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EX-32.1 - EXHIBIT 32.1 - CEB Inc. | c17527exv32w1.htm |
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2011
or
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number: 001-34849
THE CORPORATE EXECUTIVE BOARD COMPANY
(Exact name of registrant as specified in its charter)
Delaware | 52-2056410 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification Number) | |
1919 North Lynn Street | ||
Arlington, Virginia | 22209 | |
(Address of principal executive offices) | (Zip Code) |
(571) 303-3000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Not applicable
(Former name, former address or former fiscal year, if changed since last report)
(Former name, former address or former fiscal year, if changed since last report)
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. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
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 and post such files). Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
The Company had 34,557,753 shares of common stock, par value $0.01 per share, outstanding at August
5, 2011.
THE CORPORATE EXECUTIVE BOARD COMPANY
INDEX TO FORM 10-Q
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements. |
THE CORPORATE EXECUTIVE BOARD COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 144,777 | $ | 102,498 | ||||
Marketable securities |
5,351 | 10,114 | ||||||
Membership fees receivable, net |
87,808 | 141,322 | ||||||
Deferred income taxes, net |
17,175 | 18,727 | ||||||
Deferred incentive compensation |
16,159 | 15,710 | ||||||
Prepaid expenses and other current assets |
18,490 | 10,388 | ||||||
Total current assets |
289,760 | 298,759 | ||||||
Deferred income taxes, net |
40,880 | 43,524 | ||||||
Marketable securities |
9,456 | 10,850 | ||||||
Property and equipment, net |
81,798 | 83,140 | ||||||
Goodwill |
29,406 | 29,266 | ||||||
Intangible assets, net |
11,995 | 13,828 | ||||||
Other non-current assets |
33,369 | 30,782 | ||||||
Total assets |
$ | 496,664 | $ | 510,149 | ||||
Liabilities and stockholders equity |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued liabilities |
$ | 32,587 | $ | 52,439 | ||||
Accrued incentive compensation |
21,955 | 40,719 | ||||||
Deferred revenues |
260,180 | 251,200 | ||||||
Total current liabilities |
314,722 | 344,358 | ||||||
Deferred income taxes |
912 | 679 | ||||||
Other liabilities |
85,254 | 82,296 | ||||||
Total liabilities |
400,888 | 427,333 | ||||||
Stockholders equity: |
||||||||
Common stock, par value $0.01; 100,000,000 shares
authorized, 43,825,824 and 43,533,802 shares
issued, and 34,545,765 and 34,322,055 shares
outstanding at June 30, 2011 and December 31,
2010, respectively |
438 | 435 | ||||||
Additional paid-in capital |
414,206 | 409,558 | ||||||
Retained earnings |
311,311 | 300,030 | ||||||
Accumulated elements of other comprehensive income |
1,463 | 1,714 | ||||||
Treasury stock, at cost, 9,280,059 and 9,211,747
shares at June 30, 2011 and December 31, 2010,
respectively |
(631,642 | ) | (628,921 | ) | ||||
Total stockholders equity |
95,776 | 82,816 | ||||||
Total liabilities and stockholders equity |
$ | 496,664 | $ | 510,149 | ||||
See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
THE CORPORATE EXECUTIVE BOARD COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues |
$ | 119,215 | $ | 109,577 | $ | 234,073 | $ | 209,752 | ||||||||
Costs and expenses: |
||||||||||||||||
Cost of services |
43,897 | 39,283 | 84,307 | 72,795 | ||||||||||||
Member relations and marketing |
36,042 | 30,155 | 71,588 | 55,935 | ||||||||||||
General and administrative |
16,910 | 14,808 | 33,750 | 30,280 | ||||||||||||
Depreciation and amortization |
4,588 | 5,639 | 8,846 | 10,774 | ||||||||||||
Total costs and expenses |
101,437 | 89,885 | 198,491 | 169,784 | ||||||||||||
Income from operations |
17,778 | 19,692 | 35,582 | 39,968 | ||||||||||||
Other income (expense), net |
323 | (789 | ) | 1,828 | (1,247 | ) | ||||||||||
Income before provision for income taxes |
18,101 | 18,903 | 37,410 | 38,721 | ||||||||||||
Provision for income taxes |
7,757 | 7,923 | 15,712 | 16,108 | ||||||||||||
Net income |
$ | 10,344 | $ | 10,980 | $ | 21,698 | $ | 22,613 | ||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.30 | $ | 0.32 | $ | 0.63 | $ | 0.66 | ||||||||
Diluted |
$ | 0.30 | $ | 0.32 | $ | 0.62 | $ | 0.66 | ||||||||
Dividends per share |
$ | 0.15 | $ | 0.11 | $ | 0.30 | $ | 0.22 | ||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
34,516 | 34,214 | 34,435 | 34,189 | ||||||||||||
Diluted |
34,851 | 34,469 | 34,805 | 34,458 |
See accompanying notes to condensed consolidated financial statements.
4
Table of Contents
THE CORPORATE EXECUTIVE BOARD COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 21,698 | $ | 22,613 | ||||
Adjustments to reconcile net income to net cash flows provided by operating activities: |
||||||||
Depreciation and amortization |
8,846 | 10,774 | ||||||
Deferred income taxes |
3,176 | (1,948 | ) | |||||
Share-based compensation |
4,159 | 3,174 | ||||||
Excess tax benefits from share-based compensation arrangements |
(1,821 | ) | | |||||
Foreign currency translation gain |
(746 | ) | | |||||
Amortization of marketable securities premiums, net |
130 | 221 | ||||||
Changes in operating assets and liabilities: |
||||||||
Membership fees receivable, net |
53,545 | 47,169 | ||||||
Deferred incentive compensation |
(446 | ) | (2,602 | ) | ||||
Prepaid expenses and other current assets |
(8,020 | ) | 846 | |||||
Other non-current assets |
(1,880 | ) | (2,651 | ) | ||||
Accounts payable and accrued liabilities |
(17,219 | ) | (18,111 | ) | ||||
Accrued incentive compensation |
(18,955 | ) | (4,166 | ) | ||||
Deferred revenues |
8,934 | (1,568 | ) | |||||
Other liabilities |
2,902 | 2,366 | ||||||
Net cash flows provided by operating activities |
54,303 | 56,117 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(4,583 | ) | (1,217 | ) | ||||
Acquisition of business, net of cash acquired |
| (8,957 | ) | |||||
Cost method investment |
(150 | ) | | |||||
Maturities of marketable securities |
5,780 | 20,284 | ||||||
Net cash flows provided by investing activities |
1,047 | 10,110 | ||||||
Cash flows from financing activities: |
||||||||
Proceeds from the exercise of common stock options |
1,587 | | ||||||
Proceeds from the issuance of common stock under the employee stock purchase plan |
232 | 153 | ||||||
Excess tax benefits from share-based compensation arrangements |
1,821 | | ||||||
Acquisition of business, contingent consideration |
(3,655 | ) | | |||||
Credit facility issuance costs |
(542 | ) | | |||||
Purchases of treasury shares |
(2,721 | ) | (1,167 | ) | ||||
Payment of dividends |
(10,314 | ) | (7,517 | ) | ||||
Net cash flows used in financing activities |
(13,592 | ) | (8,531 | ) | ||||
Effect of exchange rates on cash |
521 | | ||||||
Net increase in cash and cash equivalents |
42,279 | 57,696 | ||||||
Cash and cash equivalents, beginning of period |
102,498 | 31,760 | ||||||
Cash and cash equivalents, end of period |
$ | 144,777 | $ | 89,456 | ||||
See accompanying notes to condensed consolidated financial statements.
