Gartner 10-K 2017
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Commission file number: 1-14443
(Exact name of registrant as specified in its charter)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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:
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of June 30, 2016, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $7,771,510,947 based on the closing sale price as reported on the New York Stock Exchange.
The number of shares outstanding of the registrant’s common stock was 82,652,880 as of January 31, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
2016 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
ITEM 1. BUSINESS.
Gartner, Inc. (“Gartner”) (NYSE: IT) is the world’s leading information technology ("IT") research and advisory company. We deliver the technology-related insight necessary for our clients to make the right decisions, every day. From CIOs and senior IT leaders in corporations and government agencies, to business leaders in high-tech and telecom enterprises and professional services firms, to supply chain professionals, marketing professionals and technology investors, we are a valuable partner to clients. As of December 31, 2016, we had clients in 11,122 distinct enterprises. We work with clients to research, analyze and interpret the business of IT, supply chain, and marketing within the context of their individual roles. Founded in 1979, Gartner is headquartered in Stamford, Connecticut, U.S.A., and as of December 31, 2016, had 8,813 employees, including 1,922 research analysts and consultants, and clients in over 90 countries.
The foundation for all Gartner products and services is our independent research on IT, supply chain, and digital marketing initiatives. The findings from this research are delivered through our three business segments – Research, Consulting and Events:
For more information regarding Gartner and our products and services, visit gartner.com. References to “the Company,” “we,” “our,” and “us” are to Gartner, Inc. and its consolidated subsidiaries.
Technological innovations are changing how businesses and other organizations plan and operate and at an increasingly rapid pace. Today, everyone is living and working in the midst of a technological revolution in which technology is seen as increasingly driving organizational strategies rather than just supporting them. The nexus of four powerful forces – social, mobile, cloud and information, coupled with the "Internet of things" – are blurring the line between the physical and digital worlds, creating unprecedented change on a scale not seen before facing every organization around the world, from business enterprises and units within enterprises of every size, to governments and government agencies, as well as other organizations. The rate and pace of technology innovation and change is rapid. Trends such as digital, cloud, the "Internet of things," and cyber-security threats are creating unprecedented change for every organization around the world, from business enterprises and units within business enterprises of every size, across every vertical industry (including governments, public sector, and not-for-profit), and in every major geography. We believe this technology revolution will remain vibrant for decades to come.
Information technology is critical to supporting increased productivity, service and performance improvement, revenue growth, and protecting the enterprise from cyber-security threats. As the costs of IT solutions continue to rise, executives and professionals have realized the importance of making well-informed decisions and increasingly seek to maximize their returns on IT capital investments. As a result, every IT investment decision in an enterprise is subject to increased financial scrutiny, especially in the current challenging economic climate. In addition, today’s IT marketplace is dynamic and complex. Technology providers continually introduce new products with a wide variety of standards and features that are prone to shorter life cycles. Users of technology – a group that encompasses nearly all organizations – must keep abreast of new developments in technology to ensure that their IT systems are reliable, efficient, secure, and meet both their current and future needs. Given the strategic and critical nature of technology decision-making and spending, business enterprises, governments and their agencies, and other organizations turn to Gartner for guidance in order to make the right decisions to maximize the value of their IT investments.
We provide our clients with the insight they need to understand where – and how – to successfully harness technology to achieve their mission critical priorities. We employ a diversified business model that utilizes and leverages the breadth and depth of our intellectual capital. The foundation of our business model is our ability to create and distribute our proprietary research content as broadly as possible via published reports, interactive tools, facilitated peer networking, briefings, consulting and advisory services, and our events, including the Gartner Symposium/ITxpo series.
We had 1,294 analysts as of December 31, 2016 located around the world who create compelling, relevant, independent and objective research and fact-based analysis on every major IT initiative and all aspects of the IT industry, including supply chain and digital marketing initiatives. Through our robust product portfolio, our global research team provides thought leadership and technology insights that CIOs, supply chain professionals, marketing professionals, executives and other technology practitioners need to make the right decisions, every day. In addition to our analysts, as of December 31, 2016 we had 628 experienced consultants who combine our objective, independent research with a practical business perspective focused on the IT industry. Finally, our events are the largest of their kind, gathering together highly qualified audiences that include CIOs and other IT executives, frontline IT architects and professionals, supply chain leaders, marketing leaders, and purchasers and providers of technology and supply chain products and services.
PRODUCTS AND SERVICES
Our diversified business model provides multiple entry points and sources of value for our clients that facilitate increased client spending on our research, consulting services and events. A critical part of our long-term strategy is to increase business volume and penetration with our most valuable clients, identifying relationships with the greatest sales potential and expanding those relationships by offering strategically relevant research and advice. We also seek to extend the Gartner brand name to develop new client relationships, augment our sales capacity, and expand into new markets around the world. In addition, we seek to increase our revenue and operating cash flow through more effective pricing of our products and services. These initiatives have created additional revenue streams through more effective packaging, campaigning and cross-selling of our products and services.
Our principal products and services are delivered through our Research, Consulting and Events businesses:
Consulting solutions capitalize on Gartner assets that are invaluable to IT decision making, including: (1) our extensive research, which ensures that our consulting analyses and advice are based on a deep understanding of the IT environment and the business of IT; (2) our market independence, which keeps our consultants focused on our clients' success; and (3) our market-leading benchmarking capabilities, which provide relevant comparisons and best practices to assess and improve performance. Gartner Consulting provides solutions to CIOs and other IT executives, and to those professionals responsible for IT applications, enterprise architecture, go-to-market strategies, infrastructure and operations, program and portfolio management, and sourcing and vendor relationships. Consulting also provides targeted consulting services to professionals in specific industries. Finally, we provide actionable solutions for IT cost optimization, technology modernization and IT sourcing optimization initiatives.
