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CEB > SEC Filings for CEB > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for CORPORATE EXECUTIVE BOARD CO

Form 10-Q for CORPORATE EXECUTIVE BOARD CO


7-Aug-2014

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."

Business Overview

We are a leading member-based advisory company that equips senior executives and their teams with insight and actionable solutions to drive corporate performance. Our mission is to unlock the potential of organizations and leaders by advancing the science and practice of management. We do this by combining the best practices of thousands of member companies with our proprietary research methodologies, benchmarking assets, and human capital analytics.

We operate through two reporting segments. The CEB segment includes the legacy CEB products and services provided to senior executives and their teams, Personnel Decisions Research Institutes, Inc. ("PDRI"), a subsidiary acquired as part of the SHL Group Holdings I ("SHL") acquisition and our 2014 acquisitions, KnowledgeAdvisors, Inc. ("KnowledgeAdvisors") and the Talent Neuron platform. PDRI provides customized personnel assessment tools and services to various agencies of the US government and also to commercial enterprises. The SHL Talent Measurement segment provides cloud-based solutions for talent assessment and talent mobility, and decision support, as well as professional services to support those solutions.

These operating assets enable us to combine our best practices, insights, and data from our CEB membership programs with SHL Talent Measurement assessments, predictive analytics, and robust technology platforms. This combination increases our capabilities for helping clients manage talent, transform operations, and reduce risk. Over time, our member network and data sets grow and strengthen the impact of our products and services for our customers. The SHL Talent Measurement products deliver rich data, analytics, and insights for assessing and managing employees and applicants, and position clients to achieve better business results through enhanced intelligence on talent and key decision-making processes from hiring and recruiting, to employee development and succession planning.

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.

Our membership subscriptions include continuous access to 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: Human Resources, Finance, Strategy and Operations, Legal and Compliance, Sales and Marketing, and Technology. 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 offers professional services to Human Resources and Sales executives. Human Resources based professional services address the entire employee life cycle, helping executives improve business performance by realizing the value and potential of their people. Sales based professional services assist our member companies with changing the way they engage customers to ensure greater success through sales management training, sales staff development and organizational alignment. The term of professional services engagements varies based on the depth of the service purchased and the size of the member organization.

SHL Talent Measurement Segment

The SHL Talent Measurement segment represents the acquired SHL business, excluding PDRI, and is a global provider of cloud-based solutions for talent assessment and talent mobility, decision support, as well as professional services to support these solutions, enabling client access to data, analytics, and insights for assessing and managing employees and applicants. SHL Talent Measurement 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.

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 and KnowledgeAdvisors revenue recognized in the post-acquisition period to reflect the adjustment of deferred revenue at the acquisition dates to fair value (the "deferred revenue fair value adjustment").

The term "Adjusted EBITDA" refers to net (loss) 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; impairment loss; gain on cost method investment; debt extinguishment 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 (loss) 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; impairment loss; gain on cost method investment; debt extinguishment costs; amortization of acquisition related intangibles; costs associated with exit activities; restructuring costs; and gain on acquisition.


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"Non-GAAP diluted earnings per share" refers to diluted (loss) 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; impairment loss; gain on cost method investment; debt extinguishment costs; 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.

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 transaction and certain other operating expenses in connection with our acquisitions 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.

Impairment loss, gain on cost method investment, and debt extinguishment costs: We believe that excluding these 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 items. We exclude these items because management does not believe they correlate to the ongoing operating results of the business.

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.

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

Adjusted Revenue



                                         Three Months Ended June 30, 2014                   Three Months Ended June 30, 2013
                                                      SHL Talent                                         SHL Talent
                                      CEB             Measurement        Total           CEB             Measurement        Total
Revenue                           $    175,370       $      55,057     $ 230,427     $    156,818       $      47,792     $ 204,610
Impact of the deferred revenue
fair value adjustment                    1,547                 403         1,950               -                2,950         2,950

Adjusted revenue                  $    176,917       $      55,460     $ 232,377     $    156,818       $      50,742     $ 207,560

                                        Six Months Ended June 30, 2014                   Six Months Ended June 30, 2013
                                                   SHL Talent                                       SHL Talent
                                      CEB          Measurement        Total           CEB           Measurement        Total
Revenue                           $   336,089     $     103,775     $ 439,864     $   304,957      $      89,925     $ 394,882
Impact of the deferred revenue
fair value adjustment                   1,847             1,387         3,234              -               7,459         7,459

Adjusted revenue                  $   337,936     $     105,162     $ 443,098     $   304,957      $      97,384     $ 402,341

Adjusted EBITDA



                                         Three Months Ended June 30, 2014                     Three Months Ended June 30, 2013
                                                      SHL Talent                                           SHL Talent
                                     CEB              Measurement         Total            CEB             Measurement        Total
Net (loss) income                                                        $ (6,421 )                                          $ 13,568
Provision for income taxes                                                 (2,187 )                                             8,451
Interest expense, net                                                       4,347                                               6,174
Gain on cost method investment                                             (6,585 )                                                -
Other expense (income), net                                                 1,616                                                 322

