XNAS:ABCO The Advisory Board Co Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2012

or

 

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

For the transition period from             to             

Commission File Number: 000-33283

 

 

THE ADVISORY BOARD COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   52-1468699

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

2445 M Street, NW, Washington, D.C.   20037
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (202) 266-5600

 

 

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  x    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  x    No  ¨

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.:

 

Large accelerated filer   x    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 Exchange Act).    Yes  ¨    No  x

As of August 1, 2012, the registrant had outstanding 34,601,271 shares of Common Stock, par value $0.01 per share.

 

 

 


Table of Contents

THE ADVISORY BOARD COMPANY

INDEX TO FORM 10-Q

 

     Page No.  

PART I. FINANCIAL INFORMATION

     1   
ITEM 1. Financial Statements      1   

Consolidated Balance Sheets as of June 30, 2012 (unaudited) and March 31, 2012

     1   

Unaudited Consolidated Statements of Income for the Three Months Ended June 30, 2012 and 2011

     2   

Unaudited Consolidated Statements of Comprehensive Income for the Three Months Ended June 30, 2012 and 2011

     3   

Unaudited Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2012 and 2011

     4   

Notes to Unaudited Consolidated Financial Statements

     5   
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations      16   
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk      22   
ITEM 4. Controls and Procedures      22   

PART II. OTHER INFORMATION

     24   
ITEM 1A. Risk Factors      24   
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds      24   
ITEM 6. Exhibits      24   
Signatures      26   


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

THE ADVISORY BOARD COMPANY

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

     June 30,
2012
    March 31,
2012
 
     (unaudited)        

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 34,886      $ 60,642   

Marketable securities

     10,307        4,823   

Membership fees receivable, net

     354,860        281,584   

Prepaid expenses and other current assets

     13,259        6,705   

Deferred income taxes, net

     8,985        7,255   
  

 

 

   

 

 

 

Total current assets

     422,297        361,009   

Property and equipment, net

     54,434        49,653   

Intangible assets, net

     19,045        19,384   

Goodwill

     74,235        74,235   

Deferred incentive compensation and other charges

     61,230        53,369   

Deferred income taxes, net of current portion

     6,144        7,655   

Investment in unconsolidated entity

     6,538        8,662   

Other non-current assets

     9,000        9,000   

Marketable securities

     143,799        122,621   
  

 

 

   

 

 

 

Total assets

   $ 796,722      $ 705,588   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Deferred revenue

   $ 386,393      $ 313,958   

Accounts payable and accrued liabilities

     59,280        57,529   

Accrued incentive compensation

     6,649        18,691   
  

 

 

   

 

 

 

Total current liabilities

     452,322        390,178   

Long-term deferred revenue

     82,508        78,498   

Other long-term liabilities

     25,354        19,865   
  

 

 

   

 

 

 

Total liabilities

     560,184        488,541   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Preferred stock, par value $0.01; 5,000,000 shares authorized, zero shares issued and outstanding

     —          —     

Common stock, par value $0.01; 90,000,000 shares authorized, 34,534,117 and 46,994,560 shares issued as of June 30, 2012 and March 31, 2012, respectively, and 34,534,117 and 33,729,780 shares outstanding as of June 30, 2012 and March 31, 2012, respectively

     345        235   

Additional paid-in capital

     333,782        315,648   

Retained (deficit) earnings

     (99,133     189,742   

Accumulated elements of other comprehensive income

     1,544        1,206   

Treasury stock, at cost 0 and 13,264,780 shares as of June 30, 2012 and March 31, 2012, respectively

     —          (289,784
  

 

 

   

 

 

 

Total shareholders’ equity

     236,538        217,047   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 796,722      $ 705,588   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated balance sheets.

 

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THE ADVISORY BOARD COMPANY

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

 

     Three Months Ended
June 30,
 
     2012     2011  

Revenue

   $ 104,142      $ 79,937   

Costs and expenses:

    

Cost of services, excludes depreciation and amortization

     58,366        43,155   

Member relations and marketing

     19,120        17,880   

General and administrative

     13,479        10,823   

Depreciation and amortization

     4,086        2,947   
  

 

 

   

 

 

 

Operating income

     9,091        5,132   

Other income, net

     576        797   
  

 

 

   

 

 

 

Income from continuing operations before provision for income taxes and equity in loss of unconsolidated entity

     9,667        5,929   

Provision for income taxes

     (3,702     (2,223

Equity in loss of unconsolidated entity

     (2,124     —     
  

 

 

   

 

 

 

Net income from continuing operations

     3,841        3,706   

Discontinued operations:

    

Net income from discontinued operations

     —          165   
  

 

 

   

 

 

 

Net income

   $ 3,841      $ 3,871   
  

 

 

   

 

 

 

Earnings per share — basic:

    

Net income from continuing operations

   $ 0.11      $ 0.11   

Net income from discontinued operations

   $ —        $ 0.01   
  

 

 

   

 

 

 

Net income per share — basic

   $ 0.11      $ 0.12   
  

 

 

   

 

 

 

Earnings per share — diluted:

    

Net income from continuing operations

   $ 0.11      $ 0.11   

Net income from discontinued operations

   $ —        $ 0.00   
  

 

 

   

 

 

 

Net income per share — diluted

   $ 0.11      $ 0.11   
  

 

 

   

 

 

 

Weighted average number of shares outstanding:

    

Basic

     34,179        32,236   

Diluted

     36,054        33,794   

The accompanying notes are an integral part of these consolidated financial statements.

 

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THE ADVISORY BOARD COMPANY

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

     Three Months Ended
June 30,
 
     2012      2011  

Net income

   $ 3,841       $ 3,871   

Other comprehensive income:

     

Net unrealized gains on marketable securities, net of tax

     338         1,070   
  

 

 

    

 

 

 

Comprehensive income

   $ 4,179       $ 4,941   
  

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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THE ADVISORY BOARD COMPANY

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Three Months Ended
June 30,
 
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 3,841      $ 3,871   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     4,086        3,124   

Deferred income taxes

     (379     (13

Excess tax benefits from stock-based awards

     (7,875     (869

Stock-based compensation expense

     3,506        2,715   

Amortization of marketable securities premiums

     455        264   

Equity in loss of unconsolidated entity

     2,124        —     

Changes in operating assets and liabilities:

    

Membership fees receivable

     (73,276     (18,449

Prepaid expenses and other current assets

     (6,554     (2,935

Deferred incentive compensation and other charges

     (7,861     (8,249

Deferred revenues

     76,445        24,030   

Accounts payable and accrued liabilities

     10,414        6,713   

Accrued incentive compensation

     (12,042     (8,687

Other long-term liabilities

     5,489        3,223   
  

 

 

   

 

 

 

Net cash (used in) / provided by operating activities

     (1,627     4,738   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (7,694     (6,085

Capitalized external use software development costs

     (834     (594

Acquisition-related earn-out payments

     (788     —     

Redemptions of marketable securities

     —          4,000   

Purchases of marketable securities

     (26,614     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (35,930     (2,679
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of common stock from exercise of stock options

     10,692        5,359   

Withholding of shares to satisfy minimum employee tax withholding for vested restricted stock units

     (3,844     (1,250

Proceeds from issuance of common stock under employee stock purchase plan

     77        57   

Excess tax benefits from stock-based awards

     7,875        869   

Purchases of treasury stock

     (2,999     (2,278
  

 

 

   

 

 

 

Net cash provided by financing activities

     11,801        2,757   
  

 

 

   

 

 

 

Net (decrease) / increase in cash and cash equivalents

     (25,756     4,816   

Cash and cash equivalents, beginning of period

     60,642        30,378   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 34,886      $ 35,194   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated statements.

 

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THE ADVISORY BOARD COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Business description and basis of presentation

The Advisory Board Company (individually and collectively with its subsidiaries, the “Company”) provides best practices research and analysis, business intelligence and software tools, and management and advisory services to hospitals, health systems, pharmaceutical and biotech companies, health care insurers, medical device companies, colleges, universities, and other educational institutions through discrete programs. Members of each program are typically charged a fixed annual fee and have access to an integrated set of services that may include best practices research studies, executive education seminars, customized research briefs, web-based access to the program’s content database, and business intelligence and software tools.

The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes as reported in the Company’s annual report on Form 10-K for the fiscal year ended March 31, 2012. The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of all significant intercompany transactions. Certain prior-period amounts have been reclassified to conform to the current-period presentation.

In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows as of the dates and for the periods presented have been included. The consolidated balance sheet presented as of March 31, 2012 has been derived from the financial statements that have been audited by the Company’s independent registered public accounting firm. The consolidated results of operations for the three months ended June 30, 2012 may not be indicative of the results that may be expected for the Company’s fiscal year ending March 31, 2013, or any other period.

On June 18, 2012, the Company completed a two-for-one split of its outstanding shares of common stock in the form of a stock dividend. Each stockholder of record received one additional share of common stock for each share of common stock owned at the close of business on May 31, 2012. Share numbers and per share amounts presented in the accompanying consolidated financial statements and notes thereto for dates before June 18, 2012 have been restated to reflect the impact of the stock split.

