10-K 1 ceb-10k_20161231.htm FORM 10-K ceb-10k_20161231.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

(Mark One)

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

For the fiscal year ended December 31, 2016

or

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

Commission File Number: 001-34849

 

CEB Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

52-2056410

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

 

 

1919 North Lynn Street

Arlington, Virginia

 

22209

(Address of principal executive offices)

 

(Zip Code)

 

(571) 303-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:

Not applicable

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  

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      No  

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

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

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller Reporting Company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  

Based upon the closing price of the registrant’s common stock as of June 30, 2016, the aggregate market value of the common stock held by non-affiliates of the registrant was $1,541,013,000.*

There were 32,275,051 shares of the registrant’s common stock outstanding at February 24, 2017.

*

Solely for purposes of this calculation, all executive officers and directors of the registrant and all shareholders reporting beneficial ownership of more than 5% of the registrant’s common stock are considered to be affiliates.

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated:

Portions of the registrant’s Proxy Statement relating to its 2017 Annual Stockholders’ Meeting to be filed pursuant to Regulation 14A within 120 days after year-end are incorporated by reference into Part III of this Report unless this Report is amended to provide such information.

 

 

 


 

CEB Inc.

TABLE OF CONTENTS

 

 

 

Page

PART I

 

 

 

 

 

Item 1. Business

 

4

 

 

 

Item 1A. Risk Factors

 

8

 

 

 

Item 1B. Unresolved Staff Comments

 

19

 

 

 

Item 2. Properties

 

19

 

 

 

Item 3. Legal Proceedings

 

20

 

 

 

Item 4. Mine Safety Disclosures

 

20

 

 

 

PART II

 

 

 

 

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

20

 

 

 

Item 6. Selected Financial Data

 

21

 

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

27

 

 

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

47

 

 

 

Item 8. Financial Statements and Supplementary Data

 

49

 

 

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

85

 

 

 

Item 9A. Controls and Procedures

 

85

 

 

 

Item 9B. Other Information

 

85

 

 

 

PART III

 

 

 

 

 

Item 10. Directors, Executive Officers and Corporate Governance

 

85

 

 

 

Item 11. Executive Compensation

 

86

 

 

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

86

 

 

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

86

 

 

 

Item 14. Principal Accountant Fees and Services

 

86

 

 

 

PART IV

 

 

 

 

 

Item 15. Exhibits, Financial Statement Schedules

 

87

 

 

 

Signatures

 

94

 

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Forward-Looking Statements

This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks, uncertainties, and assumptions. Statements using words such as “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” and variations of such words or similar expressions are intended to identify forward-looking statements. In addition, 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 revenue, 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, 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; any statements regarding the impact of our acquisitions and any related debt financing on our future business, financial results or financial condition, including our liquidity and capital resources; and any statements of assumptions underlying any of the foregoing. You are hereby cautioned that these statements are based upon our expectations at the time we make them and may be affected by important factors including, among others, the factors set forth below and in our filings with the US Securities and Exchange Commission, and consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. Our expectations, beliefs, and projections are expressed in good faith and we believe there is a reasonable basis for them.

Factors that could cause actual results to differ materially from those indicated by forward-looking statements include, among others:

 

failure of the Company’s stockholders to adopt the merger agreement with Gartner, Inc. (“Gartner”) or that the companies will otherwise be unable to consummate the merger on the terms set forth in the merger agreement;

 

uncertainty as to the market value of the non-cash portion of the merger consideration to be paid in the merger;

 

litigation in respect of the merger;

 

disruption from the merger making it more difficult to maintain certain strategic relationships;

 

our dependence on renewals of our membership-based services;

 

the sale of additional subscriptions, memberships, or leadership councils to existing members and our ability to attract new members;

 

our potential failure to adapt to changing member needs and demands or to compete successfully with other companies that offer similar products and services;

 

our potential failure to develop and sell, or expand sales markets for our CEB Talent Assessment tools and services;

 

our potential inability to attract and retain a significant number of highly skilled employees or successfully manage succession planning issues;

 

the impact of any changes to senior management that occur;

 

fluctuations in operating results;

 

the implementation of our business transformation initiative may be disruptive to our operations, potential cost overruns could have material adverse effects on our operating results, and once this initiative is completed we may not realize anticipated savings or operational benefits, however, we have opted to decelerate the design and implementation schedule of these systems;

 

our potential inability to protect our intellectual property rights;

 

our potential inability to adequately maintain and protect our information technology infrastructure and our member and client data;

 

our potential exposure to loss of revenue resulting from our unconditional service guarantee;

 

exposure to litigation related to our content we provide;

 

various factors that could affect our estimated income tax rate or our ability to use our existing deferred tax assets;

 

changes in estimates, assumptions, or revenue recognition policies used to prepare our consolidated financial statements, including those related to testing for potential goodwill impairment;

 

our potential inability to make, integrate, and maintain acquisitions and investments;

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the amount and timing of the benefits expected from acquisitions and investments;

 

the risk that Evanta may not perform at the level we are expecting, and as a result, the anticipated positive impact of the acquisition of Evanta on the operations and future financial results of CEB may not be achieved or may be lower than expected;

 

risks associated with our provision of products and services to certain US government agencies;

 

the risk that we will be required to recognize additional impairments to the carrying value of the significant goodwill and amortizable intangible asset amounts included in our balance sheet as a result of our acquisitions, which would require us to record charges that would reduce our reported results;

 

risks associated with our significant office space lease obligations in Arlington, VA, including potential landlord or subtenant defaults;

 

our potential inability to effectively manage the risks (including interest rate risk) associated with our existing indebtedness, including the terms of and restrictions in our Senior Secured Credit Facilities, as well as additional indebtedness we incurred in connection with the Evanta acquisition or other indebtedness we may incur in the future;

 

our potential inability to effectively manage the risks associated with our international operations, including the risk of foreign currency exchange fluctuations;

 

the potential effects from the withdrawal of the United Kingdom (“UK”) from the European Union;

 

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, the US economy; and

 

the impact of volatility in the trading price of our common stock, including as a result of any decision to reduce or discontinue dividends or share repurchases.

These and various other important factors that could cause actual results to differ from expected or historic results are discussed more fully in this report, including under the heading “Risk Factors” in Item 1A of this report. It is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete statement of all potential risks or uncertainties. All forward-looking statements contained in this Annual Report on Form 10-K are qualified by these cautionary statements and are made only as of the date this Annual Report on Form 10-K is filed. We assume no obligation and do not intend to update these forward-looking statements, whether as a result of new information, future events, or otherwise.

When we use the terms “Company,” “CEB,” “we,” “us,” and “our” in this Annual Report on Form 10-K, we mean CEB Inc., a Delaware corporation, and its consolidated subsidiaries.

PART I

Item 1.

Business.

Our Company

CEB Inc. (NYSE: CEB) is a best practice insight and technology company. In partnership with leading organizations around the globe, we develop innovative solutions to drive corporate performance. Our mission is to unlock the potential of organizations and leaders by advancing the science and practice of management.

We do this by combining our advanced research and analytics with best practices from thousands of member companies with our proprietary research methodologies, benchmarking assets, and human capital analytics. The combination of best practices, insights, and data from memberships with talent assessments, predictive analytics, and robust technology platforms allows us to increase our capabilities for helping clients manage talent, transform operations, and reduce risk. Over time, our member network and data sets grow and strengthen the impact of our products and services. CEB Talent Assessment services deliver rich data, analytics, and insights for assessing and managing employees and applicants and position clients to achieve better business results through enhanced intelligence for talent and key decision-making processes – from hiring and recruiting to employee development and succession planning.

On January 5, 2017, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Gartner, Inc., a Delaware corporation (“Gartner”), and Cobra Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Gartner (“Sub”). Pursuant to the Merger Agreement, Sub will be merged with and into CEB, with CEB surviving as a wholly-owned subsidiary of Gartner (the “Merger”). Pursuant to the Merger Agreement and subject to the terms and conditions therein, in the Merger each share

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of common stock of CEB Inc., par value $0.01 per share, will be converted into the right to receive (i) $54.00 in cash and (ii) 0.2284 of a share of common stock of Gartner, par value $0.0005 per share. We expect that the Merger will be consummated during the first half of 2017.

Our Segments

We operate through two reporting segments: CEB and CEB Talent Assessment.

The CEB segment provides comprehensive data analysis, research, and advisory services that align to more than 50 executive leadership roles and key recurring decisions and enable members to focus efforts to address emerging and recurring business challenges efficiently and effectively. This includes our memberships for senior executives and their teams to drive corporate performance by identifying and building on the proven best practices of the world’s best companies. Our member network is integral to our business. Close relationships with our members provide us with the business insights, solutions, and analytics that we use to support executives and professionals during their careers. Personnel Decisions Research Institutes, LLC (“PDRI”), a subsidiary in the CEB segment, provides customized personnel assessment tools and services to various agencies of the US government and also to commercial enterprises. On April 29, 2016, the Company completed the acquisition of 100% of the outstanding capital stock of CXO Acquisition Co. and Sports Leadership Acquisition Co. (collectively referred to as “Evanta”). Evanta focuses on C-suite executive development and collaboration solutions for peer-to-peer engagement, networking, and leadership training between information technology and security, human resources, and finance.

Our CEB Talent Assessment segment includes the SHL products and services of cloud-based solutions for talent assessment, development, strategy, analytics, decision support, and professional services that support those solutions enabling client access to data, analytics, and insights for assessing and managing employees and applicants. CEB Talent Assessment assists clients with determining potential candidates for employment and developing existing employees and also provides consulting services that help maximize the utility of assessment data. The tools and services provided by CEB Talent Assessment use science and data to develop talent strategies for clients that are linked to business results.

Who We Serve

We serve executives and professionals in corporate functions at more than 10,000 large corporate and middle market institutions operating in more than 70 countries. We consider the following corporate functions to be our primary markets within the CEB segment: Compliance & Legal, Finance, Human Resources, Information Technology, Innovation & Strategy, Marketing & Communications, Procurement & Operations, Risk & Audit, and Sales & Service. The CEB Talent Assessment segment focuses primarily on the Human Resources function and markets its services to other corporate functions.

