payable and accrued expenses
    
    
    4,213
    
    
    
    6,880Income taxes
    
    
    4,237
    
    
    
    (116
    )Deferred revenue
    
    
    5,248
    
    
    
    9,570Accrued rent
    
    
    1,953
    
    
    
    376Other assets
    
    
    (692
    )
    
    
    386Other current and long-term liabilities
    
    
    310
    
    
    
    (4,119
    )Net cash provided by operating activities
    
    
    50,329
    
    
    
    48,847Cash flows from investing activities:Additions to fixed assets, net of acquired amounts
    
    
    (23,613
    )
    
    
    (9,794
    )Proceeds from the disposal of fixed assets
    
    
    196
    
    
    
    Payments for acquisitions, net of cash acquired
    
    
    (19,689
    )
    
    
    (56,292
    )Net cash used in investing activities
    
    
    (43,106
    )
    
    
    (66,086
    )Cash flows from financing activities:Purchase of treasury stock
    
    
    (47,331
    )
    
    
    Proceeds from the issuance of common stock
    
    
    4,329
    
    
    
    6,057Excess tax benefit from stock-based compensation
    
    
    1,796
    
    
    
    Borrowings from line of credit, net
    
    
    20,000
    
    
    
    Principal payments of long term debt
    
    
    (488
    )
    
    
    (577
    )Net cash (used in) provided by financing activities
    
    
    (21,694
    )
    
    
    5,480Effect of exchange rates on cash balances
    
    
    450
    
    
    
    (369
    )Net decrease in cash and cash equivalents
    
    
    (14,021
    )
    
    
    (12,128
    )Cash and cash equivalents, beginning of period
    
    
    21,650
    
    
    
    42,472Cash and cash equivalents, end of period
    
    $
    7,629
    
    
    $
    30,344Supplemental cash flow information:Cash payments of interest
    
    $
    212
    
    
    $
    115Cash payments of income taxes
    
    $
    16,879
    
    
    $
    16,482Non cash financing activities:Issuance of notes payable for acquisition
    
    $
    3,574
    
    
    $
    
  5




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Notes to Condensed Consolidated Financial Statements (Unaudited)
 1. The Company and Basis of Presentation
 Organization
  Basis of Presentation
   Segment Information
 Stock-Based Compensation
  6




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Three months ended
    
    
    Nine months endedSeptember 30, 2006
    
    
    September 30, 2006(In thousands, except per share data)Stock-based compensation expense:Cost of services
    
    $
    93
    
    
    $
    260Selling, general and administrative
    
    
    830
    
    
    
    2,365Stock-based compensation
before tax
    
    
    923
    
    
    
    2,625Income tax benefit
    
    
    264
    
    
    
    738Net compensation expense
    
    $
    659
    
    
    $
    1,887Effect on earnings per share:Basic earnings per share
    
    $
    (0.03
    )
    
    $
    (0.07
    )Diluted earnings per share
    
    $
    (0.02
    )
    
    $
    (0.07
    )
 7




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Three months ended
    
    
    Nine months endedSeptember 30, 2005
    
    
    September 30, 2005(In thousands, except per share data)Net income:As reported
    
    $
    9,038
    
    
    $
    26,858Add: Stock-based compensation
expense included in reported net
income, net of related tax effects
    
    
    147
    
    
    
    479Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects
    
    
    (413
    )
    
    
    (3,561
    )Pro forma
    
    $
    8,772
    
    
    $
    23,776Earnings per share-Basic:As reported
    
    $
    0.33
    
    
    $
    0.99Pro forma
    
    $
    0.32
    
    
    $
    0.88Earnings per share-Diluted:As reported
    
    $
    0.32
    
    
    $
    0.95Pro forma
    
    $
    0.31
    
    
    $
    0.84
  8




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Stock Options
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Expected dividend yield
    
    
    
    
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected stock price volatility
    
    
    
    
    
    
    44.7
    %
    
    
    41.6
    %
    
    
    45.5
    %Risk free interest rate
    
    
    
    
    
    
    4.2
    %
    
    
    4.9
    %
    
    
    3.4
    %Expected life of options
    
    
    
    
    
    6.3 years
    
    
    6.0 years
    
    
    6.2 yearsWeighted-average fair value
per share of options
granted during the period
    
    
    
    
    
    $
    19.29
    
    
    $
    16.96
    
    
    $
    16.78
   WeightedAverage
    
    
    
    
    
    
    WeightedRemaining
    
    
    
    
    
    
    AverageContractual
    
    
    Number of
    
    
    ExerciseLife in Years
    
    
    Shares
    
    
    PriceOutstanding at January 1, 2006
    
    
    5.5
    
    
    