Reclassification

On April 1, 2012, the Company began including amortization expense for intangible assets in depreciation and amortization instead of in cost of services on its consolidated statements of income. Amounts reported for prior years have been reclassified to conform to the current period’s presentation. As a result of this reclassification, amortization expense for intangible assets of $1.2 million and $1.0 million for the three months ended June 30, 2012 and 2011, respectively, is included in depreciation and amortization on the accompanying consolidated statements of income.

Note 2. Recent accounting pronouncements

Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all recent ASUs. ASUs not listed below were assessed and determined to be not applicable or are expected to have minimal impact on the Company’s consolidated financial position and results of operations.

Recently adopted

In June 2011, the FASB amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either a single continuous statement of comprehensive income, or in two separate but consecutive statements. The new guidance eliminates the option to present components of other comprehensive income as part of the statement of equity. The provisions of this new guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted this guidance on April 1, 2012 and has presented consolidated net income and consolidated comprehensive income in two separate, but consecutive, statements. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.

In December 2011, the FASB issued an update which indefinitely defers the guidance related to the presentation of reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income on the face of the financial statements. The update is effective for annual reporting periods beginning on or after December 15, 2011 and interim periods within that fiscal year. The adoption of this guidance did not have a material effect on the Company’s financial position or results of operations.

 

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Note 3. Marketable securities

The aggregate value, amortized cost, gross unrealized gains, and gross unrealized losses on available-for-sale marketable securities are as follows (in thousands):

     As of June 30, 2012  
     Fair
value
     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
 

U.S. government-sponsored enterprises

   $ 43,676       $ 43,537       $ 173       $ 34   

Tax exempt obligations of states

     110,430         108,237         2,857         664   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 154,106       $ 151,774       $ 3,030       $ 698   
  

 

 

    

 

 

    

 

 

    

 

 

 
     As of March 31, 2012  
     Fair
value
     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
 

U.S. government-sponsored enterprises

   $ 33,472       $ 33,543       $ 130       $ 201   

Tax exempt obligations of states

     93,972         92,028         2,667         723   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 127,444       $ 125,571       $ 2,797       $ 924   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes marketable securities maturities (in thousands):

 

     As of June 30, 2012  
     Fair market
value
     Amortized
cost
 

Matures in less than 1 year

   $ 10,307       $ 10,074   

Matures after 1 year through 5 years

     31,009         30,063   

Matures after 5 years through 20 years

     112,790         111,637   
  

 

 

    

 

 

 
   $ 154,106       $ 151,774   
  

 

 

    

 

 

 

Other than redemptions upon maturity, there were no sales during the three months ended June 30, 2012 or 2011. The weighted average maturity on all marketable securities held by the Company as of June 30, 2012 was approximately 6.9 years. Pre-tax net unrealized gains on the Company’s investments of $2.3 million as indicated above were caused by the decrease in market interest rates compared to the average interest rate of the Company’s marketable securities portfolio. Of this amount, $233,000 is related to investments that mature before June 30, 2013. The Company purchased certain of its investments at a premium or discount to their relative fair values. The Company does not intend to sell these investments and it is not more likely than not that it will be required to sell the investments before recovery of the amortized cost bases, which may be maturity; therefore, the Company does not consider these investments to be other-than-temporarily impaired as of June 30, 2012. The Company has reflected the net unrealized gains and losses, net of tax, in accumulated other comprehensive income on the accompanying consolidated balance sheets. The Company uses the specific identification method to determine the cost of marketable securities that are sold.

Note 4. Acquisitions

PivotHealth

On August 1, 2011, the Company acquired for cash substantially all the assets of PivotHealth, LLC (“PivotHealth”), a leading physician practice management firm. The Company acquired PivotHealth to supplement its existing physician practice management capabilities and provide new growth opportunities with the addition of PivotHealth’s expertise in long-term physician practice management. The total purchase price, net of cash acquired, of $19.8 million consisted of an initial payment of $15.0 million of cash; the fair value of estimated additional, contingent cash payments of $2.9 million; and an additional $1.9 million placed into escrow, which will be released through the first anniversary of the acquisition date if and as certain indemnity conditions are satisfied. The contingent cash payments, which have no guaranteed minimum or maximum, will become due and payable to the former owner of the PivotHealth business if certain revenue targets are achieved over the evaluation periods beginning at the acquisition date and

 

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extending through December 31, 2014. A $0.4 million downward adjustment was made to the fair value of the liabilities for such contingent cash payments during the three months ended June 30, 2012. This adjustment was recorded in cost of services on the accompanying consolidated statements of income. See Note 9, “Fair value measurements,” for additional information.

The total purchase price was allocated to the assets acquired, including intangible assets and liabilities assumed, based on their estimated fair values as of August 1, 2011. The Company’s fair value of identifiable tangible and intangible assets was determined by using estimates and assumptions in combination with a valuation using an income approach from a market participant perspective. Of the total estimated purchase price, $1.8 million was allocated to acquired tangible assets, $1.0 million was allocated to assumed liabilities, and $6.4 million was allocated to intangible assets, which consist of the value assigned to customer related intangibles of $6.0 million, primarily customer relationships and trademarks, and employee related intangibles of $0.4 million. The acquired customer and employee related intangibles have estimated lives ranging from six months to nine years based on the cash flow estimates used to create the valuation models of each identifiable asset with a weighted average amortization period of 6.5 years. Approximately $12.6 million was allocated to goodwill, which represents synergistic benefits expected to be generated from scaling PivotHealth’s offerings across the Company’s large membership base. Goodwill is deductible for tax purposes.

The financial results of PivotHealth are included in the Company’s consolidated financial statements from the date of acquisition. Pro forma financial information for this acquisition has not been presented because the effects were not material to the Company’s historical consolidated financial statements.

Note 5. Investment in unconsolidated entity

On August 31, 2011, the Company entered into an agreement with UPMC to establish Evolent Health, Inc. (“Evolent”) for the purpose of driving provider-led, value-driven care with innovative technology, integrated data and analytics, and services. The Company provided $10.0 million and other non-cash contributions to Evolent for an initial equity interest of 44% and the right to appoint one person to Evolent’s board of directors. In addition, a member of the Company’s Board of Directors serves as the chief executive officer for Evolent. As of June 30, 2012, the Company’s equity interest in Evolent was 39%. The Company exercises significant influence over Evolent, but does not control Evolent and is not the primary beneficiary of Evolent’s activities. The Company’s investment in Evolent is accounted for under the equity method of accounting, with the Company’s proportionate share of the income or loss recognized in the consolidated statements of income. This investment will be evaluated for impairment whenever events or changes in circumstances indicate that there may be an other-than-temporary decline in value. The Company believes that no such impairment indicators existed during the three months ended June 30, 2012.

The following is a summary of the financial position of Evolent, as of the dates presented (in thousands):

 

     As of  
     June 30, 2012      March 31, 2012  
     (unaudited)         

Assets:

     

Cash

   $ 10,931       $ 14,807   

Other current assets

     1,446         821   

Intangible assets, net

     2,466         2,755   

Other non-current assets

     1,318         1,152   
  

 

 

    

 

 

 

Total assets

   $ 16,161       $ 19,535   
  

 

 

    

 

 

 

Liabilities and Members’ Equity:

     

Deferred revenue

   $ 1,696       $ 200   

Accounts payable and accrued liabilities

     1,595         669   

Long-term liabilities

     359         359   

Member’s equity

     12,511         18,307   
  

 

 

    

 

 

 

Total liabilities and member’s equity

     16,161         19,535   
  

 

 

    

 

 

 

 

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The following is a summary of the operating results of Evolent for the periods presented (in thousands) (unaudited):

 

     Three Months Ended
June  30,
 
     2012     2011  

Revenue

   $ 70      $ —     

Operating expenses

     (5,217     —     

Depreciation and amortization

     (303     —     

Interest, net

     4        —     
  

 

 

   

 

 

 

Net loss

   $ (5,446   $ —     
  

 

 

   

 

 

 

Note 6. Other non-current assets

In June 2009, the Company invested in the convertible preferred stock of a private company that provides technology tools and support services to health care providers, including the Company’s members. In addition, the Company entered into a licensing agreement with that company. As part of its investment, the Company received warrants to purchase up to 6,015,000 shares of the company’s common stock at an exercise price of $1.00 per share as certain performance criteria are met. The warrants are exercisable through June 19, 2019. The warrants contain a net settlement feature and therefore are considered to be a derivative financial instrument. The warrants are recorded at their fair value, which was $450,000 as of June 30, 2012 and March 31, 2012, and are included in other non-current assets on the accompanying consolidated balance sheets. The change in the fair value of the warrants is recorded in other income, net on the accompanying consolidated statements of income. For additional information regarding the fair value of these warrants, see Note 9, “Fair value measurements.” The convertible preferred stock investment is recorded at cost, and the carrying amount of this investment as of June 30, 2012 of $5.0 million is included in other non-current assets on the accompanying consolidated balance sheets. The convertible preferred stock accrues dividends at an annual rate of 8% that are payable if and when declared by the investee’s board of directors. As of June 30, 2012, no dividends had been declared by the investee or recorded by the Company. This investment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of this asset may not be recoverable. The Company believes that no such impairment indicators existed during the three months ended June 30, 2012 or 2011.