We also serve operational leaders in the global financial services industry, US government, and professional services and technology providers. Senior executives in the financial services industry face business challenges arising from capital and financial markets, the economy, industry competition, litigation, and regulation. Functional heads in the US government face management challenges specific to the public sector, often arising from economic, regulatory, environmental, compliance, and labor considerations. Professional services firms and technology providers use CEB to learn about customer challenges, deliver more insightful engagements, and meet new prospects. For the financial services industry, the US government, and professional services and technology providers, we offer best demonstrated practices, operational insights, analytical tools, and peer collaboration designed to drive effective executive decision making.

At December 31, 2016, our member and client network included 86% of the Fortune 500, 72% of the Dow Jones Asian Titans, and 83% of the FTSE 100.

Our Products and Services

Through our wide-range of advisory services and technology solutions, we help leaders make the right decisions faster, speed up their operations, and get the most out of their people, all in the service of eliminating barriers to and taking advantage of new opportunities for growth.

We sell a unique combination of resources to address business challenges:

 

Best Practices and Decision Support. We help our members and clients set direction for their team, function, and company by providing performance insights, benchmarks, and best practices. Through our proprietary research, we identify key economic leverage points and isolate high return-on-investment solutions for executives to implement. We offer multiple memberships that align with functional and key industry leadership roles. We deliver our research through

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various channels, including web-based resources, interactive workshops, live meetings, and published studies. In addition to best practices, we create and maintain benchmarking assets with information from executives across industries covering information such as organizational structures, costs and productivity as well as customer experience and service quality. We draw on our expansive executive network to provide our members with insight into their function, how their performance compares to benchmarks, and how to improve outcomes. In addition, we provide members with networking opportunities, including online peer discussion groups, on-request advice, feedback, and other peer interaction at both in-person and virtual events. We also help organizations secure performance gains through consulting and technology. We deliver a suite of professional services, including best practice implementation, training, and survey and diagnostic tools. We offer targeted survey and diagnostic technology to aid members in assessing the performance of their functions, processes, and teams. For certain of the best practices that we identify, we provide additional implementation support to members seeking to improve their functional performance.

 

Talent Management Services. We help organizations plan, recruit, assess, develop, engage, and drive performance of their organizational talent against corporate objectives. We evaluate their training programs and also develop workshops and technical training that enhance the potential of emerging leaders and their teams. Our assessment and development solutions help companies manage human capital investments. These offerings include cognitive ability assessments, skills and/or knowledge assessments, personality questionnaires, and job/role simulations and are generally implemented as pre-hire or post-hire applications. Our proprietary workshops and technical training provide an executive education curriculum supported by e-learning resources for members seeking to enhance skill development for their staff. These tools and services use science and data to develop talent strategies for clients that are linked to business results.

Our Business Strategy

Our strategy is to sell our cross-industry products and services to a global customer set of large corporate and middle market institutions. We intend to build on our existing business by deepening existing member and client relationships through renewal of subscriptions and cross-sales of other products, leveraging opportunities in growth markets, increasing our focus on talent management products through new product development, and continuing to build effective content platforms. We intend to continue this strategy through the following efforts:

 

Delivering must-have insights and analytics. By tapping the collective experience of the workflows of thousands of companies we collect data and generate insights that are intended to transform performance. These insights power the advice, assessments, tools, and technology we use with members and clients, with the aim that executives can take action at a lower cost than other sources of support, yielding a strong return on investment for them. This unique model for developing management insight remains the foundation for creating and delivering business value. We plan to sustain our focus on developing these insights.

 

Cultivating highly valued relationships. We want to build strong relationships with the members and clients we are privileged to serve. Our goal is that all members and clients benefit not just from the specific products they use, but from the entire breadth of our expertise and relationships through the collaboration of our products, professional services, and commercial teams. As our offerings grow, doing this well also means working to cross-sell more effectively and to integrate new compelling solutions.

 

Achieving brand and market leadership. We continue to work on raising the global visibility and awareness of the CEB brand by building a clear, compelling story about CEB in all of our markets. We believe that doing so creates demand for products, but also supports our members and clients as they adopt our solutions. Our goal is to focus on ensuring that CEB has an unmatched reputation in the vital areas where we are targeting market leadership.

 

Building compelling careers. We look to build a world-class CEB team and are vigorous about measuring talent outcomes. We believe that working at CEB means employees will have an opportunity to do high-impact work for senior executives at the world’s most respected companies and that they will work with and learn from first rate colleagues. We intend to continue building a world-class CEB team.

 

Driving agility and operational excellence. We are working to apply our own insights and tools to help us move quickly and consistently in support of our members and clients. Our goal is to ensure our processes and structures allow us to respond quickly to opportunities and risks as markets evolve.

Our Pricing

We believe that we offer a cost-effective, yet high-quality alternative to traditional professional, information, and advisory services. The majority of CEB segment products and services are purchased as a one year membership, with an annual subscription fee that is typically payable at the beginning of the contract term. Membership subscription prices vary by product and may be further adjusted

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based on member’s revenue or headcount. We offer discounted pricing schedules and modified terms for companies that purchase a large number of subscriptions. In 2016, no member or client accounted for more than 0.5% of consolidated revenue. Some of our contracts provide that 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.

Certain of our products have pricing models that are different from our membership products and services:

 

Talent assessment solutions are sold as annual subscriptions or repeatable transaction-based agreements. Pricing is based on the estimated level of assessment usage. For clients seeking more customized assessment services, deployment, or consultation, we provide engagement-specific pricing options.

 

Consulting and technology product offerings are available on a customized fee basis, reflecting the client needs, engagement duration, and required service support.

 

Our executive education offerings provide access, for an annual per-participant fee, to training and development services that may include skills diagnostic reports, learning portal access, classroom-based development sessions, webinars, and virtual office hours with faculty.

 

PDRI contracts vary between fixed firm price (“FFP”), time and material (“T&M”), license, or FFP level of effort.

 

Evanta derives most of its revenue from event sponsorship. Event sponsors pay a fee to advertise at each event with pricing dependent upon the quality and level of executive attendance.

Our Competition

We compete in the broad and highly competitive advisory services industry. We believe that the factors that differentiate us from our competitors include the quality, diversity, and size of our client base and related member network; the quality of our research and analysis; the effectiveness of our service and advice; price; the breadth, depth, and accessibility of our data assets; range and scope of product and service offerings; brand; and employees. We believe that we also provide members and clients with significant value at a lower cost than either an internal research effort or an external consulting contract.

We compete with companies that offer customized information and professional service products, such as traditional consulting firms; benchmarking firms; talent screening and assessment providers; background screening companies; recruitment process outsource services firms; executive search and leadership training providers; market research and data analytics firms; and training and development firms. Many of these competitors are significantly larger than we are, have greater resources, and have the ability to grow and make transformative moves in the marketplace for advisory services and human capital management solutions. We believe these competitors, in general, charge more for their products and services than we do or offer limited breadth across products, job roles, or geographies.

We also compete against new entrants from the software as a service (“SaaS”) or data analytics industries as well as against developing technologies such as social media, business intelligence software, and workflow software. These companies offer a variety of products and services, including market research, performance data, analysis, implementation services, employee surveys, talent assessments, networking opportunities, and educational programs.

We also compete against entities such as trade associations, nonprofit organizations, research and database companies as well as providers of free content over the Internet and through other delivery channels. We believe that these competitors offer less detailed and less trusted research, data, or advice and fewer networking opportunities and educational services. Our direct competitors generally compete with us in a single decision support center, a single corporate function, and/or in a specific industry.

Our collaboration agreement with The Advisory Board Company to enhance services to members and clients and explore new product development opportunities, which included a limited non-competition provision, expired in February 2017.

Our Employees

We employ individuals from top undergraduate and graduate programs as well as experienced talent from outside CEB, who have functional, professional, academic, industrial or organizational psychology, or consulting expertise. Our success depends on our ability to effectively attract, develop, engage, and retain outstanding talent and we believe that we offer compelling career paths, opportunities for professional development, and competitive compensation. We compete for employees with numerous information and professional services providers, many of which are significantly larger than we are and, we believe, have greater resources. At December 31, 2016, we employed approximately 4,900 staff members.

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We believe that relationships with our employees remain favorable. We continue to enhance our communication, professional development, performance management, recruiting, and on-boarding programs in an effort to attract and retain talent with the capabilities required to perform effectively in light of increasing geographic, market, role, and product diversity.

Our Sales and Marketing Efforts

We sell our products and services in more than 70 countries. We generally sell our membership-based products and services as a package, which enables executives and professionals to obtain the greatest value from the products and services as well as from our global member network. Our talent assessment and management solutions are sold as subscription services for most clients, who require long-term assessment support, but they also can be configured to reflect the unique needs of clients. Our premium professional services are generally sold as separate engagements to more specifically address the timing and service delivery needs of our client base. Our commercial structure simplifies how we interact with members and clients, improves sales teams understanding of member and client needs, enhances sales roles, and facilitates focus on our members and clients across different market segments. We believe this structural model, which aligns with member preferences and needs with resources we provide, as supported by continued investments in our technology platforms, improves customer loyalty, existing account growth, new account acquisitions, and efficiency of sales teams.

Financial Information on Geographic Areas

For information regarding revenue related to our operations in the US and foreign countries, see Note 20 to our consolidated financial statements.

Corporate Information

CEB Inc. is a Delaware corporation that was incorporated in 1997. We are a publicly traded company with common stock listed on the New York Stock Exchange under the symbol “CEB.” Our executive offices are located at 1919 North Lynn Street, Arlington, Virginia, 22209. Our telephone number is (571) 303-3000. Our website is www.cebglobal.com. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K.