5
Table of Contents
THE CORPORATE EXECUTIVE BOARD COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Nature of business and basis of presentation
The Corporate Executive Board Company (the Company) provides essential information by analyzing
and disseminating the most successful practices from its global network of members. The Company
drives corporate performance through a network of executives and business professionals by
providing actionable insights, analytical tools, and advisory support to quickly and confidently
focus efforts on what executives and their teams need to know, and do, next. The Company provides
its members with the authoritative and timely decision support they need to elevate company
performance and excel in their careers. For an annual fee, members of each program have access to
an integrated set of products and services, including best practices studies, executive education,
customized analysis, proprietary databases and decision support tools. The Company also generates
advertising and content related revenues through its wholly-owned subsidiary, Toolbox.com, LLC.
(Toolbox.com).
The accompanying condensed consolidated financial statements have been prepared by the Company in
accordance with U.S. generally accepted accounting principles (GAAP) for interim financial
information and pursuant to the rules and regulations of the United States Securities and Exchange
Commission (the SEC) for reporting on Form 10-Q. Accordingly, certain information and disclosures
required for complete consolidated financial statements are not included. It is recommended that
these condensed consolidated financial statements be read in conjunction with the consolidated
financial statements and related notes in the Companys 2010 Annual Report on Form 10-K.
In managements opinion, all adjustments, consisting of a normal recurring nature, considered
necessary for a fair presentation of the condensed consolidated financial position, results of
operations, and cash flows at the dates and for the periods presented have been included. The
condensed consolidated balance sheet presented at December 31, 2010 has been derived from the
financial statements that were audited by the Companys independent registered public accounting
firm. The results of operations for the three and six months ended June 30, 2011 may not be
indicative of the results that may be expected for the year ended December 31, 2011 or any other
period within 2011.
Note 2. Summary of significant accounting policies
Except to the extent updated or described below, a detailed description of the Companys
significant accounting policies is included in the Companys 2010 Annual Report on Form 10-K filed
with the SEC on February 28, 2011. The following notes should be read in conjunction with such
policies and other disclosures contained therein.
Revenue Recognition
The Company generates the majority of its revenues from three primary service offerings: executive
memberships, performance analytics, and leadership academies. Executive memberships generally
contain multiple deliverables, which are determined based upon the availability and delivery method
of the services and may include: on-line best practices research and insights, peer benchmarks,
decision and diagnostics tools, advisory support, and live and on-line learning events.
Performance analytics deliver data and analytical insight to drive improved performance of
executives and their teams and are accounted for as service revenues. Leadership academies
generally contain multiple deliverables and provide access to training and development services
that may include diagnostic reports, learning portal access, classroom-based development sessions,
webinars, and virtual office hours with faculty.
In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2009-13, Multiple Deliverable Revenue Arrangements (ASU 2009-13) that is
effective for revenue arrangements entered into or materially modified in fiscal years beginning on
or after June 15, 2010. This guidance eliminates the residual method under previous guidance and
replaces it with the relative selling price method when allocating revenue in a multiple
deliverable arrangement. The Company adopted ASU 2009-13 prospectively on January 1, 2011.
6
Table of Contents
When service offerings include multiple deliverables that qualify as separate units of accounting,
the Company allocates arrangement
consideration at the inception of the contract period to all deliverables based on the relative
selling price method in accordance with the selling price hierarchy, which includes vendor specific
objective evidence (VSOE) if available; third-party evidence (TPE) if VSOE is not available; or
best estimate of selling price (BESP) if neither VSOE nor TPE is available.
| VSOE. The Company determines VSOE based on established pricing and discounting
practices for the specific service when sold separately. In determining VSOE, the
Company requires that a substantial majority of the selling prices for these services
fall within a reasonably narrow pricing range. The Company limits its assessment of
VSOE for each element to either the price charged when the same element is sold
separately, or the price established by management having the relevant authority to do
so for an element not yet sold separately. |
| TPE. When VSOE cannot be established for deliverables in multiple element
arrangements, the Company applies judgment with respect to whether it can establish a
selling price based on TPE. TPE is determined based on competitor prices for similar
services when sold separately. Generally, the Companys services contain a significant
level of differentiation such that the comparable pricing of services with similar
functionality cannot be obtained. Furthermore, the Company is unable to reliably
determine what similar competitors selling prices are for similar services on a
stand-alone basis. As a result, the Company has not been able to establish selling
price based on TPE. |
| BESP. When unable to establish a selling price using VSOE or TPE, the Company
uses BESP in its allocation of arrangement consideration. The objective of BESP is to
determine the price at which the Company would transact a sale if the product or
service were sold on a stand-alone basis. The Company determines BESP for deliverables
by considering multiple factors including, but not limited to, prices it charges for
similar offerings, market conditions, competitive landscape and pricing practices. |
Revenue is recognized when (1) there is persuasive evidence of an arrangement, (2) the fee is fixed
and determinable, (3) services have been rendered and payment has been contractually earned, and
(4) collectability is reasonably assured. Certain fees are billed on an installment basis.
Customers generally may request a refund of their fees, which is provided from the date of the
refund request on a pro-rata basis relative to the length of the remaining term, under the
Companys service guarantee.
| Executive memberships. In general, the majority of the deliverables within the
Companys memberships are consistently available throughout the membership period.
Revenues are generally recognized ratably over the term of the related agreement, which is
typically 12 months. Membership fees are billable, and revenue recognition begins, when a
member agrees to the terms of the membership and the fees receivable and the related
deferred revenue are recorded upon the commencement of the agreement or collection of fees,
if earlier. In some instances, a membership may include a service that is available only
once, or on a limited basis, during the membership period. These services are separated
from the remainder of the membership and arrangement consideration is allocated based on
VSOE, if available, or BESP. The consideration allocated to services available only once
or on a limited basis is recognized as revenue upon the earlier of the delivery of the
service or the completion of the contract period, provided that all other criteria for
recognition have been met. The arrangement consideration allocated to the remainder of the
membership services continues to be recognized ratably. |
| Performance analytics. Revenues are generally recognized ratably from the date our
services begin, which is primarily after the design of the outputs, through the completion
of the services. |
| Leadership academies. Revenues are generally recognized as services are completed. The
service offering generally includes one or more class-room based training or presentation
events. Arrangement consideration is allocated on a pro-rata basis, if more than one date
of delivery is evident, and revenue is recognized on the date of delivery of each event. |
Agreements entered into between January 1, 2011 and June 30, 2011, and impacted by ASU 2009-13 have
resulted in lower results of operations for the three and six months ended June 30, 2011 than would
have been reported under the previous guidance. Revenues and income from operations are lower by
$2.1 million and $3.6 million, net income is lower by $1.2 million and $2.1 million, and basic and
diluted earnings per share are lower by $0.03 and $0.06, for the three and six months ended June
30, 2011, respectively.
To lessen the impact of ASU 2009-13, the Company completed modifications to certain memberships
that contained single or limited services. These modifications were completed on or about March
31, 2011. The modifications will allow the Company to recognize revenue ratably over the
membership period for sales of the modified memberships on or after April 1, 2011. For memberships
that have not been modified, the Company has and will continue to allocate arrangement
consideration to all services. For single or
limited services, revenues will be recognized at the earlier of delivery or the completion of the
membership period.
7
Table of Contents
Advertising and content related revenues from Toolbox.com are recognized as the services are
provided.
Note 3. Recent accounting pronouncements
Recently adopted
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements
to require additional disclosures about purchases, sales, issuances, and settlements in the
rollforward of Level 3 fair value measurements. The adoption of this new accounting guidance in
the first quarter of 2011 did not have a material impact on the consolidated financial statements.
The Company adopted ASU 2009-13 on January 1, 2011 as discussed above.
Not yet adopted
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and IFRS. The ASU is the result of joint efforts by the FASB
and International Accounting Standards Board to develop a single, converged fair value framework on
how (not when) to measure fair value and what disclosures to provide about fair value measurements.
While the ASU is largely consistent with existing fair value measurement principles in U.S. GAAP,
it modifies Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and
Disclosures (ASC 820) to expand existing disclosure requirements for fair value measurements and
makes other amendments. This ASU is effective for interim and annual periods beginning after
December 15, 2011. The Company is in the process of assessing this new guidance but the adoption of
this ASU is not expected to have a material impact on the consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. This ASU
revises the manner in which entities present comprehensive income in their financial statements.
