- Quarterly Report (10-Q)

Table of Contents

 

 

UNITED STATES
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 March 31, 2010

or

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 000-24799

THE CORPORATE EXECUTIVE BOARD COMPANY

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		52-2056410 (I.R.S. Employer Identification Number)
1919 North Lynn Street Arlington, Virginia (Address of principal executive offices)		22209 (Zip Code)

[phone]
(Registrant’s telephone number, including area code)

Not applicable
(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 o 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 (Do not check if a smaller reporting company)		Smaller reporting company o

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 issuer’s classes of common stock, as of the latest practicable date.

The Company had 34,261,465 shares of common stock, par value $0.01 per share, outstanding at May 3, 2010.

 

 

 

 

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THE CORPORATE EXECUTIVE BOARD COMPANY

INDEX TO FORM 10-Q

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2010 (Unaudited) and December 31, 2009			3
Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2010 and 2009 (Unaudited)			4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 (Unaudited)			5
Notes to Condensed Consolidated Financial Statements (Unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			11
Item 3. Quantitative and Qualitative Disclosures about Market Risk			17
Item 4. Controls and Procedures			17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			17
Item 1A. Risk Factors			17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			18
Item 3. Defaults Upon Senior Securities			18
Item 4. (Removed and Reserved)			18
Item 5. Other Information			18
Item 6. Exhibits			19
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

 

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PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements.

THE CORPORATE EXECUTIVE BOARD COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

		March 31,				December 31,
		2010				2009
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	111,938			$	31,760
Marketable securities			5,995				18,666
Membership fees receivable, net			80,771				125,716
Deferred income taxes, net			7,793				7,989
Deferred incentive compensation			12,396				9,721
Prepaid expenses and other current assets			8,149				9,584
Total current assets			227,042				203,436
Deferred income taxes, net			39,870				39,744
Marketable securities			25,527				25,784
Property and equipment, net			86,029				89,462
Goodwill			27,248				27,129
Intangible assets, net			10,906				12,246
Other non-current assets			25,547				25,394
Total assets		$	442,169			$	423,195
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued liabilities		$	35,133			$	48,764
Accrued incentive compensation			32,271				27,975
Deferred revenues			240,267				222,053
Total current liabilities			307,671				298,792
Deferred tax liabilities			893				867
Other liabilities			73,777				73,259
Total liabilities			382,341				372,918
Stockholders’ equity:
Common stock, par value $0.01; 100,000,000 shares authorized, 43,336,770 and 43,313,597 shares issued, and 34,163,374 and 34,147,008 shares outstanding at March 31, 2010 and December 31, 2009, respectively			433				433
Additional paid-in capital			403,181				401,629
Retained earnings			282,598				274,718
Accumulated elements of other comprehensive income			1,483				1,181
Treasury stock, at cost, 9,173,396 and 9,166,589 shares at March 31, 2010 and December 31, 2009, respectively			(627,867	)			(627,684	)
Total stockholders’ equity			59,828				50,277
Total liabilities and stockholders’ equity		$	442,169			$	423,195

See accompanying notes to condensed consolidated financial statements.

 

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THE CORPORATE EXECUTIVE BOARD COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

		Three months ended
		March 31,
		2010				2009
Revenues		$	100,175			$	117,440
Costs and expenses:
Cost of services			33,512				38,277
Member relations and marketing			25,780				34,810
General and administrative			15,472				15,736
Depreciation and amortization			5,135				5,973
Restructuring costs			—				944
Total costs and expenses			79,899				95,740
Income from operations			20,276				21,700
Other (expense) income, net			(458	)			90
Income before provision for income taxes			19,818				21,790
Provision for income taxes			8,185				8,718
Net income		$	11,633			$	13,072
Earnings per share:
Basic		$	0.34			$	0.38
Diluted		$	0.34			$	0.38
Dividends per share		$	0.11			$	0.44
Weighted average shares used in the calculation of earnings per share:
Basic			34,155				34,050
Diluted			34,429				34,088

See accompanying notes to condensed consolidated financial statements.