Note 7. Property and equipment

Property and equipment consists of leasehold improvements, furniture, fixtures, equipment, capitalized internal software development costs, and acquired developed technology. Property and equipment is stated at cost, less accumulated depreciation and amortization. In certain of its membership programs, the Company provides software tools under hosting arrangements where the software application resides on the Company’s or its service providers’ hardware. The members do not take delivery of the software and only receive access to the software tools during the term of their membership agreement. Software development costs that are incurred in the preliminary project stage are expensed as incurred. During the development stage, direct consulting costs and payroll- related costs for employees that are directly associated with each project are capitalized and amortized over the estimated useful life of the software once placed into operation. Capitalized software is amortized using the straight-line method over its estimated useful life, which is generally five years. Replacements and major improvements are capitalized, while maintenance and repairs are charged to expense as incurred.

The acquired developed technology is classified as software within property and equipment because the developed software application resides on the Company’s or its service providers’ hardware. Amortization for acquired developed software is included in depreciation and amortization on the Company’s consolidated statements of income. Developed software obtained through acquisitions is amortized over its weighted average estimated useful life of approximately nine years based on the cash flow estimate used to determine the value of the asset.

Furniture, fixtures, and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Leasehold improvements are depreciated using the straight-line method over the shorter of the estimated useful lives of the assets or the lease term. There are no capitalized leases included in property and equipment for the periods presented.

The amount of depreciation expense recognized on plant, property and equipment during the three months ended June 30, 2012 and 2011 was $2.9 million and $1.9 million, respectively.

 

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Internally developed capitalized software is classified as software within property and equipment and has an estimated useful life of five years. As of June 30, 2012 and 2011, the carrying value of internally developed capitalized software is $18.5 million and $9.6 million, respectively. Property and equipment consists of the following (in thousands):

 

     As of  
     June 30,
2012
    March 31,
2012
 

Leasehold improvements

   $ 23,906      $ 23,692   

Furniture, fixtures and equipment

     29,512        26,529   

Software

     47,707        43,211   
  

 

 

   

 

 

 

Property and equipment, gross

     101,125        93,432   

Accumulated depreciation and amortization

     (46,691     (43,779
  

 

 

   

 

 

 

Property and equipment, net

   $ 54,434      $ 49,653   
  

 

 

   

 

 

 

The Company evaluates its long-lived assets for impairment when changes in circumstances exist that suggests the carrying value of a long-lived asset may not be fully recoverable. If an indication of impairment exists, and the Company’s net book value of the related assets is not fully recoverable based upon an analysis of its estimated undiscounted future cash flows, the assets are written down to their estimated fair value. The Company did not recognize any material impairment losses on any of its long-lived assets during the three months ended June 30, 2012 or 2011.

Note 8. Goodwill and intangibles

Included in the Company’s goodwill and intangibles balances are goodwill and acquired intangibles and internally developed capitalized software for sale. Goodwill is not amortized as it has an estimated infinite life. Goodwill is reviewed for impairment at least annually as of March 31, or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company believes that no such impairment indicators existed during the three months ended June 30, 2012 or 2011. There was no impairment of goodwill recorded in the three months ended June 30, 2012 or 2011.

Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives, which range from six months to ten years. As of June 30, 2012, the weighted average remaining useful life of acquired intangibles was approximately 4.7 years. As of June 30, 2012, the weighted average remaining useful life of internally developed intangibles was approximately 4.2 years.

The gross and net carrying balances and accumulated amortization of intangibles are as follows (in thousands):

 

            As of June 30, 2012      As of March 31, 2012  
     Weighted
average
useful life
     Gross
carrying
amount
     Accumulated
amortization
    Net
carrying
amount
     Gross
carrying
amount
     Accumulated
amortization
    Net
carrying
amount
 

Intangibles

                  

Internally developed intangible for sale:

                  

Capitalized software

     5.0       $ 3,882       $ (503   $ 3,379       $ 3,048       $ (380   $ 2,668   

Acquired intangibles:

                  

Developed software

     4.9         6,450         (2,896     3,554         6,450         (2,567     3,883   

Customer relationships

     7.5         11,900         (3,347     8,553         11,900         (2,914     8,986   

Trademarks

     3.7         2,700         (1,731     969         2,700         (1,625     1,075   

Non-compete agreements

     4.3         1,100         (448     652         1,100         (393     707   

Customer contracts

     4.9         5,199         (3,261     1,938         5,199         (3,134     2,065   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total other intangibles

      $ 31,231       $ (12,186   $ 19,045       $ 30,397       $ (11,013   $ 19,384   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense for intangible assets for the three months ended June 30, 2012 and 2011, recorded in depreciation and amortization on the accompanying consolidated statements of income, was approximately $1.2 million and $1.0 million, respectively. The following approximates the anticipated aggregate amortization expense to be recorded in depreciation and amortization on the consolidated statements of income for the remaining nine months of the fiscal year ending March 31, 2013 and for each of the fiscal years ending March 31, 2014 through 2017: $3.5 million, $4.6 million, $4.4 million, $1.6 million, and $1.1 million, respectively, and $2.3 million thereafter.

 

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Note 9. Fair value measurements

Financial assets and liabilities

The estimated fair values of financial instruments are determined based on relevant market information. These estimates involve uncertainty and cannot be determined with precision. The Company’s financial instruments consist primarily of cash, cash equivalents, marketable securities, and common stock warrants. In addition, contingent earn-out liabilities resulting from business combinations are recorded at fair value. The following methods and assumptions are used to estimate the fair value of each class of financial assets or liabilities that are valued on a recurring basis.

Cash and cash equivalents. This includes all cash and liquid investments with an original maturity of three months or less from the date acquired. The carrying amount approximates fair value because of the short maturity of these instruments. Cash equivalents consist of money market funds with original maturity dates of less than three months for which the fair value is based on quoted market prices. The Company’s cash and cash equivalents are held at major commercial banks.

Marketable securities. The Company’s marketable securities, consisting of U.S. government-sponsored enterprise obligations and various state tax-exempt notes and bonds, are classified as available-for-sale and are carried at fair market value based on quoted market prices.

Common stock warrants. The Company holds warrants to purchase common stock in an entity that provides technology tools and support services to health care providers, including the Company’s members, that are exercisable for up to 6,015,000 of the shares of the entity, as certain performance criteria are met. The common stock warrants meet the definition of a derivative and are carried at fair value in other non-current assets on the accompanying consolidated balance sheets. Gains or losses from changes in the fair value of the warrants are recognized in other income, net on the accompanying consolidated statements of income. See Note 6, “Other non-current assets,” for additional information. The fair value of these warrants is determined using a Black-Scholes-Merton model. Key inputs into this methodology are the estimate of underlying value of the common shares of the entity that issued the warrants and the estimate of level of performance criteria that will be achieved. The entity that issued the warrants is private, and the estimate of performance criteria to be met is specific to the Company. These inputs are unobservable and are considered key estimates made by the Company.

Contingent earn-out liabilities. This class of financial liabilities represents the Company’s estimated fair value of the contingent earn-out liabilities related to acquisitions based on probability assessments of certain performance achievements during the earn-out periods. Contingent earn-out liabilities are included in other long-term liabilities on the accompanying consolidated balance sheets. See Note 4, “Acquisitions,” for additional information.

Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The valuation can be determined using widely accepted valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). As a basis for applying a market-based approach in fair value measurements, GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

   

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

   

Level 2—Observable market-based inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

   

Level 3—Unobservable inputs that are supported by little or no market activity, such as discounted cash flow methodologies.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. There were no significant transfers between Level 1, Level 2, or Level 3 during the three months ended June 30, 2012 or 2011.

 

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The Company’s financial assets and liabilities subject to fair value measurements on a recurring basis and the necessary disclosures are as follows (in thousands):

 

                                                                       
    

Fair value

as of June 30,

     Fair value measurement as of June 30, 2012
using fair value hierarchy
 
     2012      Level 1      Level 2      Level 3  

Financial assets

           

Cash and cash equivalents (1)

   $ 34,886       $ 34,886       $ —         $ —     

Available-for-sale marketable securities (2)

     154,106         154,106         —           —     

Common stock warrants (3)

     450        
—  
  
     —           450   

Financial liabilities

           

Contingent earn-out liabilities (4)

     22,900         —           —           22,900   

 

                                                                       
    

Fair value

as of March 31,

     Fair value measurement as of March 31, 2012
using fair value hierarchy
 
     2012      Level 1      Level 2      Level 3  

Financial assets

           

Cash and cash equivalents (1)

   $ 60,642       $ 60,642       $ —         $ —     

Available-for-sale marketable securities (2)

     127,444         127,444         —           —     

Common stock warrants (3)

     450         —           —           450   

Financial liabilities

           

Contingent earn-out liabilities (4)

     20,200         —           —           20,200   

 

(1) Fair value is based on quoted market prices.
(2) Fair value is determined using quoted market prices of the assets. For further detail, see Note 3, “Marketable securities.”
(3) The fair value of the common stock warrants as of June 30, 2012 and March 31, 2012 was calculated to be $0.24 per share using a Black-Scholes-Merton model. The significant assumptions were as follows: risk-free interest rate of 1.1%; expected term of 6.97 years; expected volatility of 41.03%; dividend yield of 0.0%; weighted average exercise price of $1.00 per share; and a range of warrants to become exercisable of between 1,400,000 and 1,800,000 shares.
(4) This fair value measurement is based on unobservable inputs that are supported by little or no market activity and reflect the Company’s own assumptions in measuring fair value using the income approach. In developing these estimates, the Company considered certain performance projections, historical results, and general macro-economic environment and industry trends.