The new guidance removes the presentation options in ASC 220, Comprehensive Income and requires
entities to report components of comprehensive income in either (1) a continuous statement of
comprehensive income or (2) two separate but consecutive statements. The ASU does not change the
items that must be reported in other comprehensive income. This ASU is effective for fiscal years,
and interim periods within those years, beginning after December 15, 2011. The Company is in the
process of assessing this new guidance but the adoption of this ASU is not expected to have a
material impact on the consolidated financial statements.
Note 4. Acquisitions
In May 2010, the Company completed the acquisition of Iconoculture, Inc., a Minnesota corporation
(now doing business as Iconoculture LLC, or Iconoculture). Iconoculture provides comprehensive
consumer insights and effective strategic marketing advisory services and project support to an
established customer base. The Company acquired 100% of the equity interests of Iconoculture for
an initial cash payment of $16.2 million, less cash acquired totaling $7.2 million, plus a working
capital adjustment of $4.0 million paid in July 2010. The Company also paid $1.5 million on April
1, 2011, which had been held back by the Company for any indemnifiable losses under the terms of
the acquisition agreement. In addition, the Company paid $2.5 million on April 1, 2011 as final
settlement of the additional consideration associated with Iconocultures financial performance
against certain specified targets for the year ended December 31, 2010. The acquisition date fair
value of the total consideration was $24.2 million and was allocated to the assets acquired,
including intangible assets and liabilities assumed, based on their estimated fair values. The
Company allocated $9.2 million to intangible assets with a weighted average amortization period of
4.5 years and $11.0 million to goodwill.
8
Table of Contents
Note 5. Fair value measurements
Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer
a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants at the measurement date. There is a
three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This
hierarchy
requires entities to maximize the use of observable inputs and minimize the use of unobservable
inputs. The three levels of inputs used to measure fair value are as follows:
| Level 1 Quoted prices in active markets for identical assets or liabilities. |
| Level 2 Observable inputs other than quoted prices included in Level 1, such as
quoted prices for similar assets and liabilities in active markets, quoted prices for
identical or similar assets and liabilities in markets that are not active, or other inputs
that are observable or can be corroborated by observable market data. |
| Level 3 Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities. This includes certain
pricing models, discounted cash flow methodologies and similar techniques that use
significant unobservable inputs. |
The Company has segregated all assets and liabilities that are measured at fair value on a
recurring basis into the most appropriate level within the fair value hierarchy based on the inputs
used to determine the fair value at the measurement date in the tables below (in thousands):
June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
Financial assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 144,777 | $ | | $ | | $ | 102,498 | $ | | $ | | ||||||||||||
Debt securities issued by the District of Columbia |
14,807 | | | 20,964 | | | ||||||||||||||||||
Variable insurance products held in a Rabbi Trust |
| 15,311 | | | 14,905 | | ||||||||||||||||||
Forward currency exchange contracts |
| 179 | | | 232 | | ||||||||||||||||||
Financial liabilities |
||||||||||||||||||||||||
Forward currency exchange contracts |
$ | | $ | 233 | $ | | $ | | $ | 113 | $ | | ||||||||||||
Contingent consideration Iconoculture |
| | | | | 1,900 |
The fair value of variable insurance products held in a Rabbi Trust is based on actuarial estimates
derived from various observable market inputs. The fair value of foreign currency exchange
contracts are based on bank quotations for similar instruments using models with market-based
inputs.
The fair value estimate of the Iconoculture contingent consideration was $1.9 million at December
31, 2010. In March 2011, the Company increased its estimate of contingent consideration to $2.5
million. On April 1, 2011, the Company paid $2.5 million as final settlement of the additional
consideration associated with Iconocultures financial performance against certain specified
targets for the year ended December 31, 2010.
Certain assets (i.e., goodwill, intangible assets) and liabilities are measured at fair value on a
nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an
ongoing basis but are subject to fair value adjustments in certain circumstances (e.g., when there
is impairment). No fair value adjustments were made in the three and six months ended June 30,
2011 and 2010, respectively.
Marketable securities
The aggregate fair value, amortized cost, gross unrealized gains, and gross unrealized losses on
available-for-sale marketable securities are as follows (in thousands):
June 30, 2011 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Fair | Amortized | Unrealized | Unrealized | |||||||||||||
Value | Cost | Gains | Losses | |||||||||||||
Washington D.C. tax exempt bonds |
$ | 14,807 | $ | 14,355 | $ | 452 | $ | | ||||||||
December 31, 2010 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Fair | Amortized | Unrealized | Unrealized | |||||||||||||
Value | Cost | Gains | Losses | |||||||||||||
Washington D.C. tax exempt bonds |
$ | 20,964 | $ | 20,265 | $ | 699 | $ | | ||||||||
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Table of Contents
The following table summarizes maturities of marketable securities (in thousands):
June 30, 2011 | ||||||||
Fair | Amortized | |||||||
Value | Cost | |||||||
Less than one year |
$ | 5,351 | $ | 5,291 | ||||
Matures in 1 to 5 years |
9,456 | 9,064 | ||||||
Marketable securities |
$ | 14,807 | $ | 14,355 | ||||
Note 6. Other liabilities
Other liabilities consist of the following (in thousands):
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Deferred compensation |
$ | 12,002 | $ | 11,215 | ||||
Lease incentives |
30,635 | 31,619 | ||||||
Deferred rent benefit |
24,719 | 23,079 | ||||||
Other |
17,898 | 16,383 | ||||||
Total other liabilities |
$ | 85,254 | $ | 82,296 | ||||
Note 7. Stockholders equity and share-based compensation
Share-based compensation
The Company granted 286,783 and 396,310 restricted stock units at a weighted-average fair value of
$39.02 and $25.63 in the six months ended June 30, 2011 and 2010, respectively. Share-based
compensation expense is recognized on a straight line basis, net of an estimated forfeiture rate,
for those shares expected to vest over the requisite service period of the award, which is
generally the vesting term of four years. Approximately 78,000 and 216,000 shares were issued
relating to the vesting of restricted stock units and exercise of stock options in the three and
six months ended June 30, 2011, respectively. Approximately 98,000 and 124,000 shares were issued
relating to the vesting of restricted stock units and exercise of stock options in the three and
six months ended June 30, 2010, respectively.
The Company recognized total share-based compensation costs of $2.2 million and $1.7 million in the
three months ended June 30, 2011 and 2010 and $4.2 million and $3.2 million in the six months ended
June 30, 2011 and 2010, respectively. At June 30, 2011, $21.1 million of total unrecognized
share-based compensation cost is expected to be recognized over a weighted-average period of
approximately two years.
Dividends
In May 2011, the Board of Directors declared a cash dividend of $0.15 per share for the second
quarter of 2011 for stockholders of record on June 15, 2011. The dividend, totaling $5.2 million,
was paid on June 30, 2011.
On August 4, 2011, the Board of Directors declared a third quarter cash dividend of $0.15 per
share. The dividend is payable on September 30, 2011 to stockholders of record at the close of
business on September 15, 2011. The Company funds its dividend payments with cash on hand and cash
generated from operations.
Note 8. Derivative instruments and hedging activities
The Companys international operations are subject to risks related to currency exchange
fluctuations. Prices for the Companys products and services are denominated primarily in United
States dollars (USD), including products and services sold to members that are located outside
the United States. Many of the costs associated with the Companys operations located outside the
United States are denominated in local currencies. As a consequence, increases in local currencies
against the USD in countries where the Company has foreign operations would result in higher
effective operating costs and reduced earnings. The Company uses forward
contracts, designated as cash flow hedging instruments, to protect against foreign currency
exchange rate risks inherent with its cost reimbursement agreements with its United Kingdom
subsidiary. A forward contract obligates the Company to exchange a predetermined amount of USD to
make equivalent British pound sterling (GBP) payments equal to the value of such exchanges.