 

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THE CORPORATE EXECUTIVE BOARD COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

		Three months ended
		March 31,
		2010				2009
Cash flows from operating activities:
Net income		$	11,633			$	13,072
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization			5,135				5,973
Deferred income taxes			213				(965	)
Share-based compensation			1,438				3,868
Amortization of marketable securities premiums, net			134				164
Changes in operating assets and liabilities:
Membership fees receivable, net			44,945				50,368
Deferred incentive compensation			(2,675	)			839
Prepaid expenses and other current assets			1,435				(455	)
Other non-current assets			(153	)			339
Accounts payable and accrued liabilities			(13,351	)			(21,930	)
Accrued incentive compensation			4,296				2,532
Deferred revenues			18,214				(7,171	)
Other liabilities			519				(3,004	)
Net cash flows provided by operating activities			71,783				43,630
Cash flows from investing activities:
Purchases of property and equipment			(283	)			(1,545	)
Acquisition of businesses			—				(119	)
Maturities of marketable securities			12,500				12,805
Net cash flows provided by investing activities			12,217				11,141
Cash flows from financing activities:
Proceeds from the issuance of common stock under the employee stock purchase plan			114				266
Purchase of treasury shares			(183	)			(41	)
Payment of dividends			(3,753	)			(14,969	)
Net cash flows used in financing activities			(3,822	)			(14,744	)
Net increase in cash and cash equivalents			80,178				40,027
Cash and cash equivalents, beginning of period			31,760				16,214
Cash and cash equivalents, end of period		$	111,938			$	56,241

See accompanying notes to condensed consolidated financial statements.

 

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THE CORPORATE EXECUTIVE BOARD COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Description of operations

The Corporate Executive Board Company (the “Company”) drives better decision making and superior outcomes among a global network of executives and business professionals. 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 and service 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, Inc. (“Toolbox.com”).

Note 2. Condensed consolidated financial statements

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 Company’s 2009 Annual Report on Form 10-K.

In management’s 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 Company evaluated events subsequent to March 31, 2010 for potential recognition and/or disclosure through the issuance of these financial statements. The condensed consolidated balance sheet presented at December 31, 2009 has been derived from the financial statements that were audited by the Company’s independent registered public accounting firm. The results of operations for the three months ended March 31, 2010 may not be indicative of the results that may be expected for the year ended December 31, 2010 or any other period within 2010.

Note 3. Recent accounting pronouncements

Recently adopted

In January 2010, the FASB issued new guidance requiring additional disclosures for significant transfers between Level 1 and 2 fair value measurements and clarifications to existing fair value disclosures related to the level of disaggregation, inputs, and valuation techniques. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

Not yet adopted

In January 2010, the FASB issued new accounting guidance to require additional disclosures about purchases, sales, issuances, and settlements in the rollforward of Level 3 fair value measurements. This new accounting guidance will be effective for the Company on January 1, 2011. The Company does not expect the adoption of this new accounting guidance to have a material impact on its consolidated financial statements.

In October 2009, the FASB issued new guidance for revenue recognition with multiple deliverables that is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, although early adoption is permitted. This guidance eliminates the residual method under the current guidance and replaces it with the “relative selling price” method when allocating revenue in a multiple deliverable arrangement. The selling price for each deliverable shall be determined using vendor specific objective evidence of selling price, if it exists, otherwise third-party evidence of selling price shall be used. If neither exists for a deliverable, the vendor shall use its best estimate of the selling price for that deliverable. After adoption, this guidance will also require expanded qualitative and quantitative disclosures. The Company’s memberships are sold with multiple elements, and the Company is currently assessing the impact of adoption on its financial position and results of operations.