Available Information

We make available, free of charge, on or through the investor relations section of our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as soon as reasonably practicable after we electronically file such material with, or furnish to, the Securities and Exchange Commission (“SEC”). Our Corporate Governance Guidelines, Board of Directors committee charters (including the charters of the Audit Committee, Compensation Committee, and Nominating and Governance Committee) and Code of Conduct for Officers, Directors, and Employees are also available at that same location on our website.

 

Item 1A.

Risk Factors.

The following risks could materially adversely affect our business, financial condition, and operating results. In addition to the risks discussed below and elsewhere in this Annual Report on Form 10-K, other risks and uncertainties not currently known to us or that we currently consider immaterial could, in the future, materially adversely affect our business, financial condition, and operating results. Other than “Risks related to the Merger,” unless otherwise indicated below, these risks relate to our standalone business operations without regard to the pendency or consummation of the Merger.

Risks related to the Merger

Failure to consummate the Merger could materially adversely affect our future business, financial results, and our stock price.

If the Merger is not consummated, our ongoing business may be materially adversely affected, and we will be subject to several risks, including the following:

 

having to pay certain costs relating to the proposed Merger, such as legal, accounting, financial advisor, filing, printing and mailing fees, which must be paid regardless of whether the Merger is consummated;

 

having to restart the process of finding a successor to our current Chief Executive Officer (“CEO”), who announced his intention to step down by June 2017 (and possibly without candidates who our Board of Directors had identified as “finalists,” as they may have accepted other positions or may no longer be interested in the opportunity);

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addressing the retention of our CEO and possibly other senior executives for an additional period of time, to allow for the restart and completion of a new CEO search process, which is likely to impose additional (possibly material) costs on us and may not be successful;

 

addressing any loss of personnel and/or customers that may have occurred since the announcement of the signing of the Merger Agreement, as a result of such personnel or customers believing that we would not be continuing as a stand-alone business;

 

addressing the consequences of operational decisions made since the signing of the Merger Agreement either because of restrictions on our operations imposed by the terms of the Merger Agreement or in light of the expectation that the Merger would be consummated, including decisions to delay or defer capital expenditures; new or revised operating, marketing, or sales plans and strategies; introduction of new products and services; and acquisition, joint venture and other strategic business opportunities;

 

responding to additional competition from Gartner, if it decides to enter on its own some of the business lines that it sought to acquire in the Merger; and

 

returning the focus of our management and personnel to operating our business on a stand-alone basis without any of the benefits expected to have been provided by the consummation of the Merger.

In addition to the above risks, we may be required, under certain circumstances, to pay Gartner a termination fee of up to $99 million, which may materially adversely affect our financial condition.

If the Merger is not consummated, we cannot assure our stockholders that these risks will not materialize and will not materially adversely affect our business, financial results, and stock price to the extent the current market prices reflect a market premium based on the assumption that the Merger will be consummated.

The pendency of the Merger could materially adversely affect our business, financial condition, operating results, or cash flows.

In connection with the pending Merger, some of our customers or vendors may delay or defer decisions on continuing or expanding their business dealings with us, which could materially adversely affect our revenue, earnings, cash flows and expenses, regardless of whether the Merger is consummated. Similarly, our current and prospective employees may experience uncertainty about their future roles with Gartner following the consummation of the Merger, which may materially adversely affect our ability to attract, retain, and motivate key personnel during the pendency of the Merger and which may materially adversely divert attention from the daily activities of our existing employees. In addition, due to operating covenants in the Merger Agreement, we may be unable, during the pendency of the Merger, to pursue strategic transactions, undertake significant capital projects, undertake certain significant financing transactions, and otherwise pursue other actions that are not in the ordinary course of business, even if such actions would prove beneficial. Further, the Merger may give rise to potential liabilities, including those that may result in shareholder lawsuits relating to the Merger. Any of these matters could materially adversely affect our businesses, financial condition, operating results, or cash flows.

The consummation of the Merger is subject to a number of conditions and if these conditions are not satisfied or waived, the Merger will not be consummated.

Pursuant to the Merger Agreement, consummation of the Merger is subject to a number of conditions that must be satisfied prior to the consummation of the Merger and may not occur, even if we obtain stockholder approval. Should the Merger fail to close for any reason, our business, financial condition, operating results, or cash flows may be materially adversely affected. The closing conditions under the Merger Agreement include, among others:

 

adoption of the Merger Agreement by an affirmative majority vote of the outstanding shares of our common stock;

 

the effectiveness of the registration statement on Form S-4 filed with the SEC in connection with the Merger (which was filed with the SEC by Gartner on February 6, 2017);

 

the approval for listing by the NYSE, subject to official notice of issuance, of the Gartner common stock issuable to our stockholders in the Merger;

 

the termination or expiration of any applicable waiting period under the HSR Act (early termination was granted by the FTC on February 1, 2017);

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the termination or expiration of the waiting period under German competition laws (early termination was granted on February 7, 2017) and

 

no applicable law, no legal restraint or prohibition, and no binding order or determination by any governmental entity shall be in effect that prevents, makes illegal or prohibits the consummation of the Merger or that is reasonably likely to result, directly or indirectly, in (i) any prohibition or limitation on the ownership or operation by the Company, Gartner, or any of their respective subsidiaries being compelled as a result of the Merger to dispose of or hold separate any portion of their respective businesses, properties or assets, (ii) the Company, Gartner, or any of their respective subsidiaries being compelled as a result of the Merger to dispose of or hold separate any portion of their respective businesses, properties or assets, (iii) any prohibition or limitation on the ability of Gartner to acquire or exercise full ownership rights of, any shares of the capital stock of our subsidiaries, including the right to vote or (iv) any prohibition or limitation on Gartner effectively controlling the business or operations of the Company and its subsidiaries, in each case subject to the parties obligations under the Merger Agreement to take certain actions, if necessary, to obtain regulatory approval.

For both Gartner and CEB, the obligation to consummate the Merger is also subject to the accuracy of representations and warranties of, and the performance of obligations of, the other party, in each case as set forth in the Merger Agreement, subject to specified materiality exceptions. The obligations of each party to close are also subject to the absence of any material adverse effect on the other party. As a result of the above mentioned conditions and the other conditions described in the Merger Agreement, there can be no assurance that the Merger will be consummated, even if CEB stockholder approval of the Merger is obtained.

The Merger Agreement contains provisions that could discourage a potential competing acquirer of CEB or could result in any competing proposal being at a lower price than it might otherwise be.

The Merger Agreement contains “no shop” provisions that, subject to certain exceptions, restrict our ability to solicit, encourage, facilitate or discuss competing third-party proposals to acquire all or a significant part of the Company. Further, even if our Board of Directors withdraws or qualifies its recommendation in favor of adopting the Merger Agreement, we will still be required to submit the matter to a vote of our stockholders. In addition, Gartner generally has an opportunity to offer to modify the terms of the proposed Merger in response to any competing acquisition proposal that may be made before our Board of Directors may withdraw or qualify its recommendation.

These provisions could discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of CEB from considering or proposing that acquisition, even if it were prepared to pay consideration with a higher per share cash or market value than that market value proposed to be received or realized in the Merger, or might result in a potential competing acquirer proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in certain circumstances.

Negative publicity related to the Merger may materially adversely affect CEB.  

Political and public sentiment in connection with a proposed combination may result in a significant amount of adverse press coverage and other adverse public statements affecting the parties to the Merger. Adverse press coverage and public statements, whether or not driven by political or popular sentiment, may also result in legal claims or in investigations by regulators, legislators, and law enforcement officials. Responding to these investigations and lawsuits, regardless of the ultimate outcome of the proceedings, can divert the time and efforts of our senior management from operating our businesses. Addressing any adverse publicity, governmental scrutiny, or enforcement of other legal proceedings is time-consuming and expensive and, regardless of the factual basis for the assertions being made, could have a negative effect on our reputation, on the morale of our employees, and on our relationships with regulators. It may also have a negative impact on our ability to take timely advantage of various business and market opportunities. All of these factors may materially adversely affect our business and cash flows, financial condition, and operating results.

Risks related to our business

We may fail to attract new members to our memberships, services, and products, obtain renewals from existing members, or cross-sell memberships, services, and products.

We derive the majority of our revenue from annual memberships for our memberships, products, and services. Revenue growth depends on our ability to attract prospects, sustain a high renewal rate of existing memberships, and sell additional products and services to existing members. This depends on our ability to anticipate market trends and member needs, develop effective products and services for members, develop technologically advanced methods of delivery, and deliver products and services that are more desirable than those of our competition, including in new and developing industries, business sectors, government entities, and geographies. This also depends on our ability to effectively identify, reach, and engage prospects to promote our offerings. Failure to

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attract and retain members, deliver acceptable renewal rate levels, or cross-sell memberships and products to existing members at the level we forecast, could materially adversely affect our operating results and future growth.

We may fail to continue to effectively develop, validate, support, and sell the products, services, and tools in our talent management business or extend our sales of those products, services, and tools to new and existing markets and geographies.

Our talent management business develops, validates, supports, and sells products, services, and tools for employee assessment, development, and performance management, including for talent acquisition, talent development, and talent strategy and analytics. These products, services, and tools are based on the use of science and data to develop an integrated talent management strategy for clients that drives business outcomes. Revenue growth for our talent management products, including those within the CEB Talent Assessment segment, as well as those that we have acquired or are developing, depends on our expertise, our ability to continue to acquire and develop predictive assessment intellectual property, our cloud-based SaaS platform, as well as other technologically advanced methods of delivery, our proprietary database, our ability to measure results, our ability to integrate these tools and services into a unified set of product offerings, and a continuing and growing interest in managing talent through analytics specifically and in human capital management generally. Failure to maintain our expertise, develop additional and validated predictive assessment and measurement tools, extend the adoption of SaaS and SaaS-related efforts as a mechanism for delivering our products, services, and tools, as well as develop other technologically advanced methods of delivery, expand our proprietary database, demonstrate success, or a slowing or uneven interest in managing talent through analytics either in our existing or developing markets, could materially adversely affect our operating results and future growth.