    2,152,106
    
    
    $
    15.94Granted
    
    
    
    
    
    
    183,810
    
    
    
    35.34Exercised
    
    
    
    
    
    
    (322,447
    )
    
    
    11.94Forfeited or Expired
    
    
    
    
    
    
    (38,258
    )
    
    
    16.43Outstanding at September 30, 2006
    
    
    5.1
    
    
    
    1,975,211
    
    
    $
    18.39Exercisable at September 30, 2006
    
    
    4.5
    
    
    
    1,273,262
    
    
    $
    14.05
  9




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WeightedAverage
    
    
    
    
    
    
    WeightedRemaining
    
    
    
    
    
    
    AverageContractual
    
    
    Number of
    
    
    ExerciseLife in Years
    
    
    Shares
    
    
    PriceOutstanding at January 1, 2006
    
    
    6.5
    
    
    
    861,506
    
    
    $
    19.68Granted
    
    
    
    
    
    
    183,810
    
    
    
    35.34Vested
    
    
    
    
    
    
    (329,567
    )
    
    
    13.93Forfeited
    
    
    
    
    
    
    (13,800
    )
    
    
    30.61Outstanding at September 30, 2006
    
    
    6.2
    
    
    
    701,949
    
    
    $
    26.26
      10




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Restricted Stock Awards
   WeightedNumber of
    
    
    Average FairShares
    
    
    ValueOutstanding at January 1, 2006
    
    
    93,100
    
    
    $
    21.44Granted
    
    
    40,665
    
    
    
    23.35Vested
    
    
    (7,600
    )
    
    
    23.60Forfeited or Expired
    
    
    
    
    
    
    Outstanding at September 30, 2006
    
    
    126,165
    
    
    $
    21.93
       11




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Comprehensive Income
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Net income
    
    $
    9,899
    
    
    $
    9,038
    
    
    $
    30,764
    
    
    $
    26,858Foreign currency
translation
adjustments
    
    
    1,448
    
    
    
    (1,115
    )
    
    
    3,611
    
    
    
    (4,551
    )Comprehensive income
    
    $
    11,347
    
    
    $
    7,923
    
    
    $
    34,375
    
    
    $
    22,307
 Foreign Currency
  Recently
Issued Accounting Pronouncements
  12




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2. Acquisitions
    3. Line of Credit
   13




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4. Notes Payable
  5. Earnings Per Share
   Three months ended September 30, 2006Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic earnings per share:Income available to common
stockholders
    
    $
    9,899
    
    
    
    26,008
    
    
    $
    0.38Effect of dilutive securities:Stock options and
restricted stock
    
    
    
    
    
    
    1,036Diluted earnings per share
    
    $
    9,899
    
    
    
    27,044
    
    
    $
    0.37
 Three months ended September 30, 2005Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic earnings per share:Income available to common
stockholders
    
    $
    9,038
    
    
    
    27,279
    
    
    $
    0.33Effect of dilutive securities:Stock options and
restricted stock
    
    
    
    
    
    
    1,278Diluted earnings per share
    
    $
    9,038
    
    
    
    28,557
    
    
    $
    0.32
 Nine months ended September 30, 2006Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic earnings per share:Income available to common
stockholders
    
    $
    30,764
    
    
    
    26,440
    
    
    $
    1.16Effect of dilutive securities:Stock options and
restricted stock
    
    
    
    
    
    
    1,073Diluted earnings per share
    
    $
    30,764
    
    
    
    27,513
    
    
    $
    1.12
 14




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Nine months ended September 30, 2005Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic earnings per share:Income available to common
stockholders
    
    $
    26,858
    
    
    
    27,078
    
    
    $
    0.99Effect of dilutive securities:Stock options and
restricted stock
    
    
    
    
    
    
    1,302Diluted earnings per share
    
    $
    26,858
    
    
    
    28,380
    
    
    $
    0.95
  6. Treasury Stock
  7. Commitments and Contingencies
   15




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ITEM 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
 Cautionary Statement About Forward-Looking Information
   
    
    our inability to successfully execute our growth strategy;
    
    the effects of general economic conditions and world events;
    
    competitive conditions in the early care and education industry;
    
    loss of key client relationships or delays in new center openings;
    
    subsidy reductions by key existing clients;
    
    tuition price sensitivity;
    
    various factors affecting occupancy levels, including, but not limited to, the
reduction in or changes to the general labor force that would reduce the need for child
care services;
    
    the availability of a qualified labor pool, the impact of labor organization
efforts and the impact of government regulations concerning labor and employment issues;
    
    federal and state regulations regarding changes in child care assistance
programs, welfare reform, minimum wages and licensing standards;
    
    delays in identifying, executing or integrating key acquisitions;
    
    our inability to successfully defend against or counter negative publicity
associated with claims involving alleged incidents at our centers;
    
    our inability to maintain effective internal controls over financial reporting;
and
 16