 

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Note 4. 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. The following table presents financial assets and financial liabilities that are measured at fair value on a recurring basis at the date indicated (in thousands):

		March 31, 2010												December 31, 2009
		Level 1				Level 2				Level 3				Level 1				Level 2				Level 3
Financial assets
Cash and cash equivalents — demand deposits		$	111,938			$	—			$	—			$	31,760			$	—			$	—
Available-for-sale marketable securities			31,522				—				—				44,450				—				—
Variable insurance products held in a Rabbi Trust			—				14,034				—				—				13,612				—
Forward currency exchange contracts			—				120				—				—				—				—
Financial liabilities
Forward currency exchange contracts		$	—			$	383			$	—			$	—			$	173			$	—

Certain assets, such as 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 or material fair value measurements were required for non-financial assets or liabilities in three months ended March 31, 2010 and 2009.

Note 5. Other liabilities

Other liabilities consist of the following (in thousands):

		March 31,				December 31,
		2010				2009
Deferred compensation		$	8,696			$	9,890
Lease incentives			33,096				33,588
Deferred rent benefit — long term			20,283				19,459
Other			11,702				10,322
Total other liabilities		$	73,777			$	73,259

 

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Note 6. Stockholders’ equity and share-based compensation

Share-based compensation

The Company granted 323,843 and 643,555 restricted stock units at a weighted-average fair value of $25.30 and $10.41 in the three months ended March 31, 2010 and 2009, respectively. Share-based compensation expense is recognized on a straight line basis, net of an estimated forfeiture rate, for only those shares expected to vest over the requisite service period of the award, which is generally the vesting term of four years. Estimated forfeiture rates were 16% and 14% in the three months ended March 31, 2010 and 2009, respectively. The Company recognized total share-based compensation costs of $1.4 million and $3.9 million in the three months ended March 31, 2010 and 2009, respectively. At March 31, 2010, $17.9 million of total unrecognized share-based compensation cost is expected to be recognized over a weighted-average period of approximately 2 years.

Dividends

In February 2010, the Company’s Board of Directors declared a cash dividend of $0.11 per share for the first quarter of 2010 for stockholders of record on March 15, 2010. The dividend, totaling $3.8 million, was paid on March 31, 2010.

On May 6, 2010, the Board of Directors declared a second quarter cash dividend of $0.11 per share. The dividend is payable on June 30, 2010 to stockholders of record at the close of business on June 15, 2010. The Company funds its dividend payments with cash on hand and cash generated from operations.

Note 7. Derivative instruments and hedging activities

The Company’s international operations are subject to risks related to currency exchange fluctuations. Prices for the Company’s products and services are denominated primarily in U.S. dollars, including products and services sold to members that are located outside the United States. Many of the costs associated with the Company’s operations located outside the United States are denominated in local currencies. As a consequence, increases in local currencies against the U.S. dollar in countries where the Company has foreign operations would result in higher effective operating costs and, potentially, 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 U.S. dollars to make equivalent Pound Sterling (“GBP”) payments equal to the value of such exchanges.

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. Changes in the fair value measurements of the derivative instruments are reflected as adjustments to other comprehensive income (“OCI”) and/or current earnings. The Company has no credit-risk-related contingent features in any of its agreements with its derivative counterparty. The notional amount of outstanding forward contracts was $12.2 million at March 31, 2010.

The fair values of all derivative instruments, which are designated as hedging instruments, on the Company’s condensed consolidated balance sheets are as follows (in thousands):

Balance Sheet Location		March 31, 2010				December 31, 2009
Asset Derivatives
Prepaid expenses and other current assets		$	120			$	—
Liability Derivatives
Accounts payable and accrued liabilities		$	383			$	173

 

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The pre-tax effect of the derivative instruments on the Company’s condensed consolidated statements of income is as follows for the three months ended March 31, (in thousands):

Amount of Gain (Loss)								Location of Loss Reclassified				Amount of Gain (Loss) Reclassified
Recognized in OCI on								from Accumulated OCI into				from Accumulated OCI into Income
Derivative (Effective portion)								Income (Effective portion)				(Effective portion)
2010				2009								2010				2009
$	(279	)		$	68			Cost of services				$	(174	)		$	(593	)
								Member relations and marketing					(66	)			(537	)
								General & Administrative					(60	)			(248	)
												$	(300	)		$	(1,378	)

The ineffective portion of the cash flow hedges was not material.

