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CEB > SEC Filings for CEB > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for CORPORATE EXECUTIVE BOARD CO | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CORPORATE EXECUTIVE BOARD CO


8-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The following discussion includes forward-looking statements that involve certain risks and uncertainties. For additional information regarding forward-looking statements and risk factors, see "Forward-looking statements" and Part II, Item IA. "Risk Factors."

Executive Overview

We deliver member-based advisory services, talent measurement assessments, and management solutions. We equip senior executives and their teams with essential information, actionable insights, analytical tools, and advisory support. Through our acquisition of SHL, we also provide cloud-based talent measurement and management solutions.

Our acquisition of SHL, headquartered in the UK, significantly increased the breadth and geographic scope of our operations. As a result of the incurrence of substantial new indebtedness and the use of a significant amount of our cash on hand, our financial condition differs significantly from prior periods, and our operating results over the next year will likely not be comparable to our operating results for prior periods and we are more exposed to foreign currency exchange rate fluctuations. Our business now consists of two reportable segments: CEB, including the PDRI business, and the SHL business acquired, excluding PDRI.

CEB Segment

The CEB segment helps senior executives and their teams drive corporate performance by identifying and building on the proven best practices of the world's best companies. We primarily deliver our products and services to a global client base through annual, fixed-fee membership subscriptions. Billings attributable to memberships for our CEB products and services initially are recorded as deferred revenue and then generally are recognized on a pro-rata basis over the membership contract term, which typically is 12 months. Generally, a member may request a refund of its membership fee during the membership term under our service guarantee. Refunds are provided from the date of the refund request on a pro-rata basis relative to the remaining term of the membership.

We offer comprehensive data analysis, research, and advisory services that align to executive leadership roles and key recurring decisions. To fully support our members, our products and services are offered across a wide range of industries and focus on several key corporate functions including: Finance, Corporate Services, and Corporate Strategy; Human Resources; Information Technology; Legal, Risk, and Compliance; and Sales, Marketing, and Communications.

In addition to these corporate functions, the CEB segment serves operational business leaders in the financial services industry and government agencies through insights, tools, and peer collaboration designed to drive effective executive decision making. The CEB segment also includes the results of operations of PDRI, a service provider of customized personnel assessment tools and services to various agencies of the US government.


Table of Contents

SHL Segment

The SHL segment is a global provider of cloud-based solutions for talent assessment and decision support, enabling client access to data, analytics and insights for assessing and managing employees and applicants. SHL primarily delivers assessments, consulting and training services. Assessment services are available online through metered and subscription arrangements. Consulting services are generally provided to customize assessment services and face to face assessments, delivered for a fixed fee. Training services consist of either bespoke or public courses related to use of assessments. The SHL segment represents the acquired SHL business excluding PDRI.

Non-GAAP Financial Measures

This Quarterly Report on Form 10-Q includes a discussion of Adjusted revenue, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted net income, and Non-GAAP diluted earnings per share, all of which are non-GAAP financial measures provided as a complement to the results provided in accordance with accounting principles generally accepted in the United States of America ("GAAP").

The term "Adjusted revenue" refers to revenue before the impact of the reduction of SHL revenue recognized in the post-acquisition period to reflect the adjustment of deferred revenue at the SHL acquisition date to fair value (the "deferred revenue fair value adjustment").

The term "Adjusted EBITDA" refers to net income before loss from discontinued operations, net of provision for income taxes; interest expense, net; depreciation and amortization; provision for income taxes; the impact of the deferred revenue fair value adjustment; acquisition related costs; share-based compensation; costs associated with exit activities; restructuring costs; and gain on acquisition.

The term "Adjusted EBITDA margin" refers to Adjusted EBITDA as a percentage of Adjusted revenue.

The term "Adjusted net income" refers to net income before loss from discontinued operations, net of provision for income taxes and excludes the after tax effects of the impact of the deferred revenue fair value adjustment, acquisition related costs, share-based compensation, amortization of acquisition related intangibles, costs associated with exit activities, restructuring costs, and gain on acquisition.

"Non-GAAP diluted earnings per share" refers to diluted earnings per share before the per share effect of loss from discontinued operations, net of provision for income taxes and excludes the after tax per share effects of the impact of the deferred revenue fair value adjustment, acquisition related costs, share-based compensation, amortization of acquisition related intangibles, costs associated with exit activities, restructuring costs, and gain on acquisition.

We believe that these non-GAAP financial measures are relevant and useful supplemental information for evaluating our results of operations as compared from period to period and as compared to our competitors. We use these non-GAAP financial measures for internal budgeting and other managerial purposes, including comparison against our competitors, when publicly providing our business outlook, and as a measurement for potential acquisitions. These non-GAAP financial measures are not defined in the same manner by all companies and therefore may not be comparable to other similarly titled measures used by other companies.

In connection with the SHL acquisition, we changed the definitions of our non-GAAP measures to adjust for the impact of the deferred revenue fair value adjustment to the opening balance sheet resulting from purchase accounting, amortization of related intangibles, acquisition related costs, and share-based compensation. This change was made to provide a more comprehensive understanding of our core operating results by eliminating the effect of acquisition related items from our GAAP operating results. The SHL acquisition was the first acquisition of sufficient size to cause these items to be significant. We believe that excluding these items is important in illustrating what our core operating results would have been had we not incurred these acquisition related items since the nature, size, and number of acquisitions can vary from period to period.