Gartner Summit events focus on specific topics or roles, providing IT professionals with the insight, solutions, and peer networking opportunities to succeed in their job role. Our Catalyst conferences are the premier events for front-line IT technical professionals and architects. Our Supply Chain and Digital Marketing conferences are the premier gatherings for senior supply chain and marketing leaders.
We believe that the principal factors that differentiate us from our competitors are the following:
Notwithstanding these differentiating factors, we face competition from a significant number of independent providers of information products and services. We compete indirectly with consulting firms and other information providers, including electronic and print media companies. These indirect competitors could choose to compete directly with us in the future. In addition, we face competition from free sources of information that are available to our clients through the Internet. Limited barriers to entry exist in the markets in which we do business. As a result, new competitors may emerge and existing competitors may start to provide additional or complementary services. While we believe the breadth and depth of our research assets position us well versus our competition, increased competition could result in loss of market share, diminished value in our products and services, reduced pricing, and increased sales and marketing expenditures.
Our success has resulted in part from proprietary methodologies, software, reusable knowledge capital and other intellectual property rights. We rely on a combination of patent, copyright, trademark, trade secret, confidentiality, non-compete and other contractual provisions to protect our intellectual property rights. We have policies related to confidentiality, ownership, and the use and protection of Gartner’s intellectual property. We also enter into agreements with our employees as appropriate that protect our intellectual property, and we enforce these agreements if necessary. We recognize the value of our intellectual property in the marketplace and vigorously identify, create and protect it. Additionally, we actively monitor and enforce contract compliance by our end users.
We had 8,813 employees as of December 31, 2016, an increase of 13% compared to the prior year as we continued to invest for future growth. We had 1,327 employees located at our headquarters facility in Stamford, Connecticut and a nearby office in Trumbull, Connecticut; 1,160 employees located at our Ft. Myers, Florida offices; and 2,550 employees located elsewhere in the United States in 36 other offices. We had 3,776 employees located outside of the United States in 67 offices at December 31, 2016, with 932 of those employees located in Egham, the United Kingdom. Our employees may be subject to collective bargaining agreements at a company or industry level, or works councils, in those foreign countries where this is part of the local labor law or practice. We have experienced no work stoppages and consider our relations with our employees to be favorable.
On January 5, 2017, Gartner and CEB Inc. (NYSE: CEB) ("CEB"), an industry leader in providing best practice and talent management insights, announced that they had entered into a definitive agreement whereby Gartner will acquire all of the outstanding shares of CEB in a cash and stock transaction valued at approximately $2.6 billion. Gartner will also assume (and refinance) approximately $0.9 billion in CEB debt. For additional information, see Note 16 — Subsequent Events in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Our Internet address is www.gartner.com and the Investor Relations section of our website is located at www.investor.gartner.com. We make available free of charge, on or through the Investor Relations section of our website, printable copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”).
Also available at www.investor.gartner.com, under the “Corporate Governance” link, are printable and current copies of our (i) CEO & CFO Code of Ethics which applies to our Chief Executive Officer, Chief Financial Officer, Controller and other financial managers, (ii) Global Code of Conduct, which applies to all Gartner officers, directors and employees, wherever located, (iii) Board Principles and Practices, the corporate governance principles that have been adopted by our Board and (iv) charters for each of the Board’s standing committees: Audit, Compensation and Governance/Nominating.
ITEM 1A. RISK FACTORS
We operate in a highly competitive and rapidly changing environment that involves numerous risks and uncertainties, some of which are beyond our control. In addition, we and our clients are affected by global economic conditions and trends. The following sections discuss many, but not all, of the risks and uncertainties that may affect our future performance, but is not intended to be all-inclusive. Any of the risks described below could have a material adverse impact on our business, prospects, results of operations, financial condition, and cash flows, and could therefore have a negative effect on the trading price of our common stock. Additionally risks not currently known to us or that we now deem immaterial may also harm us and negatively affect your investment.
Risks related to our proposed merger with CEB Inc.
We may not complete the proposed transaction with CEB within the timeframe we anticipate or at all, which could have a negative effect on our results of operations. On January 5, 2017, we announced together with CEB Inc. (NYSE: CEB) ("CEB") that we entered into a definitive agreement whereby we will acquire all of the outstanding shares of CEB in a cash and stock transaction valued at approximately $2.6 billion. We will also assume and refinance approximately $0.9 billion of CEB debt. The transaction has been unanimously approved by the Boards of Directors of both companies. Closing of the transaction is subject to the approval of CEB shareholders and the satisfaction of customary closing conditions. The transaction is also subject to other risks and uncertainties, such as the possibility that CEB could receive an unsolicited proposal from a third party or that either we or CEB could exercise our respective termination rights. If the transaction is not consummated or is materially delayed for any reason, we will have spent considerable time and resources, and incurred substantial costs related to the merger, many of which must be paid even if the merger is not consummated. We cannot provide any assurance that the transaction will be consummated, that there will not be a delay in the consummation of the merger, or that all or any of the anticipated benefits and cost synergies of the transaction will be obtained. If the merger is not consummated, our reputation in our industry and in the investment community could be damaged, and the market price of our common stock could decline.