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
    
    our inability to obtain insurance at the same levels or at costs comparable to
those incurred historically.
  Executive Summary and Discussion
 Fortune 500 Working Mother Magazines
  Industry Classification
    
    Percentage of CentersConsumer
    
    
    5
    %Financial Services
    
    
    15
    %Government and Education
    
    
    15
    %Healthcare
    
    
    10
    %Industrial/Manufacturing
    
    
    10
    %Office Park Consortiums
    
    
    30
    %Pharmaceutical
    
    
    5
    %Professional Services and Other
    
    
    5
    %Technology
    
    
    5
    %
 The Companys overall business strategy is centered on several key elements: identifying and
executing on growth opportunities; achieving sustainable operating margin improvement;
maintaining its competitive advantage as the employer of choice in its field; and continuing
the high quality of its programs and customer satisfaction.
  17




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Seasonality
 Results of Operations
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of services
    
    
    80.7
    
    
    
    82.0
    
    
    
    80.3
    
    
    
    81.9Gross profit
    
    
    19.3
    
    
    
    18.0
    
    
    
    19.7
    
    
    
    18.1Selling, general & administrative
    
    
    8.9
    
    
    
    8.2
    
    
    
    9.0
    
    
    
    8.2Amortization
    
    
    0.4
    
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.3Income from operations
    
    
    10.0
    
    
    
    9.5
    
    
    
    10.3
    
    
    
    9.6Interest income
    
    
    0.0
    
    
    
    0.4
    
    
    
    0.1
    
    
    
    0.2Interest expense
    
    
    -0.1
    
    
    
    0.0
    
    
    
    -0.1
    
    
    
    0.0Income before income taxes
    
    
    9.9
    
    
    
    9.9
    
    
    
    10.3
    
    
    
    9.8Income tax provisions
    
    
    4.2
    
    
    
    4.0
    
    
    
    4.3
    
    
    
    4.0Net income
    
    
    5.7
    %
    
    
    5.9
    %
    
    
    6.0
    %
    
    
    5.8
    %
 Three and Nine Months Ended September 30, 2006 Compared to the Three and Nine Months Ended
September 30, 2005
 Revenue
 19




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Gross Profit
   Selling, General and Administrative Expenses (SGA)
  20




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Amortization.
 Income from Operations
 Interest Income and Expense.
  Income Tax Expense
 Liquidity and Capital Resources
  21




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Recently Issued Accounting Pronouncements
   Critical Accounting Policies and Estimates
  
 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
 Interest Rate Risk
  Foreign Currency Exchange Rate Risk
  23




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ITEM 4. Controls and Procedures
 (a) Disclosure controls and procedures
   (b) Changes in internal control over financial reporting
  24




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PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Issuer Purchases of Equity SecuritiesTotal Number of
    
    Maximum Number ofShares
    
    Shares that May YetTotal Number
    
    
    
    
    
    Purchased as Part of
    
    Be Purchased Underof Shares
    
    Average Price
    
    Publicly Announced
    
    the Plans orPeriod
    
    Purchased
    
    Paid per Share
    
    Plans or Programs
    
    ProgramsJuly 1-31, 2006
    
    
    217,352
    
    
    $
    33.81
    
    
    
    2,698,446
    
    
    
    2,801,554August 1-31, 2006
    
    
    
    
    
    
    
    
    
    
    2,698,446
    
    
    
    2,801,554September 1-30, 2006
    
    
    
    
    
    
    
    
    
    
    2,698,446
    
    
    
    2,801,554Total
    
    
    217,352
  
 ITEM 3. Defaults Upon Senior Securities
  
 ITEM 4. Submission of Matters to a Vote of Security Holders
  
 ITEM 5. Other Information
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##### Table of Contents



ITEM 6. Exhibits
  31.1
    
    
    Certification of the Companys Chief Executive Officer pursuant to
Securities and Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of the Companys Chief Financial Officer pursuant to
Securities and Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    
    Certification of the Companys Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
200232.2
    
    
    Certification of the Companys Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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##### Table of Contents



SIGNATURE
   BRIGHT HORIZONS FAMILY SOLUTIONS, INC.By:
    
    /s/ Elizabeth J. BolandElizabeth J. BolandChief Financial Officer(Duly Authorized Officer and Principal Financial Officer)
 27