Contingent earn-out liabilities

The Company entered into an earn-out agreement in connection with its acquisition of Southwind Health Partners, L.L.C. and Southwind Navigator, LLC (together, “Southwind”) on December 31, 2009. The additional contingent payments, which have no guaranteed maximum, will become due and payable to the former owner of the Southwind business if certain milestones are met over the evaluation periods beginning at the acquisition date and extending through December 31, 2014. The Company’s fair value estimate of the Southwind earn-out liability was $5.6 million as of the date of acquisition. As of June 30, 2012, based on current facts and circumstances, the estimated aggregate fair value of this contingent obligation has increased to $18.8 million, which will be paid at various intervals, if earned, over the evaluation periods beginning on the acquisition date and extending through December 31, 2014. The fair value of the Southwind earn-out liability is impacted by changes in estimates regarding expected operating results, changes in the valuation of the Company’s stock price, and an applied discount rate which was 14.0% as of June 30, 2012. As of June 30, 2012, $2.7 million had been earned and paid to the former owners. The final amount paid will be made in a combination of cash and/or the Company’s common stock.

The Company entered into an earn-out agreement in connection with its acquisition of substantially all the assets of Cielo MedSolutions, LLC (“Cielo”) on February 1, 2011. The additional contingent payments, which will not exceed $7.0 million, become due and payable to the former owner of the Cielo business if certain product development and subscription milestones are met over the evaluation periods beginning at the acquisition date and extending through July 31, 2012. The Company’s fair value estimate of the Cielo earn-out liability, which is payable in cash, was $4.4 million as of the date of acquisition. The estimated aggregate fair value of the remaining contingent obligation for Cielo as of June 30, 2012 was $1.4 million. The fair value of the Cielo earn-out liability is impacted by estimates regarding the level of performance targets to be achieved and a discount rate, which was 14.5% as of June 30, 2012. As of June 30, 2012, $3.0 million has been earned and paid to the former owners.

The Company’s fair value estimate of the PivotHealth earn-out liability, which is payable in cash, was $2.9 million as of the date of acquisition. The estimated aggregate fair value of the contingent obligation for PivotHealth as of June 30, 2012 was $2.7 million. The fair value of the PivotHealth earn-out liability is impacted by changes in estimates regarding expected operating results and a discount rate, which was 15.0% as of June 30, 2012. See Note 4, “Acquisitions” for additional information regarding the PivotHealth acquisition and related earn-out liability.

 

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Changes in the fair value of the contingent earn-out liabilities subsequent to the acquisition date, including changes arising from events that occurred after the acquisition date, such as changes in the Company’s estimate of performance achievements, discount rates, and stock price, are recognized in earnings in the periods when the estimated fair value changes. The following table represents a reconciliation of the change in the contingent earn-out liabilities for the three months ended June 30, 2012 and 2011 (in thousands):

 

     As of June 30,  
     2012     2011  

Beginning balance

   $ 20,200      $ 15,500   

Fair value change in Southwind contingent earn-out liability (1)

     3,800        3,200   

Fair value change in Cielo contingent earn-out liability (1)

     100        —     

Fair value change in PivotHealth contingent earn-out liability (1)

     (400     —     

Southwind earn-out payment

     (800     —     
  

 

 

   

 

 

 

Ending balance

   $ 22,900      $ 18,700   
  

 

 

   

 

 

 

 

(1) Amounts were recognized in cost of services on the accompanying consolidated statements of income.

Non-financial assets and liabilities

Certain assets and liabilities are not measured at fair value on an ongoing basis but instead are measured at fair value on a non-recurring basis; that is, such assets and liabilities are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment). During the three months ended June 30, 2012 and 2011, no fair value adjustments or material fair value measurements were required for non-financial assets or liabilities.

Note 10. Stock-based compensation

Information with respect to common stock options granted under the Company’s stock incentive plans during the three months ended June 30, 2012 and 2011 are as follows:

 

     Three Months Ended June 30,  
     2012      2011  
     Number of
Options
    Weighted
Average
Exercise
Price
     Number of
Options
    Weighted
Average
Exercise
Price
 

Outstanding, beginning of quarter

     3,812,228      $ 17.04         5,059,198      $ 16.30   

Granted

     347,760        43.83         511,412        24.25   

Exercised

     (686,760     15.57         (373,742     14.35   

Forfeited

     (4,500     9.26         —          —     

Cancellations

     —          —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Outstanding, end of quarter

     3,468,728      $ 20.03         5,196,868      $ 17.22   
  

 

 

   

 

 

    

 

 

   

 

 

 

Exercisable, end of quarter

     1,872,038      $ 17.26        

The weighted average fair value of the options granted during the three months ended June 30, 2012 is estimated at $13.32 per share on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 0.7%, an expected life of approximately four years, volatility of 37.26%, and dividend yield of 0% over the expected life of the option.

 

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The following table summarizes the changes in restricted stock units (“RSUs”) granted under the Company’s stock incentive plans during the three months ended June 30, 2012 and 2011:

 

     Three Months Ended June 30,  
     2012      2011  
     Number of
RSUs
    Weighted
Average
Grant
Date
Fair
Value
     Number of
RSUs
    Weighted
Average
Grant
Date
Fair
Value
 

Non-vested, beginning of quarter

     896,640      $ 20.77         664,218      $ 17.34   

Granted

     297,872      $ 43.86         439,996      $ 24.24   

Forfeited

     (2,904   $ 22.75         —          —     

Vested

     (273,444   $ 46.19         (144,972   $ 25.56   
  

 

 

      

 

 

   

Non-vested, end of quarter

     918,164      $ 27.97         959,242      $ 20.68   
  

 

 

      

 

 

   

The Company recognized stock-based compensation expense in the following consolidated statements of income line items for stock options and RSUs, for the three months ended June 30, 2012 and 2011 (in thousands, except per share amounts):

 

     Three Months Ended
June 30,
 
     2012     2011  

Stock-based compensation expense included in:

    

Costs and expenses:

    

Cost of services

   $ 1,004      $ 843   

Member relations and marketing

     678        501   

General and administrative

     1,824        1,371   

Depreciation and amortization

     —          —     
  

 

 

   

 

 

 

Total costs and expenses

   $ 3,506      $ 2,715   
  

 

 

   

 

 

 

Operating income

   $ (3,506   $ (2,715
  

 

 

   

 

 

 

Net income

   $ (2,163   $ (1,697
  

 

 

   

 

 

 

Impact on diluted earnings per share

   $ (0.06   $ (0.05
  

 

 

   

 

 

 

There are no stock-based compensation costs capitalized as part of the cost of an asset.

As of June 30, 2012, $34.0 million of total unrecognized compensation cost related to stock-based compensation was expected to be recognized over a weighted average period of 1.6 years.

Note 11. Discontinued operations

On January 20, 2012, the Company sold its OptiLink business to Kronos Incorporated (“Kronos”) for $8.9 million in cash, net of selling costs. The OptiLink business, which is headquartered in a suburb of Portland, Oregon, employed approximately 35 employees who transferred to Kronos. The components of discontinued operations included in the consolidated statements of income consisted of (in thousands):

     Three Months
Ended June 30,
 
     2012      2011  

Revenue

   $ —         $ 1,678   

Costs and expenses:

     

Cost of services

     —           1,136   

Member relations and marketing

     —           100   

Depreciation and amortization

     —           177   
  

 

 

    

 

 

 

Income from discontinued operations before provision for income taxes

     —           265   

Provision for income taxes

     —           (100
  

 

 

    

 

 

 

Net income from discontinued operations, net of provision for income taxes

   $ —         $ 165   
  

 

 

    

 

 

 

 

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Note 12. Earnings per share

Basic earnings per share is computed by dividing net income attributable to common stockholders by the number of weighted average common shares outstanding during the period. Diluted earnings per share is computed by dividing net income attributable to common stockholders by the number of weighted average common shares increased by the dilutive effects of potential common shares outstanding during the period. The number of potential common shares outstanding is determined in accordance with the treasury stock method, using the Company’s prevailing tax rates. Certain potential common share equivalents were not included in the computation because their effect was anti-dilutive. Fully diluted shares outstanding for both the three months ended June 30, 2012 and 2011 includes 112,408 contingently issuable shares related to the component of the Southwind earn-out estimated to be settled in stock. For additional information regarding these shares, see Note 9, “Fair value measurements.”