We may not be able to obtain our preferred form of financing to consummate the merger, and the terms of the financing may be less favorable to us than expected, depending on market conditions. There is no financing condition under the merger agreement, which means that if the conditions to closing are otherwise satisfied or waived, we are obligated to consummate the merger whether or not we have sufficient funds to pay the consideration under the merger agreement. We currently intend to finance the cash portion of the merger consideration, repay and redeem certain outstanding indebtedness of CEB and its subsidiaries and pay related fees and expenses in connection with the merger using a combination of new term loans, proceeds from the issuance of debt securities (or, to extent such debt securities are not issued, borrowings under a high-yield bridge credit facility), borrowings under a 364-day credit facility, borrowings under our existing revolving credit facility, and cash on hand.
Although we have obtained debt commitments from certain lenders in connection with our financing plan, such commitment is subject to a number of conditions and we cannot provide any assurances that we will be able to close the financing as anticipated. In addition, although the debt commitment letter for the financing specifies a number of terms for the different facilities, we retain some exposure to changes in pricing and other terms based on market conditions at the time the financing is consummated, which could result in less favorable terms for the financing than expected. The terms of the expected issuance of debt securities are not committed, and the pricing and terms of such debt securities may be less favorable than expected. If terms for the debt financing are less favorable than expected, financing costs could increase, potentially significantly, and our financing or operating flexibility may be constrained. In addition, the short tenor of the 364-day credit facility, together with duration fees, pricing step-ups and other terms of the 364-day credit facility and high-yield bridge credit facility (if drawn), provide significant economic incentive for us to refinance those facilities, which could result in us accessing the market at a less favorable time than we would otherwise choose. If we cannot close on any element of our financing plan, we will need to pursue other financing options, which may result in less favorable financing terms that could increase costs and/or materially adversely affect the credit rating or financing and operating flexibility of the combined company.
If the merger agreement is terminated, we may, under certain circumstances, be obligated to pay a termination fee to CEB. These costs could require us to use available cash that would have otherwise been available for general corporate purposes. If the merger agreement is terminated in certain circumstances, we would be required to pay CEB a reverse termination fee of $125.0 million. If the merger agreement is terminated, we may decide to pay the termination fee from available cash that we would have otherwise used for general corporate purposes. For these and other reasons, a failed merger could materially adversely affect our business, operating results, financial condition and cash flows, or the price per share of our common stock.
We may experience difficulties in integrating our operations with CEB's and realizing the expected benefits of the transaction with CEB. The success of the transaction with CEB, if consummated, will depend in part on our ability to realize the anticipated business opportunities and growth prospects from combining with CEB in an efficient and effective manner. We may never realize these business opportunities and growth prospects. Further, our management might have its attention diverted while trying to integrate operations and corporate and administrative infrastructures. CEB will continue to operate independently of us until the consummation of the transaction. The integration process could take longer than anticipated and could result in the loss of key employees, the disruption of each company’s ongoing businesses, tax costs or inefficiencies, or inconsistencies in standards, controls, information technology systems, procedures and policies, any of which could materially adversely affect our ability to maintain relationships with customers, employees or other third parties, or our ability to achieve the anticipated benefits of the transaction, and could harm our financial performance. If we are unable to successfully or timely integrate the operations of CEB’s business with our business, we may incur unanticipated liabilities and be unable to realize the revenue growth, synergies and other anticipated benefits resulting from the proposed transaction, and our business, results of operations and financial condition could be materially adversely affected.
Risks related to our business
Our operating results could be negatively impacted by global economic conditions. Our business is impacted by general economic conditions and trends, in the United States and abroad. Global economic growth, including in the United States, has been subdued in recent years and there is concern this trend will continue in 2017. Terrorist attacks around the world and significant political shifts, such as the change in U.S. political leadership, have added additional uncertainty and risks to the economic environment. These trends and conditions could negatively and materially affect future demand for our products and services in general, in certain geographic regions, or in particular industry sectors. Such difficulties could include the ability to maintain client retention, wallet retention and consulting utilization rates, achieve contract value and consulting backlog growth, attract attendees and exhibitors to our events or obtain new clients. Such developments could negatively impact our financial condition, results of operations, and cash flows.
We face significant competition and our failure to compete successfully could materially adversely affect our results of operations, financial condition, and cash flows. We face direct competition from a significant number of independent providers of information products and services, including information available on the Internet free of charge. We also compete indirectly against consulting firms and other information providers, including electronic and print media companies, some of which may have greater financial, information gathering and marketing resources than we do. These indirect competitors could also choose to compete directly with us in the future. In addition, low barriers to entry exist in the markets in which we do business. As a result, new competitors may emerge and existing competitors may start to provide additional or complementary services. Additionally, technological advances may provide increased competition from a variety of sources.
There can be no assurance that we will be able to successfully compete against current and future competitors and our failure to do so could result in loss of market share, diminished value in our products and services, reduced pricing and increased marketing expenditures. Furthermore, we may not be successful if we cannot compete effectively on quality of research and analysis, timely delivery of information, customer service, and the ability to offer products to meet changing market needs for information and analysis, or price.
We may not be able to maintain the quality of our existing products and services. We operate in a rapidly evolving market, and our success depends upon our ability to deliver high quality and timely research and analysis to our clients. Any failure to continue to provide credible and reliable information that is useful to our clients could have a material adverse effect on future business and operating results. Further, if our published data, opinions or viewpoints prove to be wrong or are not substantiated by appropriate research, our reputation may suffer and demand for our products and services may decline. In addition, we must continue to improve our methods for delivering our products and services in a cost-effective manner via the Internet and mobile applications. Failure to maintain state of the art electronic delivery capabilities could materially adversely affect our future business and operating results.