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The Company formally documents all relationships between hedging instruments and hedged items as
well as its risk management objective and strategy for undertaking hedge transactions. The maximum
length of time over which the Company is hedging its exposure to the variability in future cash
flows is 12 months. The forward contracts are recognized on the consolidated balance sheets at
fair value and changes in fair value measurements are reflected as adjustments to other
comprehensive income (OCI) until such time as the actual foreign currency expenditures are made
and the unrealized gain/loss is transferred to current earnings. There is generally no or an
immaterial amount of ineffectiveness. The notional amount of outstanding forward contracts was
$19.6 million at June 30, 2011.
The fair value of derivative instruments, which are designated as hedging instruments, on the
Companys condensed consolidated balance sheets are as follows (in thousands):
Balance Sheet Location | June 30, 2011 | December 31, 2010 | ||||||
Asset Derivatives |
||||||||
Prepaid expenses and other current assets |
$ | 179 | $ | 232 | ||||
Liability Derivatives |
||||||||
Accounts payable and accrued liabilities |
$ | 233 | $ | 113 | ||||
The pre-tax effect of the derivative instruments on the Companys consolidated statements of income
is as follows (in thousands):
Amount of Gain (Loss) Recognized in OCI on Derivative (Effective portion) | ||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
Derivatives in Cash Flow Hedging Relationships | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Forward currency contracts |
$ | (11 | ) | $ | (83 | ) | $ | 518 | $ | (362 | ) | |||||
Amount of Gain (Loss) Reclassified from Accumulated OCI into Income | ||||||||||||||||
(Effective portion) | ||||||||||||||||
Location of Gain (Loss) Reclassified from | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
Accumulated OCI into Income (Effective portion) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Cost of services |
$ | 97 | $ | (118 | ) | $ | 312 | $ | (292 | ) | ||||||
Member relations and marketing |
79 | (45 | ) | 265 | (111 | ) | ||||||||||
General and administrative |
39 | (40 | ) | 127 | (100 | ) | ||||||||||
$ | 215 | $ | (203 | ) | $ | 704 | $ | (503 | ) | |||||||
Note 9. Revolving credit facility
On March 16, 2011, the Company, together with certain of its subsidiaries acting as guarantors,
entered into a $100 million five-year senior unsecured, revolving credit facility (the Credit
Facility) with certain lenders, including Bank of America, N.A., as Administrative Agent, Swing
Line Lender and L/C Issuer, and JPMorgan Chase Bank, N.A., as Syndication Agent. The Credit
Facility contains letter of credit and swing line loan sub-facilities and has a maturity date of
March 16, 2016.
The Credit Facility is available for working capital and general corporate purposes. Under the
terms of the Credit Facility, the Company has the right, from time to time, to increase the
aggregate revolving commitments from $100 million up to a maximum $150 million upon at least five
business days prior written notice to the Administrative Agent, subject to certain limitations set
forth in the Credit Facility, including the absence of a default under the Credit Facility. The
Company has issued letters of credit under the Credit Facility in an aggregate amount of $6.4
million at June 30, 2011 and has otherwise not borrowed under the Credit Facility.
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Borrowings under the Credit Facility bear interest at rates based on the ratio of the Companys
consolidated indebtedness to consolidated EBITDA (earnings before interest income, net,
depreciation and amortization, and provision for income taxes.) for applicable periods specified in
the Credit Facility (the Consolidated Leverage Ratio). Such rates are tied to the highest of the
federal funds rate, Bank of Americas prime rate and LIBOR, or to LIBOR, depending on the type of
loan.
The Company must pay the Administrative Agent a quarterly commitment fee based upon the amount by
which the aggregate revolving commitments exceed the outstanding loans and obligations of the
Company under the Credit Facility. Additionally, the Company must pay the lenders certain letter of
credit fees based upon the daily amount available to be drawn under such letters of credit. The
commitment fee and letter of credit fees vary based on the Consolidated Leverage Ratio.
The Credit Facility also contains customary financial and other covenants, including limitations on
the ability of the Company and its subsidiaries to incur debt or liens or make certain investments
and restricted payments, a requirement to maintain certain leverage and interest coverage ratios,
and certain restrictions on the sale of assets and capital expenditures. A violation of these
covenants could result in the Company being prohibited from making certain restricted payments,
including dividends, or cause a default under the Credit Facility, which would permit the
participating lenders to restrict the Companys ability to access the Credit Facility and require
the immediate repayment of any outstanding advances made under it.
Note 10. Income taxes
The Company computes its provision for income taxes by applying the estimated annual effective tax
rate to income from operations and adjusts the provision for discrete tax items recorded in the
period. The effective tax rate was 42.9% and 42.0% in the three and six months ended June 30,
2011, respectively. The effective tax rate for the three months ended June 30, 2011 includes the
effect of a discrete event related to the realizability of a state deferred tax asset which
resulted in an increase to the effective tax rate. The Company currently anticipates a full-year
expected annualized tax rate of approximately 41%, excluding the effects of unrealized currency
translation gains and losses. The effective tax rate was 41.9% and 41.6% in the three and six
months ended June 30, 2010, respectively.
The Company made income tax payments of $19.1 million and $17.2 million in the three months ended
June 30, 2011 and 2010 and $20.5 million and $18.2 million in the six months ended June 30, 2011
and 2010, respectively.
Note 11. Earnings per share
A reconciliation of basic to diluted weighted average common shares outstanding is as follows
(in thousands):
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Basic weighted average common shares outstanding |
34,516 | 34,214 | 34,435 | 34,189 | ||||||||||||
Dilutive effect of common shares outstanding |
335 | 255 | 370 | 269 | ||||||||||||
Diluted weighted average common shares outstanding |
34,851 | 34,469 | 34,805 | 34,458 | ||||||||||||
Approximately 1.3 million and 2.5 million shares in the three months ended June 30, 2011 and 2010,
respectively, and approximately 1.9 million and 2.5 million shares in the six months ended June 30,
2011 and 2010, respectively, have been excluded from the dilutive effect shown above because their
impact would be anti-dilutive. These shares related to share-based compensation awards.
Note 12. Comprehensive income
Total comprehensive income is as follows (in thousands):
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income |
$ | 10,344 | $ | 10,980 | $ | 21,698 | $ | 22,613 | ||||||||
Change in unrealized gains of marketable securities, net of tax |
(68 | ) | (70 | ) | (148 | ) | (246 | ) | ||||||||
Unrealized (losses) gains on forward contracts, net of tax |
(135 | ) | 121 | (110 | ) | 94 | ||||||||||
Change in cumulative translation adjustment |
4 | 211 | 8 | 716 | ||||||||||||
Total comprehensive income |
$ | 10,145 | $ | 11,242 | $ | 21,448 | $ | 23,177 | ||||||||
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Accumulated elements of other comprehensive income at June 30, 2011 consists of a $0.3 million
unrealized gain, net of tax, on marketable securities and a $1.2 million cumulative foreign
currency translation gain. Accumulated elements of other comprehensive income at December 31, 2010
consists of a $0.4 million unrealized gain, net of tax, on marketable securities; a $0.1 million
unrealized gain, net of tax, on forward currency exchange contracts; and a $1.2 million cumulative
foreign currency translation gain.
Note 13. Commitments and contingencies
Operating leases
The Company leases office facilities that expire on various dates through 2028. Generally, the
leases carry renewal provisions and rental escalations and require the Company to pay executory
costs such as taxes and insurance.
Future minimum rental payments under non-cancelable operating leases and future minimum receipts
under subleases, excluding executory costs, are as follows at June 30, 2011:
Total | 2011* | YE 2012 | YE 2013 | YE 2014 | YE 2015 | Thereafter | ||||||||||||||||||||||
Operating lease obligations |
$ | 590,668 | $ | 17,925 | $ | 36,477 | $ | 36,487 | $ | 35,809 | $ | 36,074 | $ | 427,896 | ||||||||||||||
Sublease receipts |
(274,988 | ) | (5,361 | ) | (13,883 | ) | (14,238 | ) | (13,382 | ) | (14,954 | ) | (213,170 | ) | ||||||||||||||
Total net lease obligations |
$ | 315,680 | $ | 12,564 | $ | 22,594 | $ | 22,249 | $ | 22,427 | $ | 21,120 | $ | 214,726 | ||||||||||||||
* | For the six months ended December 31, 2011. |
Contingencies
From time to time, the Company is subject to litigation related to normal business operations. The
Company vigorously defends itself in litigation and is not currently a party to, and the Companys
property is not subject to, any legal proceedings likely to materially affect the Companys
financial results.