Note 8. Restructuring costs

Accrued restructuring costs at March 31, 2010 consist of severance and related termination benefits. Changes to the restructuring liability are as follows (in thousands):

										Tower
		2008				2009				Group
		Plan				Plan				Plan
Balance at December 31, 2009		$	532			$	2,472			$	1,109
Cash payments			(395	)			(832	)			(1,010	)
Balance at March 31, 2010		$	137			$	1,640			$	99

The Company does not expect to incur any significant additional costs.

Note 9. Income taxes

The effective tax rate was 41.3% in the three months ended March 31, 2010, which includes a full-year expected annualized tax rate of approximately 40%. The higher than anticipated effective tax rate was primarily due to the effects of unrealized currency translation losses recognized for book purposes. The effective tax rate was 40.0% in the three months ended March 31, 2009.

The Company made income tax payments of $1.1 million and $8.1 million in the three months ended March 31, 2010 and 2009, respectively.

Note 10. Earnings per share

A reconciliation of basic to diluted weighted average common shares outstanding is as follows (in thousands):

		Three months ended March 31,
		2010				2009
Basic weighted average common shares outstanding			34,155				34,050
Effect of dilutive common shares outstanding			274				38
Diluted weighted average common shares outstanding			34,429				34,088

Approximately 2.5 million and 3.6 million shares for the three months ended March 31, 2010 and 2009, respectively, related to share-based compensation awards have been excluded from the dilutive effect shown above because their impact would be anti-dilutive.

Note 11. Comprehensive income

Total comprehensive income is as follows (in thousands):

		Three months ended March 31,
		2010				2009
Net income		$	11,633			$	13,072
Change in unrealized gains, net of tax, for available-for-sale marketable securities			(179	)			110
Change in cumulative foreign currency translation gain			505				—
Change in unrealized loss, net of tax, for forward currency exchange contracts			(167	)			762
Total comprehensive income		$	11,792			$	13,944

 

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Accumulated elements of other comprehensive income at March 31, 2010 consists of a $0.1 million unrealized loss, net of tax, on forward currency contracts; a $0.7 million unrealized gain, net of tax, on marketable securities; and a cumulative foreign currency translation gain of $0.9 million.

Note 12. 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.

On May 3, 2010, the Company amended and restated the sublease agreement entered into in June 2009 with a third party to exercise the extension clause contained in the original sublease from October 2021 through January 2028, which terminates with the Company’s existing lease in January 2028. The Company also sublet additional space from November 2011 through January 2028 and from October 2014 through January 2028. The amended and restated sublease also contains an expansion option for additional square footage, which may be exercised at the subtenant’s discretion, from October 2014 through January 2028. Total noncancelable sublease payments over the term will be approximately $283.8 million. The subtenant will be required to pay its pro rata portion of any increases in building operating expenses and real estate taxes.

Future minimum rental payments under non-cancelable operating leases and future minimum receipts under subleases, excluding executory costs, are as follows at March 31, 2010:

		Total				YE 2010				YE 2011				YE 2012				YE 2013				YE 2014				Thereafter
Operating lease obligations		$	620,116			$	25,652			$	34,760			$	34,393			$	34,248			$	33,944			$	457,119
Sublease receipts			(286,492	)			(6,932	)			(9,932	)			(13,883	)			(14,238	)			(13,383	)			(228,124	)
Total net lease obligations		$	333,624			$	18,720			$	24,828			$	20,510			$	20,010			$	20,561			$	228,995

Other

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 Company’s property is not subject to, any legal proceedings likely to materially affect our 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 accrued a liability of $3.9 million at March 31, 2010 and December 31, 2009, respectively, relating to certain sales and use tax regulations for states in which the Company sells or supports its goods and services.

Note 13. Subsequent event

On May 7, 2010, the Company completed the acquisition of Iconoculture, Inc., a Minnesota corporation (“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 $18 million in cash. The agreement to acquire Iconoculture, which includes customary post-closing adjustments for working capital, provides for additional purchase consideration if Iconoculture’s financial performance through December 31, 2010 meets certain specified targets.