We may not be able to enhance and develop our existing products and services, or introduce the new products and services that are needed to remain competitive. The market for our products and services is characterized by rapidly changing needs for information and analysis on the IT industry as a whole. The development of new products is a complex and time-consuming process. Nonetheless, to maintain our competitive position, we must continue to anticipate the needs of our client organizations, develop, enhance and improve our existing as well as new products and services to address those needs, deliver all products and services in a timely, user-friendly and state of the art manner, and appropriately position and price new products and services relative to the marketplace and our costs of developing them. Any failure to achieve successful client acceptance of new products and services could have a material adverse effect on our business, results of operations and financial position. Additionally,
significant delays in new product or service releases or significant problems in creating new products or services could materially adversely affect our business, results of operations and financial position.
Technology is rapidly evolving, and if we do not continue to develop new product and service offerings in response to these changes, our business could suffer. Disruptive technologies are rapidly changing the environment in which we, our clients, and our competitors operate. We will need to continue to respond to these changes by enhancing our product and service offerings in order to maintain our competitive position. However, we may not be successful in responding to these forces and enhance our products on a timely basis, and any enhancements we develop may not adequately address the changing needs of our clients. Our future success will depend upon our ability to develop and introduce in a timely manner new or enhanced existing offerings that address the changing needs of this constantly evolving marketplace. Failure to develop products that meet the needs of our clients in a timely manner could have a material adverse effect on our business, results of operations, and financial position.
We depend on renewals of subscription-based services and sales of new subscription-based services for a significant portion of our revenue, and our failure to renew at historical rates or generate new sales of such services could lead to a decrease in our revenues. A large portion of our success depends on our ability to generate renewals of our subscription-based research products and services and new sales of such products and services, both to new clients and existing clients. These products and services constituted approximately 75% and 73% of our total revenues for 2016 and 2015, respectively. Generating new sales of our subscription-based products and services, both to new and existing clients, is a challenging, costly, and often time consuming process. If we are unable to generate new sales, due to competition or other factors, our revenues will be adversely affected.
Our research subscription contracts are typically for 12-months or longer. Our ability to maintain contract renewals is subject to numerous factors, including the following:
Additionally, as we continue to adjust our products and service offerings to meet our clients’ continuing needs, we may shift the type and pricing of our products which may impact client renewal rates. While our Research client retention rate was 84% at both December 31, 2016 and 2015, there can be no guarantee that we will continue to maintain this rate of client renewals.
We depend on non-recurring consulting engagements and our failure to secure new engagements could lead to a decrease in our revenues. Consulting segment revenues constituted 14% of our total revenues in 2016 and 15% in 2015. Consulting engagements typically are project-based and non-recurring. Our ability to replace consulting engagements is subject to numerous factors, including the following:
Any material decline in our ability to replace consulting engagements could have an adverse impact on our revenues and our financial condition. In addition, revenue from our contract optimization business can fluctuate significantly from period to period and is not predictable.
The profitability and success of our conferences, symposia and events could be adversely affected by external factors beyond our control. The market for desirable dates and locations for conferences, symposia and events is highly competitive. If we cannot secure desirable dates and suitable venues for our conferences, symposia and events their profitability could suffer, and our financial condition and results of operations may be adversely affected. In addition, because our events are scheduled in advance and held at specific locations, the success of these events can be affected by circumstances outside of our control, such as labor strikes, transportation shutdowns and travel restrictions, economic slowdowns, reductions in government spending, geo-political crises, terrorist attacks, war, weather, natural disasters, communicable diseases, and other occurrences impacting the global, regional, or national economies, the occurrence of any of which could negatively impact the success of the event. We also face the challenge of procuring venues that are sizeable enough at a reasonable cost to accommodate some of our major events.
Our sales to governments are subject to appropriations and may be terminated. We derive significant revenues from research and consulting contracts with the United States government and its respective agencies, numerous state and local governments and their respective agencies, and foreign governments and their agencies. At December 31, 2016 and 2015, approximately $355.0 million and $345.0 million, respectively, of our total contracts were attributable to government entities. Our U.S. government contracts are subject to the approval of appropriations by the U.S. Congress to fund the agencies contracting for our services. Additionally, our contracts at the state and local levels, as well as foreign government contracts, are subject to various governmental authorizations and funding approvals and mechanisms. In general, most if not all of these contracts may be terminated at any time without cause or penalty (“termination for convenience”). Similarly, contracts with U.S. federal, state and local, and foreign governments and their respective agencies are subject to increasingly complex bidding procedures, compliance requirements and intense competition. Should appropriations for the governments and agencies that contract with us be curtailed, or should our government contracts be terminated for convenience, we may experience a significant loss of revenues.
We may not be able to attract and retain qualified personnel which could jeopardize our future growth plans, as well as the quality of our products and services. Our success depends heavily upon the quality of our senior management, research analysts, consultants, sales and other key personnel. We face competition for qualified professionals from, among others, technology companies, market research firms, consulting firms, financial services companies and electronic and print media companies, some of which have a greater ability to attract and compensate these professionals. Additionally, some of the personnel that we attempt to hire are subject to non-compete agreements that could impede our short-term recruitment efforts. Any inability to retain key personnel, or to hire and train additional qualified personnel to support the evolving needs of clients or the projected growth in our business, could materially adversely affect the quality of our products and services, as well as future business and operating results.