The Company continues to evaluate potential tax exposures relating to sales and use, payroll,
income and property tax laws, and regulations for various states in which the Company sells or
supports its goods and services. Accruals for potential contingencies are recorded by the Company
when it is probable that a liability has been incurred and the liability can be reasonably
estimated. As additional information becomes available, changes in the estimates of the liability
are reported in the period that those changes occur. The Company has a $3.0 million liability at
June 30, 2011 and December 31, 2010, respectively, relating to certain sales and use tax
regulations for states in which the Company sells or supports its goods and services.
Item 2. | Managements 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.
Executive Overview
In 2011, our objective is to continue to build on what we believe is a strong foundation for
long-term profitable growth. To do that, we intend to deepen existing member relationships, add
high-value new member companies, and leverage the member platform to launch new products and
services. With the goal of making continued progress with these growth levers, our four operating
priorities for 2011 are to create uniquely valuable insights into corporate performance; drive
loyalty, growth, and brand strength through high value member engagement; invest globally in key
markets; and leverage technology and service to deliver innovative products.
Our performance through June 30, 2011 reflects continued progress on elements of our growth
strategy. Contract Value, which we define as the aggregate annualized revenues attributed to all
agreements in effect at a given date without regard to the remaining duration of any such
agreement, was $456.8 million at June 30, 2011, an increase of 11.4%, compared to $410.1 million at
June 30,
2010, as a result of increased sales to new and existing members. Contract Value per member
institution increased 4.0% at June 30, 2011 to $84,942 from $81,637 at June 30, 2010.
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We believe that member-based operating metrics provide a useful view of the true economics,
management, and growth trends in our business. Wallet retention rate, which we define as the total
current year Contract Value from prior year members as a percentage of the total prior year
Contract Value, increased to 103% at June 30, 2011 from 91% at June 30, 2010 as a result of
improved pricing, renewals, and sales of additional products and services. We believe that Wallet
Retention Rate provides an integrated view of member buying activity as it reflects the cumulative
year-over-year impact of renewals, cross sales, and pricing growth.
Revenues were $119.2 million in the three months ended June 30, 2011, an increase of $9.6 million
from the three months ended June 30, 2010. Total costs and expenses were $101.4 million in the
three months ended June 30, 2011, an increase of $11.6 million from the three months ended June 30,
2010 primarily due to higher operating costs and additional investments in new products and market
extensions to further enhance organic growth. Our EBITDA margin was 18.9% in the three months
ended June 30, 2011 compared to an EBITDA margin of 22.1% in the three months ended June 30, 2010.
As a result, net income was $10.3 million in the three months ended June 30, 2011 compared to $11.0
million in the three months ended June 30, 2010.
Revenues were $234.1 million in the six months ended June 30, 2011, an increase of $24.3 million
from the six months ended June 30, 2010. Total costs and expenses were $198.5 million in the six
months ended June 30, 2011, an increase of $28.7 million from the six months ended June 30, 2010
primarily due to higher operating costs and additional investments in new products and market
extensions to further enhance organic growth. Our EBITDA margin was 19.5% in the six months ended
June 30, 2011 compared to an EBITDA margin of 23.2% in the six months ended June 30, 2010. As a
result, net income was $21.7 million in the six months ended June 30, 2011 compared to $22.6
million in the six months ended June 30, 2010.
Non-GAAP Financial Measures
The tables below, as well as earnings discussions, may include a discussion of EBITDA, Adjusted
EBITDA, Adjusted net income, and Non-GAAP diluted earnings per share, 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 EBITDA refers to a
financial measure that we define as earnings before interest income, net, depreciation and
amortization, and provision for income taxes. The term Adjusted EBITDA refers to a financial
measure that we define as earnings before interest income, net, depreciation and amortization,
provision for income taxes, impairment loss, costs associated with exit activities, restructuring
costs, and gain on acquisition. The term Adjusted net income refers to net income excluding the
after tax effects of impairment loss, costs associated with exit activities, restructuring costs,
and gain on acquisition. Non-GAAP diluted earnings per share refers to diluted earnings per
share excluding the after tax per share effects of impairment loss, costs associated with exit
activities, restructuring costs, and gain on acquisition.
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.
We believe that EBITDA, Adjusted EBITDA, Adjusted net income, and Non-GAAP diluted earnings per
share are relevant and useful supplemental information for our investors. We use these non-GAAP
financial measures for internal budgeting and other managerial purposes, when publicly providing
the Companys business outlook and as a measurement for potential acquisitions. A limitation
associated with EBITDA and Adjusted EBITDA is that they do not reflect the periodic costs of
certain capitalized tangible and intangible assets used in generating revenues in our business.
Management evaluates the costs of such tangible and intangible assets through other financial
measures such as capital expenditures. Management compensates for these limitations by also relying
on the comparable GAAP financial measure of Income from operations, which includes depreciation and
amortization.
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A reconciliation of net income to EBITDA is provided below (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income |
$ | 10,344 | $ | 10,980 | $ | 21,698 | $ | 22,613 | ||||||||
Interest income, net |
(149 | ) | (363 | ) | (498 | ) | (799 | ) | ||||||||
Depreciation and amortization |
4,588 | 5,639 | 8,846 | 10,774 | ||||||||||||
Provision for income taxes |
7,757 | 7,923 | 15,712 | 16,108 | ||||||||||||
EBITDA |
$ | 22,540 | $ | 24,179 | $ | 45,758 | $ | 48,696 | ||||||||
There were no adjustments that require a reconciliation of EBITDA to Adjusted EBITDA, Net income to
Adjusted net income, or Diluted earnings per share to Non-GAAP diluted earnings per share in the
three and six months ended June 30, 2011 or 2010, respectively.
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 2010
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 other than discussed below.
On January 1, 2011, we adopted Accounting Standards Update 2009-13,
Multiple-Deliverable Revenue Arrangements (ASU 2009-13), which is discussed in Note 2 to the
condensed consolidated financial statements. In response to the adoption of ASU
2009-13, we must analyze our service offerings to determine if there are multiple deliverables. If
there are multiple deliverables in our service offerings, we must account for them as separate
units of accounting. Measuring and allocating arrangement consideration to separate units of
accounting requires the application of judgment by management. We anticipate that the adoption of
ASU 2009-13 will affect the timing of revenue recognition. When arrangement
consideration is allocated to single or limited services, we will recognize revenue at the earlier
of the date of the delivery of the service or the final day of the agreement term.
Recent Accounting Pronouncements
See Note 3 to the condensed consolidated financial statements for a discussion of recent accounting
pronouncements.