Products, services, and tools to address talent management considerations account for a significant portion of our revenue, and a shift in demand away from talent management considerations could materially adversely affect our business, operating results, financial condition, and liquidity.  

A significant portion of our revenue results from our products, services, and tools that address a range of talent management considerations. The part of our business that focuses on talent management is affected by the level of business activity of our members, as well as the level of economic activity in the industries and markets these members serve. Economic downturns in certain segments or geographic regions may cause reductions in discretionary spending by our members, which may result in reductions in the growth of new business for our products, services, and tools, as well as reductions in existing business.

We may not compete successfully and, as a result, may experience reduced or limited demand for our memberships, products, and services.

The broad advisory services industry, as well as the human capital management sector in which we operate, is a highly competitive industry with low barriers to entry; numerous substitute products and services; shifting strategies and market positions including consolidation; many differentiators; and large global providers, as well as strong local and regional competitors. We generally compete against traditional consulting firms, benchmarking firms, role- or geographic-focused assessment companies, research and data analytics firms, training and development firms, trade associations, and nonprofit organizations, as well as providers of free content over the Internet and through other delivery channels. Many of our competitors are significantly larger than we are, have greater resources, and have the ability to grow and make transformative moves in the marketplace for advisory services and human capital management solutions. We also compete against new entrants from the SaaS or data analytics industries, as well as against developing technologies such as social media, business intelligence software, and workflow software. To compete successfully and achieve our growth targets, we must successfully serve new and existing members with current products and services, develop and invest in new and competitive products and services for US and international members, develop other technologically advanced methods of delivery, and deliver demonstrable return on investment to clients. Our failure to compete effectively with our competitors, both in terms of the quality and scope of our products and services, and in terms of price, could materially adversely affect our operating results and future growth.

If we do not retain CEB members for the duration of their membership terms, we would suffer a loss of future revenue due to our service guarantee.

We offer a service guarantee to some CEB research memberships under which a member may request a refund of the membership fee. When applicable, refunds are provided on a proportionate basis relative to the unused period of the membership term. Requests for refunds by a significant number of our members could materially adversely affect our operating results and future growth. Failure to retain members at the level we forecast could materially adversely affect our operating results.

We may be unable to protect our intellectual property.

Our success depends on our intellectual property. We rely on a combination of internal control, contractual arrangements, and legal protections to protect our proprietary rights. We cannot assure that the steps we have taken will be adequate to deter misappropriation

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of our intellectual property or confidential information, or that we will be able to detect unauthorized use and take timely and effective steps to enforce our rights, particularly as we expand our business to new geographies, where the framework related to the protection of intellectual property may be less robust than in the United States and Europe. If substantial and material unauthorized use of our proprietary rights in our memberships, products, services, and tools were to occur, we would be required to engage in costly and time-consuming litigation to enforce our rights, and we might not prevail in such litigation. If others were able to use our intellectual property, our ability to charge our fees for our memberships, products, services, or tools could be materially adversely affected.

We may be exposed to litigation.

As a publisher and distributor of content, a user of third-party content, an on-line content provider, a developer and provider of talent management related strategy and analytics tools, and a global company, we face potential liability for trademark and copyright infringement, discriminatory impact, and other claims based on our products and services, as well as potential liability related to our operations, employment practices, and other business practices. Any such litigation, regardless of the merits and whether or not resulting in a judgment against us, could subject us to reputational harm and have a material adverse effect on our operating results. In addition, certain of our talent measurement and assessment products may carry risks of litigation and related exposure for claims of non-compliance with employment laws related to hiring and promotion. These obligations could materially adversely affect our operating results.

We may experience confusion about our brand.

Market perception of the CEB brand affects our reputation in the marketplace, our ability to attract and retain members, clients, and employees, as well as our ability to price our products at their full value. Since 2014, we have operated with a unified master brand strategy. In 2015, we continued our brand management efforts by changing our corporate name to CEB Inc., consolidating our web presence under the cebglobal.com domain, and further aligning our legacy product brands and acquired businesses under several core platforms and the CEB master brand. Beginning in 2016, SHL Talent Measurement is now referred to as CEB Talent Assessment and similarly, the newly acquired Evanta business will be transitioned as offerings under the CEB brand in 2017. If our members and clients, or prospective members or clients, are confused by our brand strategy, or if we do not effectively transfer brand equity and enhance the brand experience from our legacy or acquired brands, or if our efforts to extend our brand equity from these various brands into existing or target markets are unsuccessful, our operating results and future growth could be materially adversely affected.

Economic uncertainty in the United States and the global economy could materially adversely impact our business, operating results, financial condition, and liquidity.

Economic uncertainty in the United States and the global economy could materially adversely affect our business, operating results, financial condition, and liquidity. These conditions also could materially adversely impact our existing and prospective members and clients, vendors, business partners, and growth prospects. If we are unable to successfully anticipate or adapt to uncertain or changing economic, financial, market, and government conditions, we may be unable to effectively plan for and respond to these changes, and our business could be materially adversely affected. While we market and sell our products and services to large and middle market enterprises throughout the year, a significant percentage of our new business and renewal bookings in the CEB segment historically have taken place in the first and fourth quarters of the year. Significant economic uncertainty during these time periods could have a disproportionately adverse effect on our current and future operating results. In addition, slowing growth in certain markets and sales channels could reduce the overall demand for professional information services and human capital management resources as global companies, government entities, and large and middle market enterprises continue to manage purchasing, departmental budgets, company-wide discretionary spending, and reduce or manage their focus on talent management solutions.

Economic conditions and regulatory changes leading up to and following the UK’s likely exit from the European Union could have a material adverse effect on our business and operating results.

In June 2016, the UK held a referendum in which voters approved an exit from the European Union (“EU”), commonly referred to as Brexit. It is expected that the UK government will initiate a process to withdraw from the EU and begin negotiating the terms of its separation. The announcement of Brexit resulted in significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the US dollar (“USD”) relative to other foreign currencies in which we conduct business. This change has had the effect of reducing the amount of our reported revenue, as sales recorded in currencies other than the USD are translated into US dollars at a lower exchange rate. In addition, this exchange rate change has reduced the reported amount of those expenses that we pay for in currencies other than the USD, again because of the lower translation into US dollars. If there is additional volatility in currency exchange rates, the impact on our reported results could be material in future periods. The announcement of Brexit and likely withdrawal of the UK from the EU may also create global economic uncertainty, which may cause our customers to closely monitor their costs and reduce their spending budgets. This outcome could materially adversely affect our business, financial condition, operating results, or cash

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flows. The terms and timing of the UK’s withdrawal from the EU cannot currently be predicted. Consequently, there may be additional impacts from Brexit in the future, any of which could materially adversely affect our operating results.

We are subject to a number of risks as a US government contractor, which could harm our reputation, result in fines or penalties against us, and/or materially adversely impact our financial condition.

Certain of our products are tailored for the public sector and provide services to US government agencies, and therefore, expose us to risks and added costs associated with government contracting, as well as risks of doing business with the federal government more generally. Our failure to comply with applicable laws and regulations could result in contract terminations, suspension or debarment from contracting with the US government, civil fines and damages, and criminal prosecution and penalties, any of which could cause our actual operating results to differ materially from those anticipated. In addition, the ongoing impact of sequestration and the possibility of further sequestration under the Budget Control Act of 2011 or other government dysfunction could result in contract terminations and slowing sales, which could materially adversely affect our operating results.

US government agencies, including the Defense Contract Audit Agency (“DCAA”) routinely audit our US government contracts and contractors’ administration processes and systems. An unfavorable outcome to an audit by the DCAA or another agency could cause our operating results to differ materially from those anticipated. If an investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits, suspension of payments, fines, and suspension or debarment from doing business with the US government. In addition, we would suffer serious harm to our reputation if allegations of impropriety were made against us. Each of these factors could cause actual operating results to differ materially from those anticipated. In addition, the continuing US government spending restrictions could materially adversely affect our operating results.

Risks related to our operations

Our acquisitions involve risks that differ from or are in addition to those faced by our operations, and our acquisitions may not achieve their anticipated results.

Through our acquisitions, we expect that we will be able to realize various benefits, including, among other things, new product development and product enhancements, cross-selling and revenue enhancement opportunities, geographic expansion, cost savings, and operating efficiencies.

Our acquisitions bring us capabilities and intellectual properties that address gaps in member and client needs and workflows. These acquisitions involve financial, operational, human resources, business, legal, and regulatory risks that differ from or are in addition to those faced by our ongoing operations, including difficulties in accurately valuing the businesses; difficulties and costs of integrating and maintaining the operations, personnel, technologies, products, vendors, and information systems of the businesses; difficulties achieving the target synergies, efficiencies, and cost savings; more cyclicality than what exists in our best practices and decision support products and services; failure to retain key personnel and members; possibility of brand confusion; entry into and ongoing management of new geographical or product markets; exposure under acquisition-related agreements; the diversion of financial and management resources; management distraction; and the integration of a different set of products and services into our existing operations. As a result, we may not be able to achieve the expected benefits of our acquisitions and could incur unanticipated increased costs, which could materially adversely affect our operating results and future growth.

We regularly evaluate potential acquisitions of businesses and products and may from time to time pursue acquisition opportunities that we believe enhance our business. We may not be successful in identifying acquisition opportunities, assessing the value of the opportunities, or completing acquisitions on favorable terms. Future acquisitions may result in dilution to earnings and may involve potentially dilutive issuances of our equity securities or the incurrence of additional debt.

Our international operations involve special risks.

In 2016, approximately 36% of our revenue related to business located outside the United States and we expect to continue expanding internationally.