 

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

The following discussion and analysis of our consolidated 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 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

Our focus for 2010 is to drive member company loyalty through high-value personal engagement, invest globally in our strongest brands, improve the member experience through enhanced technology and analytic platforms, and elevate member performance through great content and product innovation. We expect to leverage and expand our integrated sales and service model to retain and grow our existing membership base, version our products and services for markets with a substantial growth opportunity (e.g., government, Asia-Pacific region, and Europe), launch new products and services, and protect the core economics of our business through effective cost management. Our plans may include the acquisition of companies, such as Iconoculture, that bring us capabilities and intellectual property that address additional member needs.

Contract Value was $382.1 million at March 31, 2010, a decrease of 11.4%, compared to $431.1 million at March 31, 2009. The largest driver of year-over-year decrease was reduced memberships from some large company members, decreased new bookings due to macroeconomic conditions over the past twelve months, and expected Contract Value losses from programs that we consolidated in 2009. As expected, Contract Value declined sequentially and ended the first quarter down $11.6 million, or 2.9%, from December 31, 2009. The primary factor in the sequential decline was $6 million in reductions from the final portion of consolidated programs. The first quarter represents 2010’s largest renewal pool and even though renewals were stronger than expected, slower new business sales and cross sales typical of the first quarter did not generate sufficient bookings to fully offset lapsed memberships. Lower overall bookings continue to apply pressure to revenues.

Despite the decline in Contract Value, we observed several positive trends in the three months ended March 31, 2010: program renewal rates returned to pre-recession levels, aided by the ongoing maturation of our account management model; our European team generated strong results despite a difficult economic environment and the potential distraction of our imminent commercial transition there; our middle market team continued to generate sequential growth; and there was consistent performance across all programs and regions, giving us a solid platform upon which to build throughout 2010.

Net income and Adjusted net income were $11.6 million in the three months ended March 31, 2010 compared to net income of $13.1 million and Adjusted net income of $13.6 million in the three months ended March 31, 2009. Revenues and earnings were slightly ahead of our expectations primarily due to improvements in program renewals.

Total costs and expenses were $79.9 million in the three months ended March 31, 2010, a decrease of $15.8 million from the three months ended March 31, 2009. With a seasonal reduction in expenses and a smaller than expected decline in revenues, our EBITDA and Adjusted EBITDA margins were 24.5% in the first quarter of 2010 compared to an EBITDA margin of 23.1% and Adjusted EBITDA margin of 23.9% in the first quarter of 2009. While we will continue to seek greater operating efficiencies, we also plan to make selective investments where we see clear opportunities to accelerate our return to growth, such as more service and sales capacity, expansion of our Government member base, further investment in the Asia Pacific region, and targeted new product launches. As a result, we expect our operating margins in 2010 will be pressured by the combination of lower year-over-year revenue trends and expenses that will begin to trend higher.

Non-GAAP Financial Measures

The tables below include financial measures 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 net income per diluted share, excluding the per share after-tax effects of impairment loss, costs associated with exit activities, restructuring costs, and gain on acquisition.

 

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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 these non-GAAP measures to GAAP results is provided below.

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 our 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.

		Three Months Ended
		March 31,
		2010				2009
Net income		$	11,633			$	13,072
Interest income, net			(436	)			(598	)
Depreciation and amortization			5,135				5,973
Provision for income taxes			8,185				8,718
EBITDA		$	24,517			$	27,165
Restructuring costs			—				944
Adjusted EBITDA		$	24,517			$	28,109

		Three Months Ended
		March 31,
		2010				2009
Net income		$	11,633			$	13,072
Adjustments, net of tax:
Restructuring costs			—				566
Adjusted net income		$	11,633			$	13,638

		Three Months Ended
		March 31,
		2010				2009
GAAP diluted earnings per share		$	0.34			$	0.38
Adjustments, net of tax:
Restructuring costs			—				0.02
Non-GAAP diluted earnings per share		$	0.34			$	0.40

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 2009 Annual Report on Form 10-K, we have discussed those material policies that we believe are critical and require the use of complex judgment in their application.