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

 

     Three Months Ended June 30,  
     2012      2011  

Basic weighted average common shares outstanding

     34,179         32,236   

Effect of dilutive outstanding stock-based awards

     1,763         1,446   

Dilutive impact of earn-out liability

     112         112   
  

 

 

    

 

 

 

Diluted weighted average common shares outstanding

     36,054         33,794   
  

 

 

    

 

 

 

In the three months ended June 30, 2012 and 2011, 0.3 million and 0.5 million shares, respectively, related to share-based compensation awards have been excluded from the calculation of the effect of dilutive outstanding stock-based awards shown above because their effect was anti-dilutive.

Note 13. Income taxes

The Company uses a more-likely-than-not recognition threshold based on the technical merits of the tax position taken for the financial statement recognition and measurement of a tax position. If a tax position does not meet the more-likely-than-not initial recognition threshold, no benefit is recorded in the financial statements. The Company does not currently anticipate that the total amounts of unrecognized tax benefits will significantly change within the next 12 months. The Company classifies interest and penalties on any unrecognized tax benefits as a component of the provision for income taxes. No interest or penalties were recognized in the consolidated statements of income for the three months ended June 30, 2012 or 2011. The Company files income tax returns in U.S. federal and state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, and local tax examinations for filings in major tax jurisdictions before 2005.

Note 14. Stockholders’ equity

During the three months ended June 30, 2012 and 2011, the Company repurchased 62,837 and 88,072 shares, respectively, of its common stock at a total cost of approximately $3.0 million and $2.3 million, respectively, pursuant to its share repurchase program. The total amount of common stock purchased from inception under the program as of June 30, 2012 was 15,327,617 shares at a total cost of $325.9 million. All repurchases to date have been made in the open market. No minimum number of shares subject to repurchase has been fixed and the share repurchase authorization has no expiration date. The Company has funded, and expects to continue to fund, its share repurchases with cash on hand, proceeds from the sale of marketable securities, and cash generated from operations. As of June 30, 2012, the remaining authorized repurchase amount was $24.1 million.

During the three months ended June 30, 2012, the Company retired 13,327,617 shares of its treasury stock. Upon retirement, these shares resumed the status of authorized but unissued stock. The treasury stock retirement resulted in reductions to common stock of $67,000, treasury stock of $292.8 million, and retained earnings of $292.7 million. A total of 15,327,617 shares of treasury stock have been retired to date. There was no effect on the total stockholders’ equity position as a result of the retirement.

On May 1, 2012, the Company’s Board of Directors approved a two-for-one split of the Company’s common stock to be effected in the form of a stock dividend. As a result of this action, one additional share was issued on June 18, 2012 for each share held by stockholders of record at the close of business on May 31, 2012. The stock split did not have an impact on the Company’s consolidated financial position or results of operations. Share and per share amounts presented in the accompanying consolidated financial statements for dates before June 18, 2012 have been restated to reflect the impact of the stock split.

Note 15. Subsequent events

On July 5, 2012, the Company entered into an agreement with an entity created for the sole purpose of providing supply chain cost reduction consulting services to the Company on an exclusive basis. The Company’s relationship with the entity is governed by a services agreement and other documents which provide the entity’s owners the conditional right to require the Company to purchase

 

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their ownership interests at any time after certain conditions have been satisfied through December 31, 2014. These agreements also provide the Company a conditional right to require the entity’s owners to sell their ownership interests to the Company at any time between July 5, 2013 and December 31, 2014.

On July 30, 2012, the Company entered into an agreement with JPMorgan Chase Bank, N.A. serving as an administrative agent for a syndicate of commercial banks for a $150 million senior secured revolving credit facility that matures in July 2017. The credit facility will bear interest at an annual rate calculated, at the Company’s option, on the basis of either (a) an alternate base rate plus the applicable margin for alternate base rate loans under the credit agreement, which ranges from 0.75% to 1.50% based on the Company’s total leverage ratio, or (b) an adjusted LIBO rate plus the applicable margin for eurocurrency loans under the credit agreement, which ranges from 1.75% to 2.50% based on the Company’s total leverage ratio. On July 30, 2012, the applicable margin for alternate base rate loans was 0.75% and the applicable margin for eurocurrency loans was 1.75%. As of the date of this report, there were no amounts outstanding under the credit facility and $150 million was available for borrowing thereunder.

 

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

Unless the context indicates otherwise, references in this report to the “Company,” the “registrant,” “we,” “our,” and “us” mean The Advisory Board Company and its subsidiaries.

Our fiscal year ends on March 31. Fiscal 2013 is our fiscal year ending on March 31, 2013.

This management’s discussion and analysis of financial condition and results of operations includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the “Exchange Act.” Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as “may,” “will,” “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” or “intends” and similar expressions. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the results, performance, or achievements expressed or implied by the forward-looking statements, including the factors discussed under “Item 1A. Risk Factors” in our annual report on Form 10-K for the fiscal year ended March 31, 2012, or the “2012 Form 10-K,” filed with the Securities and Exchange Commission, or “SEC.” We undertake no obligation to update any forward-looking statements, whether as a result of circumstances or events that arise after the date the statements are made, new information, or otherwise.

Executive Overview

We provide best practices research and analysis, business intelligence and software tools, and management and advisory services to approximately 3,700 organizations, including hospitals, health systems, pharmaceutical and biotech companies, health care insurers, medical device companies, colleges, universities, and other educational institutions through discrete programs. Members of each program typically are charged a fixed fee and have access to an integrated set of services that may include best practice research studies, executive education seminars, customized research briefs, web-based access to the program’s content database, and software tools.

Our three key areas of focus for fiscal 2013 are to continue to deliver world-class programs that drive significant returns for our members and ensure member loyalty through outstanding value delivery; to make select investments to capture the unique opportunities presented by current health care market conditions, through developing and launching new programs and acquiring products, services, and technologies that improve performance for our members; and to attract, develop, engage, and retain world-class talent across our organization. Success in all of these areas requires very strong execution across our business, and we have a heavy focus on setting each team up to manage against and attain high goals in each area of our operations.

Our membership business model allows us to create value for our members by providing proven solutions to common and complex problems as well as quality content on a broad set of relevant issues. Our growth has been driven by strong renewal rates, ongoing addition of new memberships in our existing programs, continued new program launches, acquisition activity, and continued annual price increases. We believe high renewal rates are a reflection of our members’ recognition of the value they derive from participating in our programs. Our revenue grew 30.3% in the three months ended June 30, 2012 over the prior year period. Our contract value increased 25.8% to $411.6 million as of June 30, 2012 from $327.1 million as of June 30, 2011. We define contract value as the aggregate annualized revenue attributed to all agreements in effect at a particular date, without regard to the initial term or remaining duration of any such agreement.

Our operating costs and expenses consist of cost of services, member relations and marketing, general and administrative expenses, and depreciation and amortization expenses. Cost of services includes the costs associated with the production and delivery of our products and services, consisting of compensation for research personnel, in-house faculty, software developers, and consultants; the organization and delivery of membership meetings, teleconferences, and other events; production of published materials; technology license fees; and costs of developing and supporting our web-based content and business intelligence and software tools. Member relations and marketing includes the costs of acquiring new members and the costs of account management, consisting of compensation, including sales incentives; travel and entertainment expenses; training of personnel; sales and marketing materials; and associated support services. General and administrative expenses include the costs of human resources and recruiting, finance and accounting, management information systems, facilities management, new program development, and other administrative functions. Depreciation and amortization expense includes the cost of depreciation of our property and equipment, amortization of costs associated with the development of software and tools that are offered as part of certain of our membership programs, and amortization of acquired developed technology. Included in our operating costs for each period presented are stock-based compensation expenses and expenses representing additional payroll taxes for compensation expense as a result of the taxable income employees recognized upon the exercise of common stock options and the vesting of restricted stock units.

 

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Critical Accounting Policies

Our accounting policies, which are in compliance with U.S. generally accepted accounting principles, or “GAAP,” require us to apply methodologies, estimates, and judgments that have a significant impact on the results we report in our financial statements. In our 2012 Form 10-K, we have discussed those material accounting policies that we believe are critical and require the use of complex judgment in their application. There have been no material changes to our policies since our last fiscal year ended March 31, 2012.

Non-GAAP Financial Presentation

This management’s discussion and analysis presents supplemental measures of our performance which are derived from our consolidated financial information but which are not presented in our consolidated financial statements prepared in accordance with GAAP. These financial measures, which are considered “non-GAAP financial measures” under SEC rules, are referred to as adjusted EBITDA, adjusted net income, and non-GAAP earnings per diluted share. See “Non-GAAP Financial Measures” below for definitions of such non-GAAP financial measures and reconciliations of each non-GAAP financial measure to the most directly comparable GAAP financial measure.