Operating (loss) profit          $    (9,158 )      $           (72 )      (9,230 )    $    30,894        $      (2,379 )      28,515
Other (expense) income, net           (1,008 )                 (608 )      (1,616 )           (869 )                547          (322 )
Depreciation and amortization          9,343                  9,094        18,437            7,085                7,698        14,783
Impact of the deferred revenue
fair value adjustment                  1,547                    403         1,950               -                 2,950         2,950
Acquisition related costs              1,106                     -          1,106            1,189                  835         2,024
Impairment loss                       39,700                     -         39,700               -                    -             -
Share-based compensation               3,214                    563         3,777            2,745                  346         3,091

Adjusted EBITDA                  $    44,744        $         9,380      $ 54,124      $    41,044        $       9,997      $ 51,041

Adjusted EBITDA margin                  25.3 %                 16.9 %        23.3 %           26.2 %               19.7 %        24.6 %


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                                           Six Months Ended June 30, 2014                    Six Months Ended June 30, 2013
                                                      SHL Talent                                        SHL Talent
                                       CEB            Measurement        Total           CEB            Measurement        Total
Net income                                                              $  1,235                                          $ 24,776
Provision for income taxes                                                 3,199                                            15,097
Interest expense, net                                                      9,155                                            12,523
Gain on cost method investment                                            (6,585 )                                              -
Other expense (income), net                                                2,244                                            (1,179 )

Operating profit (loss)             $   13,216       $      (3,968 )       9,248      $   57,326       $      (6,109 )      51,217
Other (expense) income, net             (1,089 )            (1,155 )      (2,244 )           872                 307         1,179
Depreciation and amortization           17,135              17,796        34,931          14,292              15,197        29,489
Impact of the deferred revenue
fair value adjustment                    1,847               1,387         3,234              -                7,459         7,459
Acquisition related costs                2,445                  -          2,445           2,019               1,003         3,022
Impairment loss                         39,700                  -         39,700              -                   -             -
Share-based compensation                 6,731               1,026         7,757           5,356                 501         5,857

Adjusted EBITDA                     $   79,985       $      15,086      $ 95,071      $   79,865       $      18,358      $ 98,223

Adjusted EBITDA margin                    23.7 %              14.3 %        21.5 %          26.2 %              18.9 %        24.4 %

Adjusted Net Income



                                            Three Months Ended June 30,            Six Months Ended June 30,
                                            2014                  2013              2014                2013
Net (loss) income                       $      (6,421 )       $      13,568     $      1,235        $     24,776
Impact of the deferred revenue fair
value adjustment (1)                            1,219                 2,100            2,127               5,310
Acquisition related costs (1)                     743                 1,334            1,545               1,958
Impairment loss (2)                            24,139                    -            24,139                  -
Gain on cost method investment (1)             (3,944 )                  -            (3,944 )                -
Share-based compensation (1)                    2,363                 1,915            4,821               3,605
Amortization of acquisition related
intangibles (1)                                 7,429                 5,844           13,929              11,799

Adjusted net income                     $      25,528         $      24,761     $     43,852        $     47,448

Non-GAAP Diluted Earnings Per Share



                                           Three Months Ended June 30,               Six Months Ended June 30,
                                            2014                  2013               2014                 2013
Diluted (loss) earnings per share       $       (0.19 )        $      0.40       $       0.04          $      0.73
Impact of the deferred revenue fair
value adjustment (1)                             0.04                 0.06               0.06                 0.16
Acquisition related costs (1)                    0.02                 0.04               0.05                 0.05
Impairment loss (2)                              0.71                   -                0.71                   -
Gain on cost method investment (1)              (0.12 )                 -               (0.12 )                 -
Share-based compensation (1)                     0.07                 0.06               0.14                 0.11
Amortization of acquisition related
intangibles (1)                                  0.22                 0.17               0.41                 0.35

Non-GAAP diluted earnings per share     $        0.75          $      0.73       $       1.29          $      1.40

(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: 34% in 2014 and 29% in 2013 for the deferred revenue fair value adjustment; 37% in 2014 and 2013 for acquisition related costs; 40% in 2014 for the gain on cost method investment; 38% in 2014 and 39% in 2013 for share-based compensation; and 30% in 2014 and 32% in 2013 for amortization of acquisition related intangibles.

(2) The $39.7 million impairment loss associated with PDRI's non-deductible intangible assets and goodwill recognized in the three months ended June 30, 2014 was not treated as a discrete event in the provision for income taxes; rather, it was considered to be a component of the estimated annual effective rate. Approximately $0.4 million of the income tax effect associated with the non-deductible goodwill impairment loss was reflected in the income tax provision in the three and six months ended June 30, 2014 and the remaining tax effect of approximately $3.1 million and $4.1 million will be added back in the third and fourth quarter of 2014, respectively, to bring the full year adjustment to $31.3 million.

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 2013 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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