Recent Accounting Pronouncements

There were no recent accounting pronouncements that had a material effect on our condensed consolidated financial statements in the three months ended March 31, 2010. See Note 3 to the condensed consolidated financial statements for a discussion of recent accounting pronouncements.

 

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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 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 share-based compensation, 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 sales incentives and share-based compensation; travel; 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”).

•

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 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 Months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009

Revenues

Revenues decreased 14.7% to $100.2 million in the three months ended March 31, 2010 from $117.4 million in the three months ended March 31, 2009. Both lower deferred revenues at December 31, 2009 compared to December 31, 2008 and lower bookings throughout 2009 contributed to the decrease in revenues in the three months ended March 31, 2010. Deferred revenues and renewal rates increased in the three months ended March 31, 2010; however, the timing of the recognition of revenues associated with these changes was not fully realized in the first quarter.

Costs and expenses

Declines in share-based compensation, facilities expense, and the impact of changes in the exchange rates of the U.S. dollar to the British Pound all contributed to year-over-year changes in costs and expenses in 2010. These items are allocated to Cost of services, Member relations and marketing, and General and administrative expenses. We discuss them on an aggregated basis below:

•

Share-based compensation decreased $2.5 million in the three months ended March 31, 2010 compared to the same period in 2009. The decrease is primarily a result of a decrease in the total fair value of new share-based awards granted mainly as a result of declines in the trading price of our common stock and the number of awards granted compared to prior years.

•

Facilities expense decreased $2.8 million in the three months ended March 31, 2010 compared to the same period in 2009. The decrease is primarily due to subleases of a portion of our headquarters, which began in the third quarter of 2009.

 

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•

We also incurred additional expenses due to the strength of the British Pound compared to the U.S. dollar in the three months ended March 31, 2010 versus the same period in 2009. The value of the British Pound versus the U.S. dollar was approximately $0.13 higher on average in the three months ended March 31, 2010 compared to the same period in 2009. 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.

Cost of services

Cost of services decreased 12.5% to $33.5 million in the three months ended March 31, 2010 from $38.3 million in the three months ended March 31, 2009. The decrease of $4.8 million was primarily due to a $2.5 million decrease in salaries and related costs from the headcount reductions related to our restructuring plans, a $1.6 million decrease in share based compensation as discussed above, and a $1.6 million decrease in costs associated with the production and delivery of meetings and other services as a result of fewer memberships. Allocated facilities costs also decreased by $1.0 million. These decreases were partially offset by a $1.9 million increase in variable compensation due to improved operating results.

Member relations and marketing

Member relations and marketing expense decreased 25.9% to $25.8 million in the three months ended March 31, 2010 from $34.8 million in the three months ended March 31, 2009. The decrease of $9.0 million was primarily due to a $3.6 million decrease in compensation and related costs from the headcount reductions related to our restructuring plans. Additional decreases related to $1.6 million in sales incentives, $1.5 million in allocated facilities costs, third-party consultants of $0.8 million, and travel and entertainment expenses of $0.3 million.

General and administrative

General and administrative expense decreased 1.3% to $15.5 million in the three months ended March 31, 2010 from $15.7 million in the three months ended March 31, 2009. The decrease of $0.2 million was primarily due to a decrease in share-based compensation of $0.8 million and a $0.5 million decrease in salaries and related costs from the headcount reductions related to our restructuring plans. These decreases were partially offset by a $0.6 million increase in variable compensation.

Depreciation and amortization

Depreciation and amortization expense decreased 15% to $5.1 million in the three months ended March 31, 2010 from $6.0 million in the three months ended March 31, 2009. The decrease in Depreciation and amortization expense of $0.9 million was primarily due to lower depreciation expense as a result of fixed assets and leasehold improvements disposed of in the second quarter of 2009 as part of our costs associated with exit activities.

Restructuring costs

In the first quarter of 2009, we recorded $0.9 million of restructuring costs, most of which was associated with severance and related termination benefits from the restructuring plan we announced in the fourth quarter of 2008.

Other (expense) income, net

Other (expense) income, net decreased to expense of $0.5 million in the three months ended March 31, 2010 from income of $0.1 million in the three months ended March 31, 2009.