Results of Operations

The following table shows statements of income data expressed as a percentage of revenue for the periods indicated:

 

     Three Months Ended
June 30,
 
     2012     2011  

Revenue

     100.0     100.0

Costs and expenses:

    

Cost of services

     56.0     54.0

Member relations and marketing

     18.4     22.4

General and administrative

     12.9     13.5

Depreciation and amortization

     4.0     3.7
  

 

 

   

 

 

 

Total costs and expenses

     91.3     93.6
  

 

 

   

 

 

 

Operating income

     8.7     6.4

Other income, net

     0.6     1.0
  

 

 

   

 

 

 

Income from continuing operations before provision for income taxes and equity in loss of unconsolidated entity

     9.3     7.4

Provision for income taxes

     (3.6 )%      (2.8 )% 

Equity in loss of unconsolidated entity

     (2.0 )%      —  
  

 

 

   

 

 

 

Net income from continuing operations

     3.7     4.6

Discontinued operations:

    

Net income from discontinued operations

     —       0.2
  

 

 

   

 

 

 

Net income

     3.7     4.8
  

 

 

   

 

 

 

Three months ended June 30, 2012 compared to the three months ended June 30, 2011

Overview. Net income decreased to $3.8 million in the three months ended June 30, 2012 from $3.9 million in the three months ended June 30, 2011. The decrease in net income was primarily attributable to an increase of $15.2 million in cost of services incurred for new and growing programs. The decrease also reflected the impact of, increases of $1.3 million in marketing and member relations due to increased sales teams, increases of $2.7 million in general and administrative expenses related to increases in finance, information technology, and human resources expense incurred to support our growing employee base, an increase of $1.1 million in depreciation and amortization, and our $2.1 million proportionate share of the net loss of Evolent Health, or “Evolent,” which we established in the second quarter of fiscal 2012. The effect of these factors was partially offset by a 30.3% increase in revenues during the quarter.

Adjusted Net Income and Adjusted EBITDA. Adjusted net income increased 34.4% to $11.1 million in the three months ended June 30, 2012 from $8.2 million in the three months ended June 30, 2011, and adjusted EBITDA increased 42.8% to $20.2 million in the three months ended June 30, 2012 from $14.1 million in the three months ended June 30, 2011. The increases in adjusted net income and adjusted EBITDA were due to increased revenue, the effect of which was partially offset by the costs of new and growing programs, increased investment in our general and administrative infrastructure to support our growing employee base, and an increase in the number of new sales teams.

 

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Revenue. Total revenue increased 30.3% to $104.1 million in the three months ended June 30, 2012 from $79.9 million in the three months ended June 30, 2011, while contract value increased 25.8% to $411.6 million as of June 30, 2012 from $327.1 million as of June 30, 2011. The increases in revenue and contract value were primarily attributable to the introduction and expansion of new programs, including our August 1, 2011 acquisition of PivotHealth, LLC, or “PivotHealth,” our cross-selling of existing programs to existing members, and, to a lesser degree, price increases. We offered 54 membership programs as of June 30, 2012 and 50 membership programs as of June 30, 2011.

Cost of services. Cost of services increased to $58.4 million in the three months ended June 30, 2012 from $43.2 million in the three months ended June 30, 2011. As a percentage of revenue, cost of services was 56.0% for the three months ended June 30, 2012 and 54.0% for the three months ended June 30, 2011. The increase of $15.2 million in cost of services for the three months ended June 30, 2012 was primarily due to growth and expansion of our Crimson and Southwind programs, including our 2011 acquisition of PivotHealth. Also affecting costs of services were costs associated with the delivery of program content and tools to our expanded membership base, including increased staffing, licensing fees, and other costs.

Member relations and marketing. Member relations and marketing expense increased 6.9% to $19.1 million in the three months ended June 30, 2012 from $17.9 million in the three months ended June 30, 2011. As a percentage of revenue, member relations and marketing expense in the three months ended June 30, 2012 and 2011 was 18.4% and 22.4%, respectively. The increases in member relations and marketing expense were primarily attributable to an increase in sales staff and related travel and other associated costs, as well as to an increase in member relations personnel and related costs required to serve our expanding membership base. During the three months ended June 30, 2012 and 2011, we had an average of 162 and 145 new business development teams, respectively.

General and administrative. General and administrative expense increased to $13.5 million in the three months ended June 30, 2012 from $10.8 million in the three months ended June 30, 2011. As a percentage of revenue, general and administrative expense decreased to 12.9% in the three months ended June 30, 2012 from 13.5% in the three months ended June 30, 2011. The increase of $2.7 million in general and administrative costs for the three months ended June 30, 2012 was primarily attributable to an increase in share-based compensation of $0.5 million and increased costs incurred to improve our finance, human resources, information technology, and facility operations infrastructure to support our growing employee base and number of office locations.

Depreciation and amortization. Depreciation expense increased to $4.1 million, or 4.0% of revenue, in the three months ended June 30, 2012, from $2.9 million, or 3.7% of revenue, in the three months ended June 30, 2011. The increase in depreciation and amortization was primarily due to increased amortization expense from developed capitalized internal-use software tools, the PivotHealth acquisition, and to a lesser extent, depreciation on our newly renovated Austin, Texas office and on an expansion floor of our Washington, D.C. headquarters.

Other income, net. Other income, net decreased to $0.6 million in the three months ended June 30, 2012 from $0.8 million in the three months ended June 30, 2011. Other income, net consists of interest income and foreign exchange rate gains and losses. Higher average cash and investment balances contributed to an increase in interest income to $0.8 million in the three months ended June 30, 2012 from $0.6 million in the three months ended June 30, 2011. We recognized foreign exchange losses of $0.2 million and foreign exchange gains of $0.2 million during the three months ended June 30, 2012 and 2011, respectively, as a result of the effect of fluctuating currency rates on our receivable balances denominated in foreign currencies.

Provision for income taxes. Our provision for income taxes was $3.7 million and $2.2 million in the three months ended June 30, 2012 and 2011, respectively. Our effective tax rate in the three months ended June 30, 2012 was 38.3% compared to 37.5% in the three months ended June 30, 2011. The increase in our effective tax rate for the three months ended June 30, 2012 was primarily due to the effect that higher estimated net income for fiscal year 2013, compared to our net income for fiscal year 2012, has on our effective rate when compared to the fixed nature of our Washington, D.C. tax credits that we receive under the New E-conomy Transformation Act of 2000.

Equity in loss of unconsolidated entity. Our proportionate share of the losses of Evolent during the three months ended June 30, 2012 was $2.1 million. We did not recognize a comparable loss in the prior year period, as Evolent was formed on August 31, 2011.

Income from discontinued operations, net of tax. On January 20, 2012, we sold substantially all of the assets of OptiLink. As a result, the net income generated by OptiLink in the three months ended June 30, 2011 has been presented as discontinued operations.

 

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Stock-based compensation expense. We recognized the following stock-based compensation expense in the consolidated statements of income line items for stock options and restricted stock units issued under our stock incentive plans for the three months ended June 30, 2012 (in thousands, except per share amounts):

 

     Three Months Ended
June 30,
 
     2012     2011  

Stock-based compensation expense included in:

    

Costs and expenses:

    

Cost of services

   $ 1,004      $ 843   

Member relations and marketing

     678        501   

General and administrative

     1,824        1,371   

Depreciation and amortization

     —          —     
  

 

 

   

 

 

 

Total costs and expenses

   $ 3,506      $ 2,715   
  

 

 

   

 

 

 

Operating income

   $ (3,506   $ (2,715
  

 

 

   

 

 

 

Net income

   $ (2,163   $ (1,697
  

 

 

   

 

 

 

Impact on diluted earnings per share

   $ (0.06   $ (0.05
  

 

 

   

 

 

 

There are no stock-based compensation costs capitalized as part of the cost of an asset.

As of June 30, 2012, $34.0 million of total unrecognized compensation cost related to stock-based compensation was expected to be recognized over a weighted average period of 1.6 years.

Non-GAAP Financial Measures

The tables below present information for the periods indicated about our adjusted EBITDA, adjusted net income, and non-GAAP earnings per diluted share. We define “adjusted EBITDA” as net income before equity in loss of unconsolidated entity; provision for income taxes from continuing operations; discontinued operations, net of tax; other income, net, which includes interest income and foreign currency losses and gains; depreciation and amortization; acquisition and similar transaction charges; fair value adjustments to acquisition-related earn-out liabilities; and share-based compensation expense. We define “adjusted net income” as net income excluding the net of tax effect of equity in loss of unconsolidated entity; discontinued operations; amortization of acquisition-related intangibles; acquisition and similar transaction charges; fair value adjustments to acquisition-related earn-out liabilities; and share-based compensation expense. We define “non-GAAP earnings per diluted share” as net income per share excluding the net of tax effect of equity in loss of unconsolidated entity; discontinued operations; amortization of acquisition-related intangibles; acquisition and similar transaction charges; fair value adjustments made to our acquisition-related earn-out liabilities; and share-based compensation expense. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Presentation” in our 2012 Form 10-K for our reasons for including these financial measures in this report and for a description of material limitations with respect to the usefulness of such measures.