We may not be able to maintain the equity in our brand name. We believe that our “Gartner” brand, including our independence, is critical to our efforts to attract and retain clients and that the importance of brand recognition will increase as competition increases. We may expand our marketing activities to promote and strengthen the Gartner brand and may need to increase our marketing budget, hire additional marketing and public relations personnel, and expend additional sums to protect our brand and otherwise increase expenditures to create and maintain client brand loyalty. If we fail to effectively promote and maintain the Gartner brand, or incur excessive expenses in doing so, our future business and operating results could be materially adversely impacted.
Our international operations expose us to a variety of operational and other risks which could negatively impact our future revenue and growth. We have clients in over 90 countries and a substantial amount of our revenue is earned outside of the United States. Our operating results are subject to the risks inherent in international business activities, including general political and economic conditions in each country, changes in market demand as a result of tariffs and other trade barriers, challenges in staffing and managing foreign operations, changes in regulatory requirements, compliance with numerous foreign laws and regulations, and the difficulty of enforcing client agreements, collecting accounts receivable and protecting intellectual property rights in international jurisdictions. Furthermore, we rely on local distributors or sales agents in some international locations. If any of these arrangements are terminated by our agent or us, we may not be able to replace the arrangement on beneficial terms or on a timely basis, or clients of the local distributor or sales agent may not want to continue to do business with us or our new agent.
Our business and operations may be conducted in countries where corruption has historically penetrated the economy. It is our policy to comply, and to require our local partners and those with whom we do business to comply, with all applicable anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act and U.K. Bribery Act, and with applicable local laws of the foreign countries in which we operate. Our business and reputation may be adversely affected if we fail to comply with such laws.
We are exposed to volatility in foreign currency exchange rates from our international operations. For the years ended December 31, 2016 and 2015, 42% and 41%, respectively, of our revenues were derived from sales outside of the United States. Revenues earned outside the U.S. are typically transacted in local currencies, which may fluctuate significantly against the U.S. dollar. While we may use forward exchange contracts to a limited extent to seek to mitigate foreign currency risk, our revenues and results of operations could be adversely affected by unfavorable foreign currency fluctuations. Additionally, our effective tax rate is increased as the U.S dollar strengthens against foreign currencies, which could impact our operating results.
Natural disasters, terrorist acts, war, and other geo-political events could disrupt our business. We operate in numerous U.S. and international locations, and we have offices in a number of major cities across the globe. A major weather event, earthquake, flood, drought, volcanic activity, disease, or other catastrophic natural disaster could significantly disrupt our operations. In addition, acts of civil unrest, failure of critical infrastructure, terrorism, armed conflict, war, and abrupt political change, as well as responses by various governments and the international community to such acts, can have a negative effect on our business. Such events could cause delays in initiating or completing sales, impede delivery of our products and services to our clients, disrupt or shut down the Internet or other critical client-facing and business processes, impede the travel of our personnel and clients, dislocate our critical internal functions and personnel, and in general harm our ability to conduct normal business operations, any of which
can negatively impact our financial condition and operating results. Such events could also impact the timing and budget decisions of our clients, which could materially adversely affect our business.
Privacy concerns could damage our reputation and deter current and potential clients from using our products and services or attending our events. Concerns relating to global data privacy have the potential to damage our reputation and deter current and prospective clients from using our products and services or attending our events. In the ordinary course of our business and in accordance with applicable laws, we collect personal information (i) from our employees (ii) from the users of our products and services, including event attendees; and (iii) from prospective clients. We collect only basic personal information from our clients and prospects (name, email address, job title) and do not as a rule collect sensitive personal information like the social security numbers used in the United States. While we may collect credit card numbers on a limited basis from some clients to facilitate payment, we do not store such numbers. Even if unfounded, concerns about our practices with regard to the collection, use, disclosure, or security of this personal information or other data privacy related matters could damage our reputation and materially adversely affect our operating results. In addition, because many of our products and services are web-based, the amount of data we store on our servers (including personal information) has been increasing. Any systems failure or compromise of our security that results in the disclosure of our users’ personal data could seriously limit the consumption of our products and services and the attendance at our events, as well as harm our reputation and brand and, therefore, our business.
In addition, while we had been a Safe Harbor certified company for a number of years, and while we have implemented a company-wide privacy compliance program, regulatory authorities around the world continue to adopt new laws, regulations and penalties concerning data privacy. Most recently, the European Commission adopted the EU-US Privacy Shield framework (which, as of the date of this report, has undergone a number of legal challenges as to its validity), and the European Parliament formally adopted the General Data Protection Regulation (“GDPR”) which will become effective in May 2018. We are closely monitoring these legal developments and are working towards timely GDPR compliance. In the meantime, Gartner will continue to maintain and rely upon our comprehensive global data privacy compliance program and robust processes to safeguard our associates’ and clients' personal data. The interpretation and application of these laws in the United States, the European Union and elsewhere are often uncertain, inconsistent and ever changing. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data privacy practices. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.