Results of Operations
We generate the majority of our revenues through memberships that provide access to our products
and services, which are delivered through several channels. Memberships, which principally are
annually renewable agreements, primarily are payable by members at the beginning of the contract
term. Billings attributable to memberships for our products and services initially are recorded as
deferred revenues 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 operating costs and expenses consist of:
| Cost of services, which represents the costs associated with the production and
delivery of our products and services, consisting of compensation, including salaries,
variable, and share-based compensation, and for research personnel, in-house faculty, and
product advisors; the organization and delivery of membership meetings, seminars, and other
events; ongoing product development costs; production of published materials, costs of
developing and supporting our membership web platform and digital delivery of products and
services; and associated support services. |
| Member relations and marketing, which represents the costs of acquiring new members and
the costs of account management, consisting of compensation, including salaries, sales
incentives, and share-based compensation; travel and related expenses; recruiting and
training of personnel; sales and marketing materials; and associated support services, as
well as the costs of maintaining our customer relationship management software (CRM). |
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| General and administrative, which represents the costs associated with the corporate
and administrative functions, including human resources and recruiting, finance and
accounting, legal, management information systems, facilities management,
business development and other. Costs include compensation, including salaries, variable, and
share-based compensation; third-party consulting and compliance expenses; and associated
support services. |
| Depreciation and amortization, consisting of depreciation of our property and
equipment, including leasehold improvements, furniture, fixtures and equipment, capitalized
software and Web site development costs and the amortization of intangible assets. |
Three and Six Months Ended June 30, 2011 Compared to the Three and Six Months Ended June 30, 2010
Revenues
Revenues increased 8.8% to $119.2 million in the three months ended June 30, 2011 from $109.6
million in the three months ended June 30, 2010. Revenues increased 11.6% to $234.1 million in the
six months ended June 30, 2010 from $209.8 million in the six months ended June 30, 2010.
The increase of $9.6 million for the three months ended June 30, 2011 compared to the same period
in the prior year was due to an increase in bookings throughout 2010 and the first six months of
2011 and the full quarter impact of revenues from the Iconoculture, Inc. acquisition
(Iconoculture), which was completed in May 2010. This increase is net of a $2.1 million decrease
related to the deferral of certain revenues as a result of the adoption of ASU 2009-13
prospectively.
The increase of $24.3 million in the six months ended June 30, 2011 compared to the same period in
the prior year was due to an increase in bookings throughout 2010 and the first six months of 2011
and the Iconoculture acquisition. This increase is net of a $3.6 million decrease related to the
deferral of certain revenues as a result of the adoption of ASU 2009-13 prospectively.
Costs and expenses
Increases in compensation, additional costs from the Iconoculture acquisition, and the impact of
changes in the exchange rates of the U.S. Dollar (USD) to the British pound sterling (GBP) all
contributed to the year-over-year increases in costs and expenses. These items are allocated to
Cost of services, Member relations and marketing, and General and administrative expenses. We
discuss these major components of costs and expenses on an aggregated basis below:
| Compensation and related costs, including salaries and payroll taxes, increased $8.2
million and $15.8 million in the three and six months ended June 30, 2011, respectively,
compared to the same periods in 2010. The increase was primarily due to headcount
increases, as described more fully below, and the effect of our acquisition of Iconoculture
in May 2010. |
| Variable compensation decreased $0.3 million and increased $3.3 million in the three
and six months ended June 30, 2011, respectively compared to the same periods in 2010. The
decrease in the second quarter was primarily the result of a $2.1 million decrease in
estimated annual bonus payouts partially offset by a $1.8 million increase in sales
commission expense resulting from increased sales bookings in 2010 and 2011. The year to
date increase was primarily the result of a $4.5 million increase in sales commission
expense resulting from increased sales bookings in 2010 and 2011 partially offset by a $1.2
million decrease in estimated annual bonus payouts. |
| In May 2010, we acquired 100% of the equity interests of Iconoculture. Our total costs
and expenses, including compensation and related costs, increased $1.3 million and $5.5
million in the three and six months ended June 30, 2011, respectively, due to the
acquisition. |
| Our expenses are also impacted by currency fluctuations, primarily in the value of the
GBP compared to the USD. The value of the GBP versus the USD was approximately $0.14
higher on average in the three months ended June 30, 2011 compared to the same period in
2010. The value of the GBP versus the USD was approximately $0.09 higher on average for
the six months ended June 30, 2011 compared to the same period in 2010. Costs incurred for
foreign subsidiaries will fluctuate based upon changes in foreign currency rates in
addition to other operational factors. We enter into cash flow hedges for our UK
subsidiary to mitigate foreign currency risk, which offsets a portion of the impact foreign
currency fluctuations have on costs and expenses. |
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Cost of services
Cost of services increased 11.7% to $43.9 million in the three months ended June 30, 2011 from
$39.3 million in the three months ended June 30, 2010. The increase of $4.6 million was primarily
due to a $3.7 million increase in compensation and related costs, including salaries and payroll
taxes. The increase in compensation and related costs was primarily due to headcount increases
relating to investments in our product research and delivery teams. Additionally, third-party
consulting fees increased $1.0 million, travel and related expenses increased $0.5 million, and
costs associated with the production and delivery of meetings and other services and deferred
compensation expenses each increased $0.4 million. These increases were partially offset by a $1.6
million decrease in variable compensation.
Cost of services increased 15.8% to $84.3 million in the six months ended June 30, 2011 from $72.8
million in the six months ended June 30, 2010. The increase of $11.5 million was primarily due to
a $7.0 million increase in compensation and related costs, including salaries and payroll taxes.
The increase in compensation and related costs was primarily due to headcount increases relating to
investments in our product research and delivery teams and the acquisition of Iconoculture.
Additionally, third-party consulting fees increased $2.1 million, travel and related expenses
increased $1.4 million, share based compensation expense increased $1.0 million, and costs
associated with the production and delivery of meetings and other services, deferred compensation
expenses, and severance expense each increased $0.5 million. These increases were partially offset
by decreases in variable compensation of $1.3 million and facilities expense of $0.4 million.
Member relations and marketing
Member relations and marketing expense increased 19.2% to $36.0 million in the three months ended
June 30, 2011 from $30.2 million in the three months ended June 30, 2010. The increase of $5.8
million was primarily due to a $3.6 million increase in compensation and related costs, including
salaries and payroll taxes, relating to investments in our sales teams and a $2.0 million increase
in variable compensation resulting from higher sales bookings across 2010 and 2011.
Member relations and marketing expense increased 28.0% to $71.6 million in the six months ended
June 30, 2011 from $55.9 million in the six months ended June 30, 2010. The increase of $15.7
million was primarily due to a $7.2 million increase in compensation and related costs, including
salaries and payroll taxes. The increase in compensation and related costs was primarily due to
headcount increases relating to additional capacity and support for our sales teams. Additionally,
variable compensation increased $5.1 million due to higher sales bookings across 2010 and 2011,
travel and related expenses increased $0.7 million, share-based compensation increased $0.6
million, facilities expense increased $0.5 million, and third party consulting fees increased $0.5
million.
General and administrative
General and administrative expense increased 14.2% to $16.9 million in the three months ended June
30, 2011 from $14.8 million in the three months ended June 30, 2010. The increase of $2.1 million
was primarily due to a $1.3 million increase in compensation and related costs, including salaries
and payroll taxes. Additionally, third party consulting fees increased $0.6 million and travel and
related expenses increased $0.5 million. These increases were partially offset by a $0.7 million
decrease in variable compensation.
General and administrative expense increased 11.5% to $33.8 million in the six months ended June
30, 2011 from $30.3 million in the six months ended June 30, 2010. The increase of $3.5 million
was primarily due to a $1.9 million increase in compensation and related costs, including salaries
and payroll taxes. Additionally, third party consulting fees increased $0.7 million, travel and
related expenses increased $0.7 million, the fair value of the Iconoculture earnout increased $0.6
million, and employee search fees increased $0.3 million. These increases were partially offset by
a $0.7 million decrease in share-based compensation and a $0.5 million decrease in variable
compensation.
Depreciation and amortization
Depreciation and amortization expense decreased 18.6% to $4.6 million in the three months ended
June 30, 2011 from $5.6 million in the three months ended June 30, 2010. The decrease of $1.0
million was primarily due to a $0.8 million decrease in amortization.
Depreciation and amortization expense decreased 17.9% to $8.8 million in the six months ended June
30, 2011 from $10.8 million in the six months ended June 30, 2010. The decrease of $2.0 million was
primarily due to a $1.3 million decrease in amortization. The decrease in depreciation expense is
a result of fixed assets acquired as part of the build-out of our corporate headquarters in 2007
becoming fully depreciated in the second quarter of 2010.