A reconciliation of adjusted EBITDA, adjusted net income, and non-GAAP earnings per diluted share to the most directly comparable GAAP financial measures is provided below (in thousands, except per share data).

 

     Three Months Ended
June 30,
 
     2012     2011  

Net income

   $ 3,841      $ 3,871   

Equity in loss of unconsolidated entity

     2,124        —     

Provision for income taxes from continuing operations

     3,702        2,224   

Discontinued operations, net of tax

     —          (165

Other income, net

     (576     (797

Depreciation and amortization

     4,086        2,947   

Acquisition and similar transaction charges

     —          144   

Fair value adjustments to acquisition-related earn-out liabilities

     3,500        3,200   

Share-based compensation expense

     3,506        2,715   
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 20,183      $ 14,138   
  

 

 

   

 

 

 

 

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     Three Months Ended
June 30,
 
     2012      2011  

Net income

   $ 3,481       $ 3,871   

Equity in loss of unconsolidated entity

     2,124         —     

Discontinued operations, net of tax

     —           (165

Amortization of acquisition-related intangibles, net of tax

     790         750   

Acquisition and similar transaction charges, net of tax

     —           90   

Fair value adjustments to acquisition-related earn-out liabilities, net of tax

     2,160         2,000   

Share-based compensation, net of tax

     2,163         1,697   
  

 

 

    

 

 

 

Adjusted net income

   $ 11,078       $   8,242   
  

 

 

    

 

 

 

 

     Three Months Ended
June 30,
 
     2012      2011  

GAAP earnings per diluted share

   $ 0.11       $ 0.11   

Equity in loss of unconsolidated entity

     0.06         —     

Discontinued operations, net of tax

     —           (0.01

Amortization of acquisition-related intangibles, net of tax

     0.02         0.02   

Acquisition and similar transaction charges, net of tax

     —           0.01   

Fair value adjustments to acquisition-related earn-out liabilities, net of tax

     0.06         0.06   

Share-based compensation, net of tax

     0.06         0.05   
  

 

 

    

 

 

 

Non-GAAP earnings per diluted share

   $     0.31       $     0.24   
  

 

 

    

 

 

 

Liquidity and Capital Resources

Cash flows generated from operating activities are our primary source of liquidity. We believe that existing cash, cash equivalents, and marketable securities balances and operating cash flows will be sufficient to support operating and capital expenditures, as well as share repurchases, during at least the next 12 months. We had cash, cash equivalents, and marketable securities balances of $189.0 million and $188.1 million as of June 30, 2012 and March 31, 2012, respectively. We expended $3.0 million and $2.3 million in cash to purchase shares of our common stock through our share repurchase program during the three months ended June 30, 2012 and 2011, respectively. We have no long-term indebtedness.

Cash flows from operating activities. The combination of revenue growth, profitable operations, and payment for memberships in advance of accrual revenue typically results in operating activities that generate cash flows in excess of net income on an annual basis. Cash flows from operating activities fluctuate from quarter to quarter based on the timing of new and renewal contracts as well as certain expenses, and the first quarter of our fiscal year typically provides the lowest quarterly cash flows from operations. Net cash flows used in operating activities were $1.6 million in the three months ended June 30, 2012, compared to net cash flows provided by operating activities of $4.7 million in the three months ended June 30, 2011. The decrease in net cash flows provided by operating activities during the current period was primarily due to larger annual employee bonus payments made during the three months ended June 30, 2012 resulting from strong fiscal 2012 performance as well as the accelerated timing of member payments between the fourth quarter of fiscal 2012 and the first quarter of fiscal 2013.

Cash flows from investing activities. Our cash management and investment strategy and capital expenditure programs affect investing cash flows. Net cash flows used in investing activities were $35.9 million and $2.7 million in the three months ended June 30, 2012 and 2011, respectively. Investing activities during the three months ended June 30, 2012 consisted of the net purchases of marketable securities of $26.6 million, capital expenditures of $8.5 million, and acquisition-related earn-out payments of $0.8 million. Investing activities during the three months ended June 30, 2011 consisted primarily of capital expenditures of $6.7 million, partially offset by proceeds on the redemption and sales of marketable securities of $4.0 million.

Cash flows from financing activities. We had net cash flows provided by financing activities of $11.8 million and $2.8 million in the three months ended June 30, 2012 and 2011, respectively. Financing activities during the three months ended June 30, 2012 primarily consisted of $10.7 million from the issuance of common stock upon the exercise of stock options and $7.9 million in additional tax benefits related to share-based compensation arrangements, offset in part by the repurchase of shares under our

 

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repurchase program. Financing activities during the three months ended June 30, 2011 primarily consisted of $5.4 million from the issuance of common stock upon the exercise of stock options, offset in part by share repurchase activity. We repurchased 62,837 shares at a total cost of approximately $3.0 million and 88,072 shares at a total cost of approximately $2.3 million in the three months ended June 30, 2012 and 2011, respectively, pursuant to our share repurchase program. In the three months ended June 30, 2012 and 2011, we withheld $3.8 million and $1.3 million in shares, respectively, to satisfy the minimum employee tax withholding for certain vested restricted stock units.

Revolving credit facility. On July 30, 2012, we obtained a $150.0 million five-year senior secured revolving credit facility under a credit agreement, dated as of July 30, 2012, with the lenders party thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent, and the other agents party thereto.

Under the revolving credit facility, up to $150.0 million principal amount of borrowings and other credit extensions may be outstanding at any time. The facility loans may be borrowed, repaid and reborrowed from time to time during the term of the facility and will mature and be payable in full on July 30, 2017. At our election, and upon our satisfaction of specified conditions, the maximum principal amount available under the credit agreement may be increased by up to an additional $50.0 million in minimum increments of $10.0 million, which may be made available by increasing the revolving loan commitments or by our entry into one or more tranches of term loans. The credit agreement contains a sublimit for up to $5.0 million principal amount of swing line loans outstanding at any time and a sublimit for the issuance of up to $10.0 million of letters of credit outstanding at any time.

The revolving credit facility was undrawn at the facility closing date of July 30, 2012. As of the date of this report, there were no amounts outstanding under the credit facility and $150.0 million was available for borrowing thereunder. We may use the proceeds of borrowings under the facility, when drawn, to finance working capital needs and for general corporate purposes, including permitted acquisitions.

Amounts drawn under the revolving credit facility generally will bear interest at an annual rate calculated, at our option, on the basis of either (a) an alternate base rate plus the applicable margin for alternate base rate loans under the credit agreement, which ranges from 0.75% to 1.50% based on our total leverage ratio, or (b) an adjusted LIBO rate plus the applicable margin for eurocurrency loans under the credit agreement, which ranges from 1.75% to 2.50% based on our total leverage ratio. We are required to pay a commitment fee on the unutilized portion of the facility at an annual rate of between 0.25% and 0.40% based on our total leverage ratio. The interest rate on the alternate base rate loans will fluctuate as the base rate fluctuates, while the interest rate on the eurocurrency loans will be adjusted at the end of each applicable interest period. At the facility closing date, the applicable margin for alternate base rate loans was 0.75% and the applicable margin for eurocurrency loans was 1.75%. Interest on alternate base rate loans will be payable quarterly in arrears, while interest on eurocurrency loans will be payable at the end of each applicable interest period, which may be one, two, three or six months, except that, in the case of a six-month interest period, interest will be payable at the end of each three-month period.

The Advisory Board Company is the borrower under the revolving credit facility. All of The Advisory Board Company’s obligations under the facility are and will be guaranteed by certain of our existing and future domestic subsidiaries. Our obligations and the obligations of each subsidiary guarantor under the facility are and will be secured by first-priority liens on, and first-priority security interests in, substantially all of our assets, including a pledge of some or all of the capital stock of each of our domestic subsidiaries held by such loan party.

The revolving credit facility contains customary negative covenants restricting certain actions that may be taken by us and our subsidiaries. Subject to specified exceptions, these covenants limit our ability and the ability of our subsidiaries to incur indebtedness, create liens on their assets, pay cash dividends, repurchase our common stock and make other restricted payments, make investments or loans to other parties, sell assets, engage in mergers and acquisitions, enter into transactions with affiliates, and change their business. The facility also contains customary affirmative covenants, including, among others, covenants requiring compliance with laws, maintenance of corporate existence, licenses, properties and insurance, payment of taxes and performance of other material obligations, and delivery of financial and other information to the lenders under the credit agreement.

We are required under the credit agreement to satisfy the following three financial ratios, each of which will be measured for us and our subsidiaries on a consolidated basis as of the end of each fiscal quarter ending on and after September 30, 2012 for the period of four consecutive fiscal quarters ending with the end of each such fiscal quarter:

 

   

a maximum total leverage ratio, under which the ratio of consolidated total indebtedness to consolidated earnings before interest, taxes, depreciation, amortization and other items specified in the credit agreement (“EBITDA”) may not be greater than 3.50 to 1.00;

 

   

a maximum senior secured leverage ratio, under which the ratio of consolidated total secured indebtedness to consolidated EBITDA may not be greater than 2.50 to 1.00; and

 

   

a minimum interest coverage ratio, under which the ratio of consolidated EBITDA to consolidated interest expense may not be less than 3.00 to 1.00.