Our international operations involve risks that differ from or are in addition to those faced by our US operations, including:

 

difficulties in developing products, services, and technology tailored to the needs of members and clients around the world, including in emerging markets;

 

difficulties in serving members and clients around the world, including in emerging markets;

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different employment laws and rules and related social and cultural factors that could result in cyclical fluctuations in use and revenue;

 

dependence on distributors and other third parties;

 

cultural and language differences;

 

limited recognition of our brand;

 

different regulatory and compliance requirements, including in the areas of privacy and data protection, anti-bribery and anti-corruption, trade sanctions, marketing and sales, and other barriers to conducting business;

 

absence, in some jurisdictions, of effective laws to protect our intellectual property rights;

 

greater difficulties in managing our operations outside of the United States;

 

different or less stable political, operating, and economic environments and market fluctuations;

 

civil disturbances or other catastrophic events that reduce business activity;

 

higher operating costs;

 

lower operating margins;

 

differing accounting principles and standards;

 

currency fluctuations between the USD and foreign currencies that could materially adversely affect financial and operating results;

 

restrictions on or adverse tax consequences from entity management efforts; and

 

unexpected changes in United States or foreign tax laws.

If we are not able to efficiently adapt to or effectively manage our business in markets outside of the United States, our business prospects and operating results could be materially adversely affected.

We may fail to adequately protect our member and client data.

In the normal course of operations, we collect and maintain confidential and sensitive data, including personal information, from members and clients. We rely on a complex network of technical safeguards and internal controls to protect this data. Failure to adequately protect this data, including failure to continue to improve our internal controls or failure to prevent the misuse of or misappropriation of member and client data, could result in data loss, corruption, or breach. If a data loss, corruption, or breach occurs, we could be exposed to litigation from members and clients, our reputation could be harmed, and we could lose existing and have difficulty attracting new members and clients, all of which could materially adversely affect our operating results.

Changes to privacy and data protection rules and regulations may make compliance more complex and challenging. Such changes could increase the cost of compliance, which could lower the margins or profitability of our business. Our failure to comply with or implement processes in this area could result in legal liability, damage to our reputation in the global marketplace, or added considerations around commercial activity. Additionally, regulations frequently allow for the imposition of substantial fines and penalties, thereby creating a greater risk of significant financial impact should we fail to comply.

We may fail to adequately operate, maintain, develop, and protect our information technology infrastructure.

Our information technology infrastructure serves our global memberships and clients and supports our employees and operations. Our failure to make the capital infrastructure expenditures and improvements necessary to remain technologically advanced, meet our internal operational and business needs and allow us to service our memberships and clients could materially adversely affect our delivery of existing products and services, our development of new products and services, our reputation, and our operating results and future growth.

Increased global information technology security threats and more sophisticated and targeted computer crime pose a risk to the security of our systems and networks and the confidentiality, availability, and integrity of data processed and stored on those systems and networks. While we attempt to mitigate these risks by employing a number of administrative, technical, and physical safeguards, including employee training; technical security controls; comprehensive monitoring of our networks and systems; and maintenance of backup and protective systems, our systems, networks, products, solutions, and services remain potentially vulnerable to various threats. Depending on their nature and scope, such threats could potentially lead to the compromise of confidential information;

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improper use of our systems and networks; manipulation and destruction of data; defective products; production downtimes; and operational disruptions, which in turn could materially adversely affect our reputation, competitiveness, and operating results.

In addition, we deliver our memberships, products, and services to members and clients primarily through online means. Although we have implemented plans and procedures to address service interruptions, we could experience natural disasters, power loss, cyber-attacks, operator error, or similar events, which could cause an interruption in service or damage to our facilities and/or data. Our disaster recovery and business continuity plans and procedures are designed to address many of the potential service interruptions, but these safeguards may prove to be insufficient or not as effective as anticipated, and may not be adequate to prevent interruptions from certain causes or unforeseen types of events. Such service interruptions could prevent us from providing services to our members and clients or cause us to violate service level agreements with our members, which could materially adversely affect our ability to retain existing members and clients and attract new members and clients. In addition, such service interruptions or any perceptions of unreliability could materially adversely affect our ability to retain existing members and clients and harm our ability to attract new members and clients.

Updates and replacements of key internal systems and processes, particularly our CRM and ERP system, or problems or delays with the design or implementation of these systems and processes could interfere with, and therefore harm, our business and operations.

In 2016, we began a multi-year project to update and replace certain key internal systems and processes, including our customer relationship management system and our enterprise resource planning system, to enable a single global platform that will support business growth and drive business process simplification and standardization. We have invested, and will continue to invest, significant capital and human resources in the design and implementation of these systems and processes, which are intended to transform our operations and give us greater agility as our business grows in size and complexity. We have opted to decelerate the design and implementation schedule of these systems. Any problems, disruptions, delays, or other issues in the design and implementation of the new systems or processes, particularly any that impact our operations, could materially adversely affect our ability to process customer orders, deliver products and services, provide service and support to our customers, bill and track our customers, collect payment from our customers, record and transfer information in a timely and accurate manner, recognize revenue, file SEC reports in a timely manner, or otherwise run our business. Even if we do not encounter these adverse effects, as noted above, the design and implementation of these new systems and processes may be much more costly and take more time than we anticipated, especially if the Merger is not consummated. If the Merger is not consummated and as a standalone company we are unable to successfully design and implement these new systems and processes as planned, or if the implementation of these systems and processes is more lengthy or costly than anticipated, our business, financial condition, and operating results could be negatively impacted.

Our lease of significant office space in Arlington, Virginia and planned corporate headquarters consolidation are subject to several risks, including landlord and subtenant default and our inability to sublease unused space.

We are currently party to three leases of office building space in Arlington, Virginia. We intend to relocate and consolidate our corporate headquarters in early 2018 into a single building in Arlington that is under construction. We expect that the planned consolidation will result in us being subject to two office leases in Arlington, and that we will continue to sublease a substantial portion of that space to others, including an existing major subtenant. If the major subtenant, or other subtenants, default on their lease obligations to us, or if we are unable to sublease all or part of our space available for sublease at acceptable rents or at all, we may incur substantial additional lease costs and expenses and/or experience material loss of sublease rental income, which could materially adversely affect our operating results. If our new corporate headquarters is not completed on schedule, or if the new headquarters landlord or its guarantors default on their obligations pursuant to the new headquarters lease, we may incur material costs and expenses, and/or be required to pay additional rental amounts. Unanticipated difficulties in consolidating our operations in our new corporate headquarters, including IT system interruptions, may result in loss of employee and operational productivity and additional costs and expenses, which could have an adverse effect on our operating results.

We make estimates and assumptions in connection with the preparation of our consolidated financial statements, and any changes to those estimates and assumptions could have a material adverse effect on our operating results.

In connection with the preparation of our consolidated financial statements, we use certain estimates and assumptions based on historical experience and other factors. Our most critical accounting estimates are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In addition, as discussed in Note 2 to our consolidated financial statements, we make certain estimates, including decisions related to revenue recognition, income taxes, and other contingencies. While we believe that these estimates and assumptions are reasonable under the circumstances, they are subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material adverse effect on our operating results.

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We may be subject to future impairment losses due to potential declines in the fair value of our assets.

At December 31, 2016, the net carrying value of goodwill and intangible assets was $565.0 million and $184.2 million, respectively, and represented 40% and 13%, respectively, of our total assets of $1.4 billion. We apply a fair value test to evaluate goodwill for impairment annually in the fourth quarter of each year, and between these periods if events occur or circumstances change, which suggest that the goodwill or intangible assets should be evaluated. The testing of goodwill for potential impairment inherently involves management judgments as to the assumptions used to project amounts included in the valuation process and as to anticipated future market conditions and their potential effect on future performance. Changes in assumptions or estimates can materially affect the determination of fair value, and assumptions and estimates are subject to risks and uncertainties, including many over which we have little or no control. The potential for goodwill impairment is increased during a period of economic uncertainty or following a significant acquisition. In 2016, we recorded impairment losses of $69.4 million related to the Evanta reporting unit, including $67.9 million related to goodwill and $1.5 million related to intangible assets. In 2014, we recorded impairment losses of $39.7 million, including $20.8 million related to customer list intangible assets and $18.9 million related to goodwill of the PDRI reporting unit. The fair value of the CEB Talent Assessment reporting unit exceeded its carrying value by approximately 9% at October 1, 2016. The CEB Talent Assessment reporting unit remains at risk for future impairment if the projected operating results are not met or other inputs in the fair value measurements change. Changes in our business strategy or changes in market or other conditions could result in declining performance that would require us to examine our goodwill for potential impairment and could lead to a requirement that we record additional impairment charges, which would materially adversely affect our operating results.

Changes in, or interpretations of, tax rules and regulations may materially adversely affect our effective tax rates.

We are subject to income and other taxes in the United States, the UK, and numerous other foreign jurisdictions. Significant judgment is required in evaluating our provision for income taxes. We also are subject to tax audits in various jurisdictions, and such jurisdictions may assess additional tax against us. Our global operations subject us to additional tax regimes. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation, or the effects of a change in tax policy in the United States or in any of the numerous foreign jurisdictions where we do business, could have a material effect on our operating results in the period or periods for which that determination is made. Changes in the tax laws of the foreign jurisdictions in which we operate are anticipated to arise as a result of the base erosion and profit shifting (“BEPS”) proposals issued by the Organization for Economic Co-operation and Development (“OECD”). The OECD, which represents a coalition of member countries that encompass most of the jurisdictions in which we operate, has published action plans aimed at addressing perceived issues within tax systems that may lead to tax avoidance by companies. Given the unpredictability of these possible changes and their potential interdependency, it is very difficult to accurately assess the overall effect of such potential tax changes on our effective tax rate at this time, and that could materially adversely affect our operating results.

We are subject to foreign currency risk.

We serve executives and professionals in more than 70 countries around the world. Prices for CEB segment memberships, products, and services primarily are denominated in USD; however, we do offer foreign currency billing to members outside of the United States in the British pound sterling, Euro, and Australian dollar. Prices for CEB Talent Assessment tools and services are primarily denominated in the local currency. As a result of operating outside the United States, we are at risk for exchange rate fluctuations, which could affect our operating results.