Other (expense) income, net in the three months ended March 31, 2010 was comprised of $0.4 million of interest income and $0.5 million of earnings relating to the change in the fair value participant accounts in our deferred compensation plan. This income was offset by a $0.8 million foreign currency loss and other expense of $0.6 million. Other (expense) income, net in the three months ended March 31, 2009 was comprised of $0.6 million of interest income and $0.4 million of other income, partially offset by a $0.3 million foreign currency loss, and a $0.6 million loss relating to the change in fair value of participant accounts in our deferred compensation plan.

 

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Provision for income taxes

The effective tax rate was 41.3% in the three months ended March 31, 2010, which includes a full-year expected annualized tax rate of approximately 40%. The higher than anticipated effective tax rate was primarily due to the effects of unrealized currency translation losses recognized for book purposes. The effective tax rate was 40.0% in the three months ended March 31, 2009.

We made income tax payments of $1.1 million and $8.1 million in the three months ended March 31, 2010 and 2009, respectively.

Liquidity and Capital Resources

Cash flows generated from operating activities are our primary source of liquidity. In 2009, we worked aggressively to align our cost structure with a lower revenue profile by implementing a range of expense management activities, including the elimination of lower-performing programs, workforce reductions, discretionary expense controls, and real estate subleases. In the first quarter of 2010, we increased our quarterly dividend to $0.11 from $0.10. Our Q1 2009 dividend was $0.44 which we decreased to $0.10 in the second quarter of 2009. We had cash and cash equivalents and marketable securities of $143.5 million and $76.2 million at March 31, 2010 and December 31, 2009, respectively.

We believe that existing cash and cash equivalents and marketable securities balances and operating cash flows will be sufficient to support operations, capital expenditures, and the payment of dividends, as well as potential share repurchases during 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 brands and enhance technology. Also, we may make investments in, or acquisitions of, complementary businesses, which could also require us to seek additional financing.

On May 7, 2010, we completed the acquisition of Iconoculture, Inc., a Minnesota corporation (“Iconoculture”). Iconoculture provides comprehensive consumer insights and effective strategic marketing advisory services and project support to an established customer base. We acquired 100% of the equity interests of Iconoculture for $18 million in cash. The agreement to acquire Iconoculture, which includes customary post-closing adjustments for working capital, provides for additional purchase consideration if Iconoculture’s financial performance through December 31, 2010 meets certain specified targets.

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 $71.8 million and $43.6 million in the three months ended March 31, 2010 and 2009, respectively.

The increase in cash flows from operations is primarily due to an $18.2 million increase in deferred revenues over December 31, 2009 compared to a decrease of $7.2 million in the same period of 2009. The increase in deferred revenues is the result of higher sales bookings in the first quarter of 2010 versus the first quarter of 2009. Accounts payable and accrued expenses decreased $13.4 million in the three months ended March 31, 2010 compared to a decrease of $23.2 million in the same period of 2009. The decrease in 2009 was due mostly to the payment of the restructuring costs and higher tax payments.

We made income tax payments of $1.1 million and $8.1 million in the three months ended March 31, 2010 and 2009, respectively and expect to continue making tax payments in future periods. We made payments under restructuring plans of $2.2 million and $3.1 million in the three months ended March 31, 2010 and 2009, respectively, and expect to make approximately $1.0 million in restructuring payments across the remainder of 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 $12.2 million and $11.1 million in the three months ended March 31, 2010 and 2009, respectively. We generated $12.5 million and $12.8 million from maturities of marketable securities and utilized $0.3 million and $1.5 million for capital expenditures, primarily on technology infrastructure, in the three months ended March 31, 2010 and 2009, respectively. We estimate that capital expenditures to support our infrastructure will be approximately $8.0 million in 2010.

 

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Cash flows from financing activities

Net cash flows used in financing activities were $3.8 million and $14.7 million in the three months ended March 31, 2010 and 2009, respectively. The $10.9 million decrease in cash flows used in financing activities is primarily the result of the decrease in our quarterly dividend per-share rate from $0.44 in the first quarter of 2009 to $0.11 in the first quarter of 2010.