Our non-GAAP financial measures reflect adjustments based on the following items, as well as the related income tax effects:

Certain business combination accounting entries and expenses related to acquisitions: We have adjusted for the impact of the deferred revenue fair value adjustment, amortization of acquisition related intangibles, and acquisition related costs. We incurred significant expenses primarily in connection with our SHL acquisition and also incurred certain other operating expenses, which we generally would not have otherwise incurred in the periods presented as a part of our continuing operations. We believe that excluding these acquisition related items from our non-GAAP financial measures provides useful supplemental information to our investors and is important in illustrating what our core operating results would have been had we not incurred these acquisition related items since the nature, size, and number of acquisitions can vary from period to period.

Share-based compensation: Although share-based compensation is a key incentive offered to our employees, we evaluate our operating results excluding such expense. Accordingly, we exclude share-based compensation from our non-GAAP financial measures because we believe it provides valuable supplemental information that helps investors have a more complete understanding of our operating results. In addition, we believe the exclusion of this expense facilitates the ability of our investors to compare our operating results with those of other peer companies, many of which also exclude such expense in determining their non-GAAP measures, given varying valuation methodologies, subjective assumptions, and the variety and amount of award types that may be utilized.

These non-GAAP measures may be considered in addition to results prepared in accordance with GAAP, but they should not be considered a substitute for, or superior to, GAAP results. We intend to continue to provide these non-GAAP financial measures as part of our future earnings discussions and, therefore, the inclusion of these non-GAAP financial measures will provide consistency in our financial reporting.

For comparative purposes, the prior year non-GAAP measures have been recast to conform to the current definitions.

A reconciliation of each of the non-GAAP measures to the most directly comparable GAAP measure is provided below (in thousands).

The table below reconciles Revenue to Adjusted revenue (in thousands):

                                           Three Months Ended June 30,           Six Months Ended June 30,
                                            2013                 2012              2013               2012
Revenue                                $      204,610       $      135,718     $     394,882       $  264,185
Impact of deferred revenue fair
value adjustment                                2,950                   -              7,459               -

Adjusted revenue                       $      207,560       $      135,718     $     402,341       $  264,185


Table of Contents

The table below reconciles Net income to Adjusted EBITDA (in thousands):

                                           Three Months Ended June 30,              Six Months Ended June 30,
                                           2013                  2012                2013                2012
Net income                             $      13,568         $      14,765       $     24,776        $     30,326
Interest expense (income), net                 6,174                   (58 )           12,523                (135 )
Depreciation and amortization                 14,783                 5,935             29,489              10,964
Provision for income taxes                     8,451                 9,993             15,097              20,987
Impact of the deferred revenue fair
value adjustment                               2,950                    -               7,459                  -
Acquisition related costs                      2,024                 2,253              3,022               2,729
Share-based compensation                       3,091                 2,268              5,857               4,236

Adjusted EBITDA                        $      51,041         $      35,156       $     98,223        $     69,107

Adjusted EBITDA margin                          24.6 %                25.9 %             24.4 %              26.2 %

The table below reconciles Net income to Adjusted net income (in thousands):

                                            Three Months Ended June 30,             Six Months Ended June 30,
                                             2013                 2012              2013                2012
Net income                              $       13,568       $       14,765     $      24,776       $      30,326
Impact of the deferred revenue fair
value adjustment (1)                             2,100                   -              5,310                  -
Acquisition related costs (1)                    1,334                1,344             1,958               1,623
Share-based compensation (1)                     1,915                1,361             3,605               2,543
Amortization of acquisition related
intangibles (1)                                  5,844                  913            11,799               1,738

Adjusted net income                     $       24,761       $       18,383     $      47,448       $      36,230

(1) Adjustments are net of the estimated income tax effect using statutory rates based on the relative amounts allocated to each jurisdiction in the applicable period. The following income rates were used: 29% for the deferred revenue fair value adjustment; 37% for acquisition related costs; 39% for share-based compensation; and 32% for amortization of acquisition related intangibles.

The table below reconciles Diluted earnings per share to Non-GAAP diluted earnings per share:

                                            Three Months Ended June 30,             Six Months Ended June 30,
                                            2013                  2012                2013                2012
Diluted earnings per share              $        0.40         $        0.44       $        0.73         $   0.90
Impact of the deferred revenue fair
value adjustment                                 0.06                    -                 0.16               -
Acquisition related costs                        0.04                  0.04                0.05             0.05
Share-based compensation                         0.06                  0.04                0.11             0.08
Amortization of acquisition related
intangibles                                      0.17                  0.03                0.35             0.05

Non-GAAP diluted earnings per share     $        0.73         $        0.55       $        1.40         $   1.08

Critical Accounting Policies

Our accounting policies require us to apply methodologies, estimates and judgments that have a significant impact on the results we report in our consolidated financial statements. In our 2012 Annual Report on Form 10-K, we discussed those material policies that we believe are critical and require the use of complex judgment in their application. There have been no changes to our critical accounting policies since that time.

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