We use forward contracts, primarily cash flow hedging instruments, to mitigate a portion of these risks. The maximum length of time of these hedging contracts is 12 months. Although we believe that our foreign exchange hedging policies are reasonable and prudent under the circumstances, they only partially offset any adverse financial impact resulting from unfavorable changes in foreign currency exchange rates, especially if these changes are extreme and occur over a short period of time. Hedging transactions involve certain additional risks such as counterparty risk, the legal enforceability of hedging contracts, the early repayment of hedged transactions, and the risk that unanticipated and significant changes in foreign exchange rates may cause a significant loss of basis in the contract and change in current period expense. We cannot make assurances that we will be able to enter into hedging transactions or that such hedging transactions will adequately protect us against the foregoing risks. In addition, any cash flow hedges not perfectly correlated (and appropriately designated and documented as such) with foreign exchange transactions would impact our reported income as gains and losses on the ineffective portion of such hedges would be recorded in our consolidated statements of operations.

We are subject to interest rate risk.

Borrowings under our Senior Secured Credit Facilities are at variable rates of interest and expose us to interest rate risk. If interest rates were to increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same. We may or may not enter into interest rate swaps with respect to all of our variable rate indebtedness and any

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swaps we may enter into may not fully mitigate our interest rate risk. Additionally, hedging transactions involve certain additional risks such as counterparty risk, the legal enforceability of hedging contracts, the early repayment of hedged transactions, and the risk that unanticipated and significant changes in interest rates may cause a significant loss of basis in the contract and a change in current period expense.

In the event that we need to refinance all or a portion of our outstanding debt before maturity or as it matures, we may not be able to obtain terms as favorable as the terms of our existing debt or refinance our existing debt at all. If interest rates or other factors existing at the time of refinancing result in higher interest rates upon refinancing, then the interest expense relating to the refinanced debt would increase. Furthermore, if any rating agency changes our credit rating or outlook, our debt and equity securities could be materially adversely affected.

Hedging instruments often are not guaranteed by an exchange or its clearing house and involve risks and costs.

Hedging instruments involve risk since they are often not guaranteed by an exchange or a clearing house. The enforceability of agreements underlying derivative transactions may depend on compliance with applicable regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in a default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized gains and force us to cover our resale commitments, if any, at the then current market price. Although we generally seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract to cover our risk. We cannot assure that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until expiration, which could result in losses.

Our leverage could materially adversely affect our financial condition or operating flexibility and prevent us from fulfilling our obligations under our Senior Secured Credit Facilities and Notes.

Total consolidated debt at December 31, 2016 was $874.6 million, net of issuance costs, consisting of the Term Loan A-3 Loans, Revolving Credit Facility, and Notes. In addition, we had $88.8 million of undrawn availability under the Revolving Credit Facility (after $240.0 million of outstanding borrowings and a reduction of availability to cover $21.2 million of outstanding letters of credit) at December 31, 2016. Our level of indebtedness could have important consequences on our future operations including:

 

making it more difficult for us to satisfy our payment and other obligations under our outstanding debt, which may result in defaults;

 

subjecting us to the risk of increased sensitivity to interest rate increases on our outstanding indebtedness, which have a variable rate of interest, which could cause our debt service obligations to increase significantly;

 

reducing the availability of our cash flows to fund working capital, capital expenditures, acquisitions, and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes;

 

limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industry in which we operate and the general economy;

 

placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged; and

 

increasing our vulnerability to the impact of adverse economic and industry conditions.

In addition, we may incur substantial additional indebtedness in the future. The terms of our Senior Secured Credit Facilities and Notes limit, but do not prohibit, us from incurring additional indebtedness. This may include additional indebtedness under certain circumstances that may also be guaranteed by our domestic subsidiaries that guarantee our obligations under the Senior Secured Credit Facilities. Our ability to incur additional indebtedness may have the effect of reducing the amounts available to pay amounts due with respect to our indebtedness. If we incur new debt or other liabilities, the related risks that we and our subsidiaries now face could intensify.

Our ability to make required payments or to refinance our indebtedness depends on our future performance, which will be affected by financial, business and economic conditions, and other factors, many of which are not in our control. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital, or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In addition, the terms of existing or future debt agreements may restrict us from pursuing any of these alternatives.

17


 

If we are in default under our Senior Secured Credit Facilities due to our inability to make the required payments or if we otherwise fail to comply with the financial and other covenants contained in the credit agreement governing the Senior Secured Credit Facilities, all of our debt would become immediately due and payable and the lenders under our Senior Secured Credit Facilities could be permitted to foreclose on our assets securing such debt.

The covenants in our Senior Secured Credit Facilities and Notes impose restrictions that may limit our operating and financial flexibility.

The Senior Secured Credit Facilities and Notes include negative covenants or limitations that may, subject to exceptions, limit our ability and the ability of our subsidiaries to, among other things:

 

create, incur, assume, or suffer to exist liens;

 

make investments and loans;

 

create, incur, assume, or suffer to exist additional indebtedness or guarantees;

 

engage in mergers, acquisitions, consolidations, sale-leasebacks, and other asset sales and dispositions;

 

pay dividends or redeem, or repurchase our capital stock, except in certain specified circumstances;

 

alter the business that we and our subsidiaries conduct;

 

engage in certain transactions with officers, directors, and affiliates;

 

prepay, redeem or purchase other indebtedness;

 

enter into certain burdensome agreements; and

 

make material changes to accounting and reporting practices.

In addition, the Senior Secured Credit Facilities include a financial covenant that subjects us to a maximum net leverage ratio.

Operating results below current levels or other adverse factors, including a significant increase in interest rates, could result in us being unable to comply with certain covenants contained in our Senior Secured Credit Facilities and Notes. If we violate these covenants and are unable to obtain waivers, our debt under the Senior Secured Credit Facilities and Notes would be in default and could be accelerated and could permit the lenders to foreclose on our assets securing the debt thereunder. If the indebtedness is accelerated, we may not be able to repay our debt or borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms that are acceptable to us. If our debt is in default for any reason, our cash flows, operating results, or financial condition could be materially adversely affected. In addition, complying with these covenants may also cause us to take actions that may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions.

Any decisions to reduce or discontinue paying cash dividends to our shareholders or repurchase shares of our common stock pursuant to our previously announced stock repurchase program could cause the market price for our common stock to decline.

We may reduce or discontinue repurchases of our common stock as we deem appropriate and as market conditions allow. We may modify, suspend, or cancel our cash dividend policy in any manner and at any time. Any reduction or discontinuance by us of the payment of quarterly cash dividends or repurchases of our common stock pursuant to our stock repurchase program could cause the market price of our common stock to decline. Moreover, in the event our payment of quarterly cash dividends or repurchases of shares of our common stock are reduced or discontinued, our failure or inability to resume paying cash dividends or repurchasing shares of our common stock at historical levels could cause the market price of our common stock to decline.

We may invest in companies for strategic reasons and may not realize a return on our investments.

From time to time, we may invest in companies to further their strategic objectives and support our key business initiatives. Such investments could include equity or debt instruments in private companies that may be non-marketable. The success of these companies may depend on product development, market acceptance, operational efficiency, and other key business factors. If any of these private companies fail, we could lose all or part of our investment in that company. If we determine that impairment indicators exist and that there are other-than-temporary declines in the fair value of the investment, we may be required to write down the investments to their fair value and recognize the related write-down as an investment loss.

18


 

Risks related to our people

We may be unable to hire and retain key personnel, recruit and retain highly skilled management and employees, or effectively plan for succession, particularly after the announcement of the proposed Merger with Gartner.

Continued and future success of our business depends on our ability to hire, train, and retain key personnel, including senior leaders; skilled sales, research, and entry-level personnel; and the industrial and organizational psychologists and other individuals who are a critical component of our talent management business; and to hire, train, and retain highly skilled management and employees, including from our acquisitions. Once hired, new employees, particularly our new sales staff, can experience a delay in productivity until they are fully trained; and significant numbers of entry-level sales staff can impact our overall productivity. We experience competition for new hires and our existing employees from competitors and other businesses wherever we do business. We have employer protection agreements with senior staff that restrict them from competing with and soliciting employees from us following their employment. Further, the pendency of the Merger creates additional uncertainty that makes hiring, retention, and succession planning particularly difficult. If we fail to retain key personnel, or to attract, train, and retain a sufficient number of management and employees, including entry-level sales staff, in the future, our operating results and future growth could be materially adversely affected, and the morale and productivity of our workforce in the near term could be disrupted.

Effective succession planning is a key factor for our long-term success. Failure to enable the effective transfer of knowledge and facilitate smooth transitions with regard to key employees could materially adversely affect our long-term strategic planning and execution and negatively affect our business, financial condition, operating results, and prospects. If we fail to enable the effective transfer of knowledge and facilitate smooth transitions for key personnel, the operating results and future growth for our business could be materially adversely affected, and the morale and productivity of the workforce could be disrupted.

We rely on our executive officers, corporate leadership team, and the leaders of our geographic regions and departments for the success of our business.

We rely on our executive officers, corporate leadership team, and the leaders of geographic regions and departments to manage our operations. Given the range of our products and services, the scale of operations, and geographic scope, these executives and senior managers must have a thorough understanding of our product and service offerings and operations, as well as the skills and experience necessary to manage a large organization in diverse geographic locations. If one or more members of our management team leave and we cannot replace them with suitable candidates quickly, or if members of our management team are not able to demonstrate the skills necessary in a global business, we could experience difficulty in managing our business properly. If the Merger is not consummated, we may also encounter challenges in hiring qualified personnel to replace key employees that may depart during the pendency of the Merger. In addition, we would need to restart the search process for a new CEO and potentially retain the existing CEO and other senior executives who are not expected to remain at Garner while seeking replacement candidates. This could harm our business prospects, client relationships, employee morale, and operating results.

 

Item 1B.

Unresolved Staff Comments.

None.