Internet and critical internal computer system failures, cyber-attacks, or compromises of our systems or security could damage our reputation and harm our business. A significant portion of our business is conducted over the Internet and we rely heavily on computer systems to conduct our operations. Individuals, groups, and state-sponsored organizations may take steps that pose threats to our operations, our computer systems, our employees, and our customers. They may develop and deploy malicious software to gain access to our networks and attempt to steal confidential information, launch distributed denial of service attacks, or attempt other coordinated disruptions. These threats are constantly evolving and becoming more sophisticated, thereby increasing the difficulty of detecting and successfully defending against them. A cyber-attack, widespread Internet failure or Internet access limitations, or disruption of our critical information technology systems through denial of service, viruses, or other events could cause delays in initiating or completing sales, impede delivery of our products and services to our clients, disrupt other critical client-facing or business processes, or dislocate our critical internal functions. Such events could significantly harm our ability to conduct normal business operations and negatively impact our financial results.
We take steps to secure our management information systems, including our computer systems, intranet, proprietary websites, email and other telecommunications and data networks, and we carefully scrutinize the security of outsourced website and service providers prior to retaining their services. However, the security measures implemented by us or by our outside service providers may not be effective and our systems (and those of our outside service providers) may be vulnerable to theft, loss, damage and interruption from a number of potential sources and events, including unauthorized access or security breaches, cyber-attacks, computer viruses, power loss, or other disruptive events. Our reputation, brand, financial condition and operating results could be materially adversely affected if, as a result of a significant cyber event or other technology-related catastrophe, our operations are disrupted or shutdown; our confidential, proprietary information is stolen or disclosed; we incur costs or are required to pay fines in connection with stolen customer, employee, or other confidential information; we are required to dedicate significant resources to system repairs or increase cyber security protection; or we otherwise incur significant litigation or other costs as a result of these occurrences.
We may experience outages and disruptions of our online services if we fail to maintain an adequate operations infrastructure. Our increasing user traffic and complexity of our products and services demand more computing power. We have spent and expect to continue to spend substantial amounts to maintain data centers and equipment, to upgrade our technology and network infrastructure to handle increased traffic on our websites, and to deliver our products and services through emerging channels, such as mobile applications. However, any inefficiencies or operational failures could diminish the quality of our products, services,
and user experience, resulting in damage to our reputation and loss of current and potential users, subscribers, and advertisers, potentially harming our financial condition and operating results.
Our outstanding debt obligations could impact our financial condition or future operating results. We have a credit arrangement that provides for a five-year, $600.0 million term loan and a $1.2 billion secured five year revolving credit facility (the “2016 Credit Agreement”). The 2016 Credit Agreement was amended on January 20, 2017 to permit the acquisition of CEB and the incurrence of an additional $1.375 billion senior secured term loan B facility, a $300.0 million 364-day senior unsecured bridge facility and a senior unsecured high-yield bridge facility of up to $600.0 million (or the issuance of a corresponding amount of debt securities (the "Notes")) to finance, in part, the acquisition and repay certain debt of CEB, and to modify certain covenants (the "First Amendment"). In connection with financing the CEB acquisition, the Company has also received a commitment with respect to $600.0 million unsecured senior bridge facilities. The 2016 Credit Agreement contains an expansion feature by which the term loan and revolving facility may be increased, at our option and under certain conditions, by up to an additional $750.0 million in the aggregate plus additional amounts subject to the satisfaction of certain conditions, including a maximum secured leverage ratio. At December 31, 2016, we had a total of $700.0 million outstanding under the 2016 Credit Agreement.
The affirmative, negative and financial covenants of the 2016 Credit Agreement, as amended, as well as the covenants related to the Notes, by the First Amendment, could limit our future financial flexibility. Additionally, a failure to comply with these covenants could result in acceleration of all amounts outstanding under the 2016 Credit Agreement and the Notes, which would materially impact our financial condition unless accommodations could be negotiated with our lenders and Noteholders. No assurance can be given that we would be successful in doing so, or that any accommodations that we were able to negotiate would be on terms as favorable as those presently contained in the 2016 Credit Agreement. The associated debt service costs of these credit arrangements could impair our future operating results. The outstanding debt may limit the amount of cash or additional credit available to us, which could restrain our ability to expand or enhance products and services, respond to competitive pressures or pursue future business opportunities requiring substantial investments of additional capital.
We may require additional cash resources which may not be available on favorable terms or at all. We may require additional cash resources due to changed business conditions, implementation of our strategy and stock repurchase program, to repay indebtedness or to pursue future business opportunities requiring substantial investments of additional capital, including acquisitions. If our existing financial resources are insufficient to satisfy our requirements, we may seek additional borrowings or issue debt. Prevailing credit and debt market conditions may negatively affect debt availability and cost, and, as a result, financing may not be available in amounts or on terms acceptable to us, if at all. In addition, the incurrence of additional indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would further restrict our operations.
If we are unable to enforce and protect our intellectual property rights our competitive position may be harmed. We rely on a combination of copyright, trademark, trade secret, patent, confidentiality, non-compete and other contractual provisions to protect our intellectual property rights. Despite our efforts to protect our intellectual property rights, unauthorized third parties may obtain and use technology or other information that we regard as proprietary. Our intellectual property rights may not survive a legal challenge to their validity or provide significant protection for us. The laws of certain countries, particularly in emerging markets, do not protect our proprietary rights to the same extent as the laws of the United States. Accordingly, we may not be able to protect our intellectual property against unauthorized third-party copying or use, which could adversely affect our competitive position. Additionally, there can be no assurance that another party will not assert that we have infringed its intellectual property rights.
Our employees are subject to non-compete agreements, non-solicitation agreements and assignment of invention agreements, to the extent permitted under applicable law. When the non-competition period expires, former employees may compete against us. If a former employee chooses to compete against us prior to the expiration of the non-competition period, we seek to enforce these non-compete provisions but there is no assurance that we will be successful in our efforts.