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Other income (expense), net
Other income (expense), net increased to $0.3 million of income in the three months ended June 30,
2011 from $0.8 million of expense in the three months ended June 30, 2010. Other income (expense),
net in the three months ended June 30, 2011 was comprised of $0.2 million of interest income, net
and a $0.1 million foreign currency gain. Other income (expense), net in the three months ended
June 30, 2010 was comprised of $0.4 million of interest income and a $0.1 million of foreign
currency gain offset by a $0.9 million decrease in the fair value of deferred compensation plan
assets and $0.4 million of other expense.
Other income (expense), net increased to $1.8 million in the six months ended June 30, 2011 from
$1.2 million of expense in the six months ended June 30, 2010. Other income (expense) in the six
months ended June 30, 2011 was comprised of a $0.7 million foreign currency gain, a $0.6 million
increase in the fair value of deferred compensation plan assets, and $0.5 million of interest
income, net. Other income (expense), net in the six months ended June 30, 2010 was comprised of
$0.8 million of interest income offset by a $0.3 million decrease in the fair value of deferred
compensation plan assets, a $0.8 of foreign currency loss, and $0.9 million of other expense.
Provision for income taxes
We recorded a provision for income taxes of $7.8 million in the three months ended June 30, 2011
compared to $7.9 million in the three months ended June 30, 2010. We recorded a provision for
income taxes of $15.7 million in the six months ended June 30, 2011 compared to $16.1 million in
the six months ended June 30, 2010.
The effective tax rate was 42.9% and 42.0% in the three and six months ended June 30, 2011,
respectively. The effective tax rate for the three months ended June 30, 2011 includes the effect
of a discrete event related to the realizability of a state deferred tax asset which resulted in an
increase to the effective tax rate. The tax expense or benefit for unusual items, or certain
adjustments to the valuation allowance are treated as discrete items in the interim period in which
the events occur. The effective tax rate was 41.9% and 41.6% in the three and six months ended
June 30, 2010, respectively. Our provision for income taxes differs from the U.S. statutory rate
of 35% primarily due to state income taxes and nondeductible expenses.
We currently anticipate a full-year 2011 expected annualized tax rate of approximately 41%,
excluding the effects of unrealized currency translation gains/losses.
Liquidity and Capital Resources
Cash flows generated from operating activities have been our primary source of liquidity. On March
16, 2011, we entered into a $100 million five-year senior unsecured, revolving credit facility (the
Credit Facility) with certain lenders, including Bank of America, N.A., as Administrative Agent,
Swing Line Lender and L/C Issuer, and JPMorgan Chase Bank, N.A., as Syndication Agent. The Credit
Facility contains letter of credit and swing line loan sub-facilities and has a maturity date of
March 16, 2016.
The Credit Facility is available for working capital and general corporate purposes. Under the
terms of the Credit Facility, we have the right, from time to time, to increase the aggregate
revolving commitments from $100 million up to a maximum $150 million, subject to certain
limitations set forth in the Credit Facility. We have issued letters of credit under the Credit
Facility in an aggregate amount of $6.4 million at June 30, 2011 and have otherwise not borrowed
under the Credit Facility.
We had cash and cash equivalents and marketable securities of $159.6 million and $123.5 million at
June 30, 2011 and December 31, 2010, respectively. We believe that existing cash and cash
equivalents and marketable securities balances and operating cash flows will be sufficient to
support operations, anticipated capital expenditures, and the payment of dividends, as well as
potential share repurchases for at least the next 12 months. Our future cash flows will depend on
many factors, including our rate of Contract Value growth and selective investments to expand our
market presence and enhance technology. Also, we may make investments in, or
acquisitions of, complementary businesses, which could require us to borrow against the Credit
Facility as an additional source of liquidity for permitted acquisitions or seek additional
financing.
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In May 2010, we completed the acquisition of Iconoculture. We acquired 100% of the equity
interests of Iconoculture for an initial cash payment of $16.2 million, less cash acquired totaling
$7.2 million, plus a working capital adjustment of $4.0 million paid in July 2010. We also paid
$1.5 million on April 1, 2011, which had been held back by us for any indemnifiable losses under
the terms of the acquisition agreement. In addition, we paid additional consideration of $2.5
million on April 1, 2011 based on Iconocultures financial performance against certain specified
targets for the year ended December 31, 2010.
Cash flows from operating activities
Membership subscriptions, which principally are annually renewable agreements, generally are
payable by members at the beginning of the contract term. Historically, the combination of revenue
growth, profitable operations, and advance payments of membership subscriptions has resulted in net
cash flows provided by operating activities. Net cash flows provided by operating activities were
$54.3 million and $56.1 million in the six months ended June 30, 2011 and 2010, respectively.
Cash flows from operations have recently benefited from recent booking trends as evidenced by the
increase in Contract Value, accounts receivable and deferred revenues. This benefit was primarily
offset by increased incentive compensation paid in the first six months of 2011 versus the same
period of 2010 and increased operating expenses.
We made income tax payments of $20.5 million and $18.2 million in the six months ended June 30,
2011 and 2010, respectively and expect to continue making tax payments in future periods. We made
payments under restructuring plans of $3.0 million in the six months ended June 30, 2010.
Cash flows from investing activities
Our cash management, acquisition, and capital expenditure strategies affect cash flows from
investing activities. Net cash flows provided by investing activities were $1.0 million in the six
months ended June 30, 2011 versus $10.1 million in the six months ended June 30, 2010. We
generated $5.8 million from maturities of marketable securities and used $4.6 million for capital
expenditures, primarily on technology infrastructure and new product platforms, in the six months
ended June 30, 2011.
We generated $20.3 million from maturities of marketable securities and used $1.2 million for
capital expenditures, primarily on technology infrastructure, in the six months ended June 30,
2010. Additionally, we utilized $9.0 million for the Iconoculture acquisition in May 2010, which
included an initial payment of $16.2 million, net of cash acquired totaling $7.2 million.
We estimate that capital expenditures to support our infrastructure will be approximately $8.0 to
$10.0 million in 2011.
Cash flows from financing activities
Net cash flows used in financing activities were $13.6 million and $8.5 million in the six months
ended June 30, 2011 and 2010, respectively. The $5.1 million increase in cash flows used in
financing activities is the result of the increase in our quarterly dividend from $0.11
per share in the first and second quarters of 2010 to $0.15 per share in the first and second
quarters of 2011 resulting in dividends paid of $10.3 million and $7.5 million in the six months
ended June 30, 2011 and 2010, respectively. Additionally, we utilized $3.7 million for the
acquisition of businesses, primarily related to payments in April 2011 of the Iconoculture
contingent consideration and an amount which had been held back for indemnifiable losses under the
terms of the acquisition agreement. We also repurchased $2.7 million of our common stock in the six
months ended June 30, 2011 compared to $1.2 million in the six months ended June 30, 2010. These
repurchases were the result of employees using common stock received from the exercise of
share-based awards to satisfy the minimum statutory federal and state withholding requirements. We
also received $1.6 million from the exercise of share-based awards and recorded a $1.8 million tax
benefit related to share-based compensation in the six months ended June 30, 2011.
Commitments and contingencies
We continue to evaluate potential tax exposure relating to sales and use, payroll, income and
property tax laws, and regulations for various states in which we sell or support our goods and
services. Accruals for potential contingencies are recorded when it is probable that a liability
has been incurred, and the liability can be reasonably estimated. As additional information
becomes available, changes in the estimates of the liability are reported in the period that those
changes occur. We have accrued a liability of $3.0 million at June 30, 2011 and December 31, 2010,
respectively, relating to certain sales and use tax regulations for states in which we sell or
support our goods and services.
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Contractual obligations
There have been no material changes to the contractual obligations tables as disclosed in our 2010
Annual Report on Form 10-K. We have operating lease obligations that relate primarily to our office
leases that expire on various dates through 2028. The operating lease obligations generally include
scheduled rent increases.
Off-Balance Sheet Arrangements
We have no off-balance sheet financing or other arrangements
with unconsolidated entities or financial partnerships (such as entities often referred to as
structured finance or special purpose entities) established for purposes of facilitating
off-balance sheet financing or other debt arrangements or for other contractually narrow or limited
purposes.