Item 2.

Properties.

Our corporate headquarters located in Arlington, Virginia consists of 625,000 square feet under a lease expiring in 2028. These facilities accommodate research, marketing and sales, information technology, administrative, and graphic and editorial services personnel. Our Arlington office serves as the principal location for our CEB segment operations. Our CEB Talent Assessment segment’s principal office is located in Thames Ditton, England. We also lease offices in 22 other locations throughout the United States, 14 locations throughout Europe (in addition to England), and in 18 other countries outside of the United States and Europe to support our global operations.

In July 2014, we entered into a lease agreement to become the primary tenant of a new commercial building in Arlington, Virginia. The lease is for approximately 349,000 square feet and it is estimated that we will commence making cash payments in 2018 for a fifteen-year term. Refer to Note 18 of our consolidated financial statements for further discussion. The terms of our leases, including the new Arlington, Virginia lease, generally contain provisions for rental and operating expense escalations. Our office leases have terms that expire between 2017 and 2032, exclusive of renewal options.

We believe that our existing and planned facilities are adequate for our current needs and additional facilities are available for lease to meet any future needs. We currently sublease approximately 391,000 square feet of our corporate headquarters to unaffiliated third parties that will expire between 2018 and 2028. We also sublease approximately 51,000 square feet at four other facilities.

19


 

Item 3.

Legal Proceedings.

From time to time, we are subject to litigation related to normal business operations. We vigorously defend ourselves in litigation and are not currently a party to, and our property is not subject to, any legal proceedings likely to materially affect our operating results.

Item 4.

Mine Safety Disclosures.

Not applicable.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information, Holders and Dividends

Our common stock is traded on the New York Stock Exchange under the symbol “CEB.” At February 1, 2017, there were 33 stockholders of record. The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock and cash dividends declared and paid per common share.

 

 

 

High

 

 

Low

 

 

Dividends

Declared

and Paid

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First quarter

 

$

64.97

 

 

$

49.27

 

 

$

0.4125

 

Second quarter

 

$

66.80

 

 

$

56.88

 

 

$

0.4125

 

Third quarter

 

$

67.84

 

 

$

52.69

 

 

$

0.4125

 

Fourth quarter

 

$

61.35

 

 

$

47.33

 

 

$

0.4125

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First quarter

 

$

81.12

 

 

$

66.69

 

 

$

0.3750

 

Second quarter

 

$

90.54

 

 

$

78.78

 

 

$

0.3750

 

Third quarter

 

$

91.57

 

 

$

67.58

 

 

$

0.3750

 

Fourth quarter

 

$

78.21

 

 

$

58.63

 

 

$

0.3750

 

 

We have historically paid a quarterly dividend on our common stock.  Future cash dividends, if any, are subject to the sole discretion of the Board of Directors. Under the terms of the Merger Agreement, during the period before the closing of the Merger, we are prohibited from paying any dividends without Gartner’s consent other than ordinary course dividends in accordance with past practice. In February 2017, the Board of Directors declared a first quarter 2017 cash dividend of $0.4125 per common share.

Recent Sales of Unregistered Securities

There were no sales of unregistered equity securities in 2016.

Issuer Purchases of Equity Securities

A summary of our share repurchase activity for the fourth quarter of 2016 is set forth below:

 

 

 

Total Number of

Shares Purchased (1)

 

 

Average Price

Paid per Share

 

 

Total Number of

Shares Purchased as

Part of a Publicly

Announced Plan

 

 

Approximate $

Value of Shares

That May Yet Be

Purchased

Under the Plan

 

October 1, 2016 to October 31, 2016

 

 

 

 

$

 

 

 

 

 

$

137,141,367

 

November 1, 2016 to November 30, 2016

 

 

251

 

 

$

51.34

 

 

 

 

 

$

137,141,367

 

December 1, 2016 to December 31, 2016

 

 

46

 

 

$

59.63

 

 

 

 

 

$

137,141,367

 

Total

 

 

297

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Includes shares of common stock surrendered by employees to the Company to satisfy income tax withholding obligations.

20


 

In February 2016, our Board of Directors approved a $150 million stock repurchase program, which is authorized through December 31, 2017. Repurchases may be made through open market purchases or privately negotiated transactions. Under the terms of the Merger Agreement, we are prohibited from repurchasing our common stock without Gartner’s consent between the date of the Merger Agreement and the consummation of the Merger (or the earlier termination of the Merger Agreement).

 

 

Item 6.

Selected Financial Data.

The following table sets forth selected financial and operating data. The selected financial data presented below has been derived from our consolidated financial statements, which have been audited by our independent registered public accounting firm. You should read the selected financial data presented below in conjunction with our consolidated financial statements, the notes to our consolidated financial statements, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Consolidated Statements of Operations Data

 

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012 (1)

 

 

 

(In thousands, except per share amounts)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CEB segment

 

$

761,648

 

 

$

731,834

 

 

$

701,573

 

 

$

634,302

 

 

$

564,062

 

CEB Talent Assessment segment

 

 

188,146

 

 

 

196,600

 

 

 

207,401

 

 

 

185,751

 

 

 

58,592

 

Total revenue

 

 

949,794

 

 

 

928,434

 

 

 

908,974

 

 

 

820,053

 

 

 

622,654

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CEB segment (2)

 

 

24,237

 

 

 

147,210

 

 

 

98,108

 

 

 

103,322

 

 

 

97,013

 

CEB Talent Assessment segment (3)

 

 

(17,401

)

 

 

(8,048

)

 

 

(4,463

)

 

 

(12,609

)

 

 

(12,345

)

Total operating profit

 

 

6,836

 

 

 

139,162

 

 

 

93,645

 

 

 

90,713

 

 

 

84,668

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (expense) income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(29,681

)

 

 

(20,636

)

 

 

(18,410

)

 

 

(22,586

)

 

 

(11,882

)

Debt modification costs

 

 

(1,656

)

 

 

(4,775

)

 

 

 

 

 

(6,691

)

 

 

 

Interest income and other

 

 

7,846

 

 

 

3,781

 

 

 

10,030

 

 

 

(998

)

 

 

1,834

 

Gain on cost method investment

 

 

 

 

 

 

 

 

6,585

 

 

 

 

 

 

 

Other (expense) income, net

 

 

(23,491

)

 

 

(21,630

)

 

 

(1,795

)

 

 

(30,275

)

 

 

(10,048

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income before provision for income taxes

 

 

(16,655

)

 

 

117,532

 

 

 

91,850

 

 

 

60,438

 

 

 

74,620

 

Provision for income taxes

 

 

18,003

 

 

 

25,004

 

 

 

40,678

 

 

 

28,467

 

 

 

37,569

 

Net (loss) income

 

$

(34,658

)

 

$

92,528

 

 

$

51,172

 

 

$

31,971

 

 

$

37,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.08

)

 

$

2.77

 

 

$

1.52

 

 

$

0.95

 

 

$

1.11

 

Diluted

 

$

(1.08

)

 

$

2.75

 

 

$

1.50

 

 

$

0.94

 

 

$

1.10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

32,087

 

 

 

33,367

 

 

 

33,666

 

 

 

33,543

 

 

 

33,462

 

Diluted

 

 

32,087

 

 

 

33,672

 

 

 

34,039

 

 

 

33,943

 

 

 

33,821

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared and paid per common share

 

$

1.65

 

 

$

1.50

 

 

$

1.05

 

 

$

0.90

 

 

$

0.70

 

 

Consolidated Balance Sheet Data

 

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

 

(In thousands)

 

Cash and cash equivalents and marketable securities

 

$

134,929

 

 

$

113,329

 

 

$

114,934

 

 

$

119,554

 

 

$

72,699

 

Total assets (4)

 

$

1,412,592

 

 

$

1,338,552

 

 

$

1,347,972

 

 

$

1,391,317

 

 

$

1,301,569

 

Deferred revenue

 

$

436,225

 

 

$

449,694

 

 

$

452,679

 

 

$

416,367

 

 

$

365,747

 

Debt – long term (4)

 

$

866,681

 

 

$

556,418

 

 

$

485,094

 

 

$

498,948

 

 

$

517,511

 

Total stockholders’ (deficit) equity

 

$

(174,930

)

 

$

43,677

 

 

$

86,137

 

 

$

139,742

 

 

$

115,502

 

21


 

 

Non-GAAP Financial Measures (5)

 

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

 

(In thousands, except per share amounts)

 

Adjusted revenue

 

$

962,871

 

 

$

931,923

 

 

$

914,980

 

 

$

829,967

 

 

$

639,788

 

Adjusted EBITDA

 

$

248,800

 

 

$

243,044

 

 

$

229,087

 

 

$

209,405

 

 

$

175,448

 

Adjusted EBITDA margin

 

 

25.8

%

 

 

26.1

%

 

 

25.0

%

 

 

25.2

%

 

 

27.4

%

Adjusted net income

 

$

121,143

 

 

$

126,939

 

 

$

113,142

 

 

$

103,911

 

 

$

87,104

 

Non-GAAP diluted earnings per share

 

$

3.78

 

 

$

3.77

 

 

$

3.32

 

 

$

3.06

 

 

$

2.58

 

 

Other Operating Statistics (Unaudited)

 

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

CEB segment Contract Value (in thousands) (6)

 

$

683,201

 

 

$

708,336

 

 

$

683,451

 

 

$

610,830

 

 

$

561,823

 

CEB segment constant currency Contract

   Value (in thousands) (7)

 

$

689,606

 

 

$

717,151

 

 

 

 

 

 

 

 

 

 

 

 

 

CEB segment member institutions (8)

 

 

7,397

 

 

 

7,340

 

 

 

7,056

 

 

 

6,418

 

 

 

5,957

 

CEB segment Contract Value per member

   institution (8)

 

$

91,988

 

 

$

96,026

 

 

$

96,702

 

 

$

95,078

 

 

$

94,200

 

CEB segment constant currency Contract

   Value per member institution (7)

 

$

92,794

 

 

$

95,439

 

 

 

 

 

 

 

 

 

 

 

 

 

CEB segment Wallet retention rate (9)

 

 

87

%

 

 

92

%

 

 

99

%

 

 

97

%

 

 

102

%

CEB segment constant currency Wallet

   retention rate (7)

 

 

88

%

 

 

93

%

 

 

 

 

 

 

 

 

 

 

 

 

CEB Talent Assessment segment Contract

   Value (in thousands) (10)

 

$

98,383

 

 

$

109,807

 

 

 

 

 

 

 

 

 

 

 

 

 

CEB Talent Assessment segment constant

   currency Contract Value (in thousands) (7)

 

$

102,746

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CEB Talent Assessment segment Wallet

   retention rate (11)

 

 

95

%

 

 

98

%

 

 

103

%

 

 

101

%

 

 

97

%

 

(1)

The Company acquired 100% of the equity interests of SHL Group Holdings 1 on August 2, 2012.