Commitments and contingencies

On May 3, 2010, we amended and restated the sublease agreement entered into in June 2009 with a third party to exercise the extension clause contained in the original sublease from October 2021 through January 2028, which terminates with our existing lease in January 2028. We also sublet additional space of approximately 96,000 square feet from November 2011 through January 2028 and approximately 32,000 square feet from October 2014 through January 2028. The amended and restated sublease also contains an expansion option, which may be exercised at the subtenant’s discretion, for an additional 32,000 square feet from October 2014 through January 2028. Total noncancelable sublease payments over the term will be approximately $283.8 million. The subtenant will be required to pay its pro rata portion of any increases in building operating expenses and real estate taxes. We expect that the sublease will reduce 2010 rent expense by approximately $9 million and reduce 2011 rent expense by approximately $12.7 million. The sublease represents an additional step in our efforts to re-align sales and service resources and to move closer to its membership base.

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 supports its 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 $3.9 million at March 31, 2010 and December 31, 2009, respectively, relating to certain sales and use tax regulations for states in which we sell or support our goods and services.

Contractual obligations

There have been no material changes to the contractual obligations tables as disclosed in our 2009 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

At March 31, 2010 and December 31, 2009, we had 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.

Forward-looking statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are based on management’s beliefs, current expectations and information currently available to management. These statements are contained throughout this Quarterly Report on Form 10-Q, including under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.’’ Forward-looking statements frequently contain words such as “believes,” “expects,” “anticipates,” “intends,” “plans, “will,” “estimates,” “forecasts,” “projects” and other words of similar meaning. One can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts, financial results or financial condition. Forward-looking statements include information concerning our possible or assumed results of operations, business strategies, financing plans, competitive position and potential growth opportunities.

 

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Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those set forth in the forward-looking statements. One must carefully consider any such statement and should understand that many factors could cause actual results to differ materially from the forward-looking statements. Factors that could cause actual results to differ materially from those indicated by forward-looking statements include, among others, uncertainty in the global economy, downward pressures on our 2010 margins, our dependence on renewals of our membership-based services, the sale of additional programs to existing members and our ability to attract new members, success in collections of our membership fees, our restructuring plans may not be successful, lower demand for our products and services, risks relating to international regulations and business risks, foreign currency exposures, our transition to an integrated account model may cause unanticipated negative results, financial and operational risks associated with our acquisitions, our potential inability to attract and retain a significant number of highly skilled employees, our potential inability to protect our intellectual property rights, our potential exposure to litigation related to the content of our products, our potential exposure to loss of revenue resulting from our service guarantee, various factors that could affect our estimated income tax rate or our ability to use our existing deferred tax assets, changes in estimates or assumptions relating to share-based compensation expense under FAS 123(R), possible volatility of our stock price, and future financial performance of members and industries. One should carefully evaluate such forward-looking statements in light of factors, including risk factors, described in the Company’s filings with the Securities and Exchange Commission, especially on Forms 10-K, 10-Q and 8-K. In Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as filed on March 1, 2010, 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 undertake no obligation, other than as required by law, to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Item 3.		Quantitative and Qualitative Disclosures About Market Risk.

There has been no material change in the Company’s assessment of its sensitivity to market risk since its presentation set forth in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in its Annual Report on Form 10-K for the year ended December 31, 2009.

Item 4.		Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of the amendment to our Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer 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”)), and have concluded that as of March 31, 2010, 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 three months ended March 31, 2010 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 and is not currently a party to, and the Company’s 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 2009 Annual Report on Form 10-K.

 

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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
January 1, 2010 to January 31, 2010			—			$	—				—			$	22,316,404
February 1, 2010 to February 28, 2010			—			$	—				—			$	22,316,404
March 1, 2010 to March 31, 2010 (1)			6,807			$	26.83				6,807			$	22,133,761
Total			6,807			$	26.83				6,807

 

(1)		Amounts include 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.

Repurchases may continue to 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

 

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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: May 10, 2010	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

 

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