Toolbox.com
Toolbox.com has not benefited from the favorable revenue dynamics or operating platform of our
membership programs. As a result, we have initiated a comprehensive review of strategic
alternatives for its business operations and technology platform. The carrying value of goodwill
and intangible assets at June 30, 2011 was $4.7 million. Decisions that we make regarding the
future direction of Toolbox.com could impact the recoverability of these assets.
Forward-looking statements
This Quarterly Report on Form 10-Q, including Managements Discussion and Analysis of Financial
Condition and Results of Operations in Item 2, contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 that involve risks, uncertainties
and assumptions. If the risks or uncertainties materialize or the assumptions prove incorrect, the
results of the Company and its consolidated subsidiaries may differ materially from those expressed
or implied by such forward-looking statements and assumptions. All statements other than statements
of historical fact are statements that could be deemed forward-looking statements, including but
not limited to any projections of revenues, margins, expenses, provision for income taxes,
earnings, cash flows, share repurchases, acquisition synergies, foreign currency exchange rates or
other financial items; any statements of the plans, strategies and objectives of management for
future operations, including the execution of cost reduction programs and restructuring plans; any
statements concerning expected development, performance or market share relating to products or
services; any statements regarding future economic conditions or performance; any statements
regarding pending investigations, claims or disputes; any statements of expectation or belief; and
any statements of assumptions underlying any of the foregoing.
Factors that could cause actual results to differ materially from those indicated by
forward-looking statements include, among others, our dependence on renewals of our
membership-based services, the sale of additional programs to existing members and our ability to
attract new members, our potential failure to adapt to member needs and demands, our potential
inability to attract and retain a significant number of highly skilled employees, risks associated
with the results of restructuring plans, fluctuations in operating results, our potential inability
to protect our intellectual property, our potential exposure to loss of revenues resulting from our
unconditional service guarantee, exposure to litigation related to our content, various factors
that could affect our estimated income tax rate or our ability to utilize our deferred tax assets,
changes in estimates, assumptions or revenue recognition policies used to prepare our consolidated
financial statements, our potential inability to make, integrate and maintain acquisitions and
investments, and the amount and timing of the benefits expected from acquisitions and investments,
our potential inability to implement, maintain, upgrade and effectively operate our technology and
information infrastructure, our potential inability to effectively manage the risks associated with
our international operations, including the risk of foreign currency exchange fluctuations, our
potential inability to effectively anticipate, plan for and respond to changing economic and
financial markets conditions, especially in light of ongoing uncertainty in the worldwide economy
and possible volatility of our stock price. In Part I, Item 1A. Risk Factors of the Companys
2010 Annual Report on Form 10-K, as filed on February 28, 2011, the Company discusses in more
detail various important factors that could cause
actual results to differ from expected or historic results. One should understand that it is not
possible to predict or identify all such factors. Consequently, the reader should not consider any
such list to be a complete statement of all potential risks or uncertainties. All forward-looking
statements contained in this Quarterly Report on Form 10-Q are qualified by these cautionary
statements and are made only as of the date this Quarterly Report on Form 10-Q is filed. We assume
no obligation and do not intend to update these forward-looking statements.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
There has been no material change in the Companys assessment of its sensitivity to market risk
since its presentation set forth in Item 7A, Quantitative and Qualitative Disclosures About Market
Risk, in its 2010 Annual Report on Form 10-K.
Item 4. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this Quarterly Report on Form 10-Q, our Chief Executive
Officer and Chief Financial Officer, with the participation of management, have evaluated our
disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities and Exchange Act of 1934, as amended (the Exchange Act)). Based on that
evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of
June 30, 2011, our disclosure controls and procedures are effective in providing reasonable
assurance that information required to be disclosed in the reports that the Company files and
submits under the Exchange Act is recorded, processed, summarized, and reported when required and
is accumulated and communicated to management, as appropriate, to allow timely decisions regarding
required disclosure
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting that occurred
during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings. |
From time to time, the Company is subject to litigation related to normal business operations. The
Company vigorously defends itself in litigation. The Company is not currently a party to, and the
Companys property is not subject to, any legal proceedings likely to materially affect our
financial results.
Item 1A. | Risk Factors. |
In addition to the other information contained in this Quarterly Report on Form 10-Q, you should
carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our 2010 Annual
Report on Form 10-K. There were no material changes during the quarter ended June 30, 2011 to the
information included in Item 1A. Risk Factors in our 2010 Annual Report on Form 10-K.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Issuer Purchases of Equity Securities
Total Number of | ||||||||||||||||
Shares | Approximate $ | |||||||||||||||
Average | Purchased as | Value of Shares | ||||||||||||||
Total | Price | Part of a | That May Yet Be | |||||||||||||
Number of | Paid Per | Publicly | Purchased | |||||||||||||
Shares Purchased | Share | Announced Plan | Under the Plans | |||||||||||||
April 1, 2011 to April 30, 2011 (1) |
11 | $ | 45.22 | 11 | $ | 19,293,979 | ||||||||||
May 1, 2011 to May 31, 2011 (1) |
21,163 | $ | 40.24 | 21,163 | $ | 18,442,403 | ||||||||||
June 1, 2011 to June 30, 2011 (1) |
2,045 | $ | 39.03 | 2,045 | $ | 18,362,583 | ||||||||||
Total |
23,219 | $ | 40.13 | 23,219 | ||||||||||||
(1) | Amounts relate to the effect of employees using common stock received from the exercise of
share-based awards to satisfy the statutory minimum federal and state withholding requirements
generated from the exercise of such awards. In effect, the Company repurchased, at fair market
value, a portion of the common stock received by employees upon exercise of their awards. |
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Repurchases may be made from time to time in open market and privately negotiated transactions
subject to market conditions. No minimum number of shares has been fixed. We fund our share
repurchases with cash on hand and cash generated from operations.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | (Removed and Reserved). |
Item 5. | Other Information. |
None.
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Item 6. | Exhibits. |
(a) Exhibits:
Exhibit No. | Description | |
31.1* | Certification of the Chief Executive Officer pursuant to Rule 13a 14(a) of the Securities
Exchange Act of 1934, as amended |
|
31.2* | Certification of the Chief Financial Officer pursuant to Rule 13a 14(a) of the Securities
Exchange Act of 1934, as amended |
|
32.1* | Certifications pursuant to 18 U.S.C. Section 1350 |
|
101.INS** | XBRL Instance Document |
|
101.SCH** | XBRL Taxonomy Extension Schema Document |
|
101.CAL** | XBRL Taxonomy Extension Calculation Linkbase Document |
|
101.LAB** | XBRL Taxonomy Extension Labels Linkbase Document |
|
101.PRE** | XBRL Taxonomy Extension Presentation Linkbase Document |
* | Filed herewith |
|
** | Furnished with the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011 |
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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.
THE CORPORATE EXECUTIVE BOARD COMPANY (Registrant) |
||||
Date: August 9, 2011 | By: | /s/ Richard S. Lindahl | ||
Richard S. Lindahl | ||||
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
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Exhibit Index
Exhibit No. | Description | |
31.1* | Certification of the Chief Executive Officer pursuant to Rule 13a 14(a) of the Securities
Exchange Act of 1934, as amended |
|
31.2* | Certification of the Chief Financial Officer pursuant to Rule 13a 14(a) of the Securities
Exchange Act of 1934, as amended |
|
32.1* | Certifications pursuant to 18 U.S.C. Section 1350 |
|
101.INS** | XBRL Instance Document |
|
101.SCH** | XBRL Taxonomy Extension Schema Document |
|
101.CAL** | XBRL Taxonomy Extension Calculation Linkbase Document |
|
101.LAB** | XBRL Taxonomy Extension Labels Linkbase Document |
|
101.PRE** | XBRL Taxonomy Extension Presentation Linkbase Document |
* | Filed herewith |
|
** | Furnished with the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011 |
25