We have grown, and may continue to grow, through acquisitions and strategic investments, which could involve substantial risks. We have made and may continue to make acquisitions of, or significant investments in, businesses that offer complementary products and services or otherwise support our growth objectives. The risks involved in each acquisition or investment include the possibility of paying more than the value we derive from the acquisition, dilution of the interests of our current stockholders should we issue stock in the acquisition, decreased working capital, increased indebtedness, the assumption of undisclosed liabilities and unknown and unforeseen risks, the ability to retain key personnel of the acquired company, the inability to integrate the business of the acquired company, the time to train the sales force to market and sell the products of the acquired business, the potential disruption of our ongoing business and the distraction of management from our day to day business. The realization of any of these risks could adversely affect our business. Additionally, we face competition in identifying acquisition targets and consummating acquisitions.
We face risks related to litigation. We are, and in the future may be, subject to a variety of legal actions, such as employment, breach of contract, intellectual property-related, and business torts, including claims of unfair trade practices and misappropriation of trade secrets. Given the nature of our business, we are also subject to defamation (including libel and slander), negligence, or other claims relating to the information we publish. Regardless of the merits and despite vigorous efforts to defend any such claim can affect our reputation, and responding to any such claim could be time consuming, result in costly litigation and require us to enter into settlements, royalty and licensing agreements which may not be offered or available on reasonable terms. If a claim is made against us which we cannot defend or resolve on reasonable terms, our business, brand, and financial results could be materially adversely affected.
We face risks related to taxation. We are a global company with clients in over 90 countries. A substantial amount of our earnings is generated outside of the United States and taxed at rates significantly less than the U.S. statutory federal income tax rate. Our effective tax rate, financial position and results of operations could be adversely affected by earnings being higher than anticipated in jurisdictions with higher statutory tax rates and, conversely, lower than anticipated in jurisdictions that have lower statutory tax rates, by changes in the valuation of our deferred tax assets and/or by changes in tax laws or accounting principles and their interpretation by relevant authorities.
At the present time, the United States and other countries where we do business have either changed or are actively considering changes in their tax, accounting and other related laws. In the United States, proposed and other tax law changes, particularly those directed at taxing unremitted and future foreign earnings, could increase our effective tax rate. In 2014, Ireland modified its tax residency rules. While these changes are not effective until 2021 for many companies with Irish resident operations, including Gartner, the new rules could increase our effective tax rate at that future date. Likewise, during 2015, the Organization for Economic Development and Cooperation (“OECD”) released final reports on various actions items associated with its initiative to prevent Base Erosion and Profit Shifting (“BEPS). The future enactment by various governments of these and future OECD proposals could significantly increase our tax obligations in many countries where we do business. These actual, potential, and other changes, both individually and collectively, could materially increase our effective tax rate and negatively impact our financial position, results of operations, and cash flows.
In addition, our tax filings for various years are subject to examination by domestic and international taxing authorities and, during the ordinary course of business, we are under audit by various tax authorities. Recent and future actions on the part of the OECD and various governments will likely result in increased scrutiny of our tax filings. Although we believe that our tax filings and related accruals are reasonable, the final resolution of tax audits may be materially different from what is reflected in our historical tax provisions and accruals and could have a material adverse effect on our effective tax rate, financial position, results of operations, and cash flows, particularly in major taxing jurisdictions including, but not limited to: the United States, Ireland, India, Canada, United Kingdom, Japan, and France.
As of December 31, 2016, we had approximately $340.0 million of accumulated undistributed earnings in our non-U.S. subsidiaries. Under U.S. GAAP rules, no provision for income taxes that may result from the remittance of such earnings is required if the Company has the ability and intent to reinvest such funds overseas indefinitely. Our current plans do not demonstrate a need to repatriate these undistributed earnings to fund our U.S. operations or otherwise satisfy the liquidity needs of our U.S. operations. We intend to reinvest these earnings in our non-U.S. operations, except in instances in which the repatriation of these earnings would result in minimal additional tax. As a result, the Company has not recognized income tax expense that could result from the remittance of these earnings. However, future events such as a change in our liquidity needs or U.S. tax laws could cause us to change our repatriation policy and decide to repatriate some or all of these undistributed earnings. As a result, we could be required to accrue additional taxes in the future which could have a material impact on our consolidated financial position, cash flows and results of operations in future periods.
Our corporate compliance program cannot guarantee that we are in compliance with all applicable laws and regulations. We operate in a number of countries, including emerging markets, and as a result we are required to comply with numerous, and in many cases, changing international and U.S. federal, state and local laws and regulations. As a result, we have developed and instituted a corporate compliance program which includes the creation of appropriate policies defining employee behavior that mandate adherence to laws, employee training, annual affirmations, monitoring and enforcement. However, if any employee fails to comply with, or intentionally disregards, any of these laws, regulations or our policies, a range of liabilities could result for the employee and for the Company, including, but not limited to, significant penalties and fines, sanctions and/or litigation, and the expenses associated with defending and resolving any of the foregoing, any of which could have a negative impact on our reputation and business.