(2)

Included a $69.4 million impairment loss for Evanta and $24.0 million of business transformation costs in 2016 and a $39.7 million and $22.6 million impairment loss for PDRI in 2014 and 2013, respectively.

(3)

Included $28.9 million and $8.0 million of additional amortization expense in 2016 and 2015 associated with the 2015 change in the estimated useful life of the SHL trade name, respectively.

(4)

In 2015, the Company early adopted ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs and ASU 2015-17, Balance Sheet Classification of Deferred Taxes. Accordingly, prior year amounts were retrospectively adjusted to conform to the current year presentation.

(5)

See “Non-GAAP Financial Measures” below.

(6)

We define “CEB segment Contract Value” at the end of the quarter, as the aggregate annualized revenue attributed to all agreements in effect on such date, without regard to the remaining duration of any such agreement. CEB segment Contract Value does not include the impact of PDRI and Evanta events.

(7)

Calculated on a constant currency basis whereby financial information in the current period for amounts recorded in currencies other than the USD is translated into USD at the average exchange rates in effect during the comparable period of the prior year (rather than the actual exchange rates in effect during the current year period).

(8)

We define “CEB segment member institutions” at the end of the quarter, as member institutions with Contract Value in excess of $10,000. The same definition is applied to “CEB segment Contract Value per member institution.”

22


 

(9)

We define “CEB segment Wallet retention rate” at the end of the quarter, as the total current year segment Contract Value from prior year members as a percentage of the total prior year segment Contract Value. The CEB segment Wallet retention rate does not include the impact of PDRI and Evanta events.

(10)

We define “CEB Talent Assessment segment Contract Value” at the end of the quarter, as the aggregate annualized revenue in effect on such date, without regard to the remaining duration of any such agreement, attributed to all subscription agreements for online product access plus the aggregate annual revenue attributed to all advanced purchases of online testing units. We began to calculate and provide this operating metric in the three months ended December 31, 2015.

(11)

We define “CEB Talent Assessment segment Wallet retention rate” at the end of the quarter on a constant currency basis, as the last current 12 months of total segment Adjusted revenue from prior year customers as a percentage of the prior 12 months of total segment Adjusted revenue.

 

Non-GAAP Financial Measures

This Annual Report includes a discussion of Adjusted revenue, Adjusted effective tax rate, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted net income, Non-GAAP diluted earnings per share, and constant currency financial information, all of which are non-GAAP financial measures provided as a complement to the results provided in accordance with accounting principles generally accepted in the United States of America (“GAAP”). “Adjusted EBITDA margin” refers to Adjusted EBITDA as a percentage of Adjusted revenue. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measure is included in the accompanying tables.

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

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

 

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

 

Net non-operating foreign currency gain (loss): Beginning in the first quarter of 2015, we adjusted for the impact of the net non-operating foreign currency gain (loss) included in other (expense) income. These items primarily result from the remeasurement of foreign currency cash balances held by CEB US and subsidiaries with the US dollar (“USD”) as their functional currency, USD cash balances held by subsidiaries with a functional currency other than the USD, certain intercompany notes, and the balance sheets of non-US subsidiaries whose functional currency was the USD prior to the revision of our corporate structure on October 1, 2015 to geographically align our intellectual property with our US and global commercial operations, resulting in a significant change to the economic facts and circumstances for subsidiaries that were previously dependent on the parent company for financing. We believe this information is useful to investors to facilitate comparison of operating results and better identify trends in our businesses.

 

Business transformation costs: Beginning in the first quarter of 2016, we adjusted for the impact of costs associated with our business transformation initiative, which is a multiyear effort for the development and implementation of cloud-based computing systems and training that will consolidate and standardize our sales processes and financial systems. These costs include software license fees and third-party vendor costs related to the implementation and development of the systems, and costs related to employees that are solely dedicated to the initiative. Under new accounting rules in effect as of January 1, 2016, the majority of costs related to the development and implementation of cloud-based computing systems now have to be expensed in the current period as they are incurred instead of being capitalized and depreciated over time. We believe that excluding these items from our non-GAAP financial measures provides useful supplemental information to our investors and is important in illustrating what our core operating results would have been had we not incurred these items. We exclude these items because management does not believe they correlate to the ongoing operating results of the business.

23


 

 

Debt modification costs, CEO non-competition obligation, gain (loss) on other investments, net, equity method investment gain (loss), restructuring costs, impairment loss, and gain on cost method investment: From time to time, we opportunistically enter into transactions outside of our core operations that we believe will improve our overall future financial position or otherwise be beneficial to our business. These transactions may include, but are not limited to, modifying our debt, entering into a transition agreement with an extended non-competition obligation with our CEO in connection with his decision to step down, or investing in private entities. These transactions and their related economic consequences affect our results of operations in the manner required by GAAP. We exclude these items when evaluating our results of operations because management does not believe they correlate to the ordinary course operating expenditures or operating results of the business. We believe that excluding these items from our non-GAAP financial measures provides useful supplemental information to our investors and is important in illustrating what our core operating results would have been had we not incurred these items.

 

Share-based compensation: Although share-based compensation is a key incentive offered to our employees, we evaluate our operating results excluding such expense. We believe the exclusion of this expense facilitates the ability of our investors to compare our operating results with those of other peer companies, many of which also exclude such expense in determining their non-GAAP measures, given varying valuation methodologies and assumptions, and the variety and amount of award types that may be utilized by different companies.

 

Adjusted effective tax rate: Beginning in the third quarter of 2015, we adjusted for the impact of certain discrete items included in the effective tax rate, including items unrelated to the current year, changes in statutory tax rates, or other items that are not indicative of our ongoing operations. We exclude these items because management believes it will facilitate the comparison of the annual effective tax rate over time. The Adjusted effective tax rate is calculated by dividing the adjusted provision for income taxes, which excludes discrete items and the tax effects of the other non-GAAP adjustments (using statutory rates), by the adjusted income before the provision for income taxes.

We are a global company that reports financial information in USD. Foreign currency exchange rate fluctuations affect the amounts reported from translating foreign revenue and expenses into USD. These rate fluctuations can have a significant effect on our reported operating results. As a supplement to our reported operating results, we present constant currency financial information. We use constant currency financial information to provide a framework to assess how our business performed excluding the effects of changes in foreign currency translation rates. Management believes this information is useful to investors to facilitate comparison of operating results and better identify trends in our businesses. To calculate financial information on a constant currency basis, financial information in the current period for amounts recorded in currencies other than the USD is translated into USD at the average exchange rates in effect during the comparable period of the prior year (rather than the actual exchange rates in effect during the current year period).

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 the most directly comparable GAAP measure is provided below (in thousands, except per share amounts):

Adjusted Revenue

 

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

Revenue

 

$

949,794

 

 

$

928,434

 

 

$

908,974

 

 

$

820,053

 

 

$

622,654

 

Impact of the deferred revenue fair value adjustment

 

 

13,077

 

 

 

3,489

 

 

 

6,006

 

 

 

9,914

 

 

 

17,134

 

Adjusted revenue

 

$

962,871

 

 

$

931,923

 

 

$

914,980

 

 

$

829,967

 

 

$

639,788

 

 

Constant Currency Adjusted Revenue

 

 

 

Year Ended December 31,

 

 

Year Ended December 31,

 

 

 

2016

 

vs.

2015

 

 

2015

 

vs.

2014

 

Adjusted revenue

 

$

962,871

 

 

$

931,923

 

 

$

931,923

 

 

$

914,980

 

Currency exchange rate fluctuations

 

 

10,981

 

 

 

 

 

 

 

32,286

 

 

 

 

 

Constant currency Adjusted revenue

 

$

973,852

 

 

 

 

 

 

$

964,209

 

 

 

 

 

24


 

 

Adjusted EBITDA 

 

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

Net (loss) income

 

$

(34,658

)

 

$

92,528

 

 

$

51,172

 

 

$

31,971

 

 

$

37,051

 

Provision for income taxes

 

 

18,003

 

 

 

25,004

 

 

 

40,678

 

 

 

28,467

 

 

 

37,569

 

Interest expense, net

 

 

28,922

 

 

 

20,179

 

 

 

18,046

 

 

 

22,337

 

 

 

10,834

 

Debt modification costs

 

 

1,656

 

 

 

4,775

 

 

 

 

 

 

6,691

 

 

 

 

Net non-operating foreign currency (gain) loss

 

 

(6,890

)

 

 

(5,649

)

 

 

(8,642

)

 

 

3,314

 

 

 

1,259

 

Gain on cost method investment

 

 

 

 

 

 

 

 

(6,585

)

 

 

 

 

 

 

Loss on other investments, net

 

 

797

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity method investment loss

 

 

640

 

 

 

1,437

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

102,176

 

 

 

74,027

 

 

 

68,286

 

 

 

60,087

 

 

 

37,858

 

Business transformation costs

 

 

24,035

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of the deferred revenue fair value adjustment

 

 

13,077

 

 

 

3,489

 

 

 

6,006

 

 

 

9,914

 

 

 

17,134