 

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Consolidated EBITDA as defined in the credit agreement may not be computed in the same manner in which we define “adjusted EBITDA” from time to time for purposes of reports we file with the SEC and present in our other publicly available financial disclosures.

Contractual Obligations

Our 2012 Form 10-K discloses certain commitments and contractual obligations that existed as of March 31, 2012. Our December 2009 acquisition of Southwind Health Partners, L.L.C. and Southwind Navigator, LLC included a contingent obligation to make additional cash and/or common stock payments if certain milestones were met. As of June 30, 2012, based on current facts and circumstances, we have increased the estimated aggregate fair value of this contingent obligation to $18.8 million, which will be paid at various intervals, if earned, over evaluation periods beginning on the acquisition date and extending through December 31, 2014. As of June 30, 2012, $2.7 million has been earned and paid to the former owners.

Our February 2011 acquisition of substantially all of the assets of Cielo MedSolutions, LLC (“Cielo”) included a contingent obligation to make additional cash payments if certain milestones were met. As of June 30, 2012, based on current facts and circumstances, we have estimated the aggregate fair value of the remaining contingent obligation at $1.4 million, which will be paid at various intervals if certain subscription milestones are met over the evaluation periods beginning at the acquisition date extending through July 31, 2012. As of June 30, 2012, the portion of the contingent payments relating to the product development milestones had been finalized and a total of approximately $3.0 million had been earned and paid to the former owner of the Cielo business.

Our August 2011 acquisition of PivotHealth included a contingent obligation to make additional cash payments if certain revenue targets were achieved over evaluation periods beginning at the acquisition date and extending through December 31, 2014. As of June 30, 2012, the estimated aggregate fair value of the contingent obligation for PivotHealth was $2.7 million.

Off-Balance Sheet Arrangements

As of June 30, 2012, we had no off-balance sheet financing or other arrangements with unconsolidated entities or financial partnerships (such as entities often referred to as structured finance or special purpose entities) established for purposes of facilitating off-balance sheet financing or other debt arrangements or for other contractually limited purposes.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest rate risk. We are exposed to interest rate risk primarily through our portfolio of cash, cash equivalents, and marketable securities, which is designed for safety of principal and liquidity. Cash and cash equivalents include investments in highly liquid U.S. Treasury obligations with maturities of less than three months. As of June 30, 2012, our marketable securities consisted of $110.4 million in tax-exempt notes and bonds issued by various states and $43.7 million in U.S. government-sponsored enterprise securities. The weighted average maturity on all our marketable securities as of June 30, 2012 was approximately 6.9 years. We perform periodic evaluations of the relative credit ratings related to our cash, cash equivalents, and marketable securities. Our portfolio is subject to inherent interest rate risk as investments mature and are reinvested at current market interest rates. We currently do not use derivative financial instruments to adjust our portfolio risk or income profile. Because of the nature of our investments, we have not prepared quantitative disclosure for interest rate sensitivity in accordance with Item 305 of the SEC’s Regulation S-K, as we believe the effect of interest rate fluctuations would not be material.

Foreign currency risk. Our international operations, which account for approximately 3% of our revenue, subject us to risks related to currency exchange fluctuations. Prices for our services sold to members located outside the United States are sometimes denominated in local currencies (primarily British Pound Sterling). As a consequence, increases in the value of the U.S. dollar against local currencies in countries where we have members would result in a foreign exchange loss recognized by us. We recorded foreign currency exchange losses of $0.2 million during the three months ended June 30, 2012 and gains of $0.2 million during the three months ended June 30, 2011, which are included in other income, net in our consolidated statements of income. A hypothetical 10% change in foreign currency exchange rates would not have had a material impact on our financial position as of June 30, 2012.

Item 4. Controls and Procedures.

Our Chief Executive Officer, or “CEO,” and Chief Financial Officer, or “CFO,” have evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this quarterly report as required by Rule 13a-15(b) or 15d-15(b) under the Exchange Act.

 

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Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Based on their evaluation, such officers have concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures were effective.

During the period covered by this quarterly report, there have been no changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1A. Risk Factors.

As discussed in this report, our actual results could differ materially from the results expressed or implied in our forward-looking statements. Except for the risk factor shown below, there have been no material changes in the risk factors from those described in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2012. The risk factor shown below is provided in connection with the $150 million five-year senior secured revolving credit facility that we obtained on July 30, 2012 and that is described in this report under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Covenants under our credit agreement may restrict our future operations.

Our senior secured credit facility imposes operating and financial restrictions that may limit our discretion on some business matters, which could make it more difficult for us to expand, finance our operations, acquire other businesses, and engage in other business activities that may be in our interest. The credit facility contains customary negative covenants that limit our ability and the ability of our subsidiaries to incur indebtedness, create liens on our assets, pay cash dividends, repurchase our common stock and make other restricted payments, make investments or loans to other parties, sell assets, engage in mergers and acquisitions, enter into transactions with affiliates, and change our business. In addition, the credit agreement requires us to comply with or maintain a maximum total leverage ratio, a maximum senior secured leverage ratio, and a minimum interest coverage ratio. We may incur indebtedness in addition to the $150 million of revolving credit indebtedness we may incur from time to time under our credit facility. Any additional indebtedness we may incur in the future may subject us to similar or even more restrictive conditions.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

In January 2004, our board of directors authorized the repurchase by us from time to time of up to $50 million of our common stock. That authorization was increased in cumulative amount to $100 million in October 2004, to $150 million in February 2006, to $200 million in January 2007, to $250 million in July 2007, and to $350 million in April 2008. All repurchases have been made in the open market pursuant to this publicly announced repurchase program. No minimum number of shares has been fixed, and the share repurchase authorization has no expiration date. A summary of the share repurchase activity for our first quarter of fiscal 2013 follows:

 

     Total Number of
Shares Purchased
     Average Price
Paid Per Share
     Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
     Approximate
Dollar Value of
Shares That May
Yet Be Purchased
Under the Plan
 

April 1 to April 30, 2012

     —         $ —           —         $ 27,090,521   

May 1 to May 31, 2012

     42,510       $ 47.03         42,510       $ 25,091,239   

June 1 to June 30, 2012

     20,327       $ 49.19         20,327       $ 24,091,298   
  

 

 

       

 

 

    

Total

     62,837       $ 47.73         62,837      
  

 

 

       

 

 

    

As of June 30, 2012, we had repurchased a total of 15,327,617 shares under our repurchase program since the program’s inception.

Item 6. Exhibits.

(a) Exhibits:

 

      3.1    Certificate of Incorporation of The Advisory Board Company (the “Company”), as amended. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2011.
      3.2    Amended and Restated Bylaws of the Company. Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission (the “Commission”) on November 14, 2007.
      4.1    Form of Common Stock Certificate. Incorporated by reference to Exhibit 4.1 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 filed with the Commission on October 29, 2001.
    31.1    Certification of the Chief Executive Officer pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934, as amended.
    31.2    Certification of the Chief Financial Officer pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934, as amended.
    32.1    Certifications pursuant to 18 U.S.C. Section 1350.

 

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*101    XBRL (Extensible Business Reporting Language). The following materials from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2012, formatted in XBRL: (i) Consolidated Balance Sheets as of June 30, 2012 (unaudited) and March 31, 2012, (ii) Unaudited Consolidated Statements of Income for the Three Months Ended June 30, 2012 and 2011, (iii) Unaudited Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2012 and 2011, and (iv) Notes to Unaudited Consolidated Financial Statements.

 

* As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  THE ADVISORY BOARD COMPANY
Date: August 9, 2012   By:  

/s/ Michael T. Kirshbaum

    Michael T. Kirshbaum
    Chief Financial Officer and Treasurer
    (Duly Authorized Officer)

 

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Table of Contents

INDEX TO EXHIBITS

 

Exhibit

Number

  

Description of Exhibit

    31.1    Certification of the Chief Executive Officer pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934, as amended
    31.2    Certification of the Chief Financial Officer pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934, as amended
    32.1    Certifications pursuant to 18 U.S.C. Section 1350
*101    XBRL (Extensible Business Reporting Language). The following materials from the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2011, formatted in XBRL: (i) Consolidated Balance Sheets as of December 31, 2011 (unaudited) and March 31, 2011, (ii) Unaudited Consolidated Statements of Income for the Three and Nine Months Ended December 31, 2011 and 2010, (iii) Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2011 and 2010, and (iv) Notes to Unaudited Consolidated Financial Statements.

 

* As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

27

XNAS:ABCO The Advisory Board Co Quarterly Report 10-Q Filling

The Advisory Board Co XNAS:ABCO Stock - Get Quarterly Report SEC Filing of The Advisory Board Co XNAS:ABCO stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNAS:ABCO The Advisory Board Co Quarterly Report 10-Q Filing - 6/30/2012
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