Risks related to our common stock
Our operating results may fluctuate from period to period and/or the financial guidance we have given may not meet the expectations of investors, which may cause the price of our common stock to decline. Our quarterly and annual operating results may fluctuate in the future as a result of many factors, including the timing of the execution of research contracts, the extent of completion of consulting engagements, the timing of symposia and other events, the amount of new business generated, the mix of domestic and international business, currency fluctuations, changes in market demand for our products and services, the timing of the development, introduction and marketing of new products and services, competition in our industry, the impact of our acquisitions, and general economic conditions. An inability to generate sufficient earnings and cash flow, and achieve our forecasts, may impact our operating and other activities. The potential fluctuations in our operating results could cause period-to-period comparisons of operating results not to be meaningful and may provide an unreliable indication of future operating results. Furthermore, our operating results may not meet the expectations of investors or the financial guidance we have previously provided. If this occurs, the price of our common stock could decline.
Our stock price may be impacted by factors outside of our control and you may not be able to resell shares of our common stock at or above the price you paid. The price of our common stock is subject to significant fluctuations in response to, among other factors, developments in the industries in which we do business, general economic conditions, general market conditions, geo-political events, changes in the nature and composition of our stockholder base, changes in securities analysts’ recommendations regarding our securities and our performance relative to securities analysts’ expectations for any quarterly period, as well as other factors outside of our control including any and all factors that move the securities markets generally. These factors may materially adversely affect the market price of our common stock.
Future sales of our common stock in the public market could lower our stock price. Sales of a substantial number of shares of common stock in the public market by our current stockholders, or the threat that substantial sales may occur, could cause the market price of our common stock to decrease significantly or make it difficult for us to raise additional capital by selling stock. Furthermore, we have various equity incentive plans that provide for awards in the form of stock appreciation rights, restricted stock, restricted stock units and other stock-based awards which have the effect of adding shares of common stock into the public market. At the present time, we are executing against a board-approved share repurchase program to reduce the number of outstanding shares of our common stock. At December 31, 2016, approximately $1.1 billion remained available for share purchases under this program. No assurance can be given that we will continue these activities in the future when the program is completed, or in the event that the price of our common stock reaches levels at which repurchases are not accretive.
Future sales of our common stock from grants and awards could lower our stock price. As of December 31, 2016, the aggregate number of shares of our common stock issuable pursuant to outstanding grants and awards under our equity incentive plans was approximately 2.6 million shares (approximately 1.5 million of which have vested). In addition, at the present time, approximately 6.2 million shares may be issued in connection with future awards under our equity incentive plans. Shares of common stock issued under these plans are freely transferable and have been registered under the Securities Act of 1933, as amended (the “Securities Act”), except for any shares held by affiliates (as that term is defined in Rule 144 under the Securities Act) which are subject to certain limitations. We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock.
Interests of certain of our significant stockholders may conflict with yours. To our knowledge, as of the date hereof, and based upon publicly-available SEC filings, three institutional investors each presently hold over 5% of our common stock. While no stockholder or institutional investor individually holds a majority of our outstanding shares, these significant stockholders may be able, either individually or acting together, to exercise significant influence over matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation, adoption or amendment of equity plans and approval of significant transactions such as mergers, acquisitions, consolidations and sales or purchases of assets. In addition, in the event of a proposed acquisition of the Company by a third party, this concentration of ownership may delay or prevent a change of control in us. Accordingly, the interests of these stockholders may not always coincide with our interests or the interests of other stockholders, or otherwise be in the best interests of us or all stockholders.
Our anti-takeover protections may discourage or prevent a change of control, even if a change in control would be beneficial to our stockholders. Provisions of our restated certificate of incorporation and bylaws and Delaware law may make it difficult for any party to acquire control of us in a transaction not approved by our Board of Directors. These provisions include: (i) the ability of our Board of Directors to issue and determine the terms of preferred stock; (ii) advance notice requirements for inclusion of stockholder proposals at stockholder meetings; and (iii) the anti-takeover provisions of Delaware law. These provisions could discourage or prevent a change of control or change in management that might provide stockholders with a premium to the market price of their common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
The Company has no unresolved written comments that were received from the SEC staff 180 days or more before the end of our fiscal year relating to our periodic or current reports under the Exchange Act.
ITEM 2. PROPERTIES.
We currently lease 39 domestic and 67 international offices. These offices support our executive and administrative activities, research and consulting, sales, systems support, and other functions. We have a significant presence in Stamford, Connecticut; Ft. Myers, Florida; and Egham, the United Kingdom. The Company does not own any real properties.
Our Stamford corporate headquarters are located in 213,000 square feet of leased office space in three buildings located on the same campus. The Company's lease on the Stamford headquarters facility expires in 2027 and contains three five-year renewal options at fair value. In 2016 we leased an additional 21,179 square feet of space in a fourth building adjacent to our Stamford headquarters facility under a five-year lease.
In Ft. Myers we lease 250,821 square feet of space in two buildings located on the same campus and we also have an additional 21,601 square feet of leased space in two separate but nearby buildings that house staff training and other facilities. Our Ft. Myers leases expire in 2030. To accommodate future growth in Ft. Myers we also expect to lease additional space with terms similar to our current buildings. In Egham we currently lease 112,800 square feet of office in two separate buildings but intend to consolidate our Egham operations into a new 108,000 square foot adjacent building presently under construction in mid-2017. The new Egham lease has a term of 15 years.
We expect to continue to invest in our business by adding headcount, and as a result, we may need additional office space in various locations. Should additional space be necessary, we believe that it will be available and at reasonable terms.
ITEM 3. LEGAL PROCEEDINGS.
We are involved in various legal and administrative proceedings and litigation arising in the ordinary course of business. The outcome of these individual matters is not predictable at this time. However, we believe that the ultimate resolution of these matters, after considering amounts already accrued and insurance coverage, will not have a material adverse effect on our financial position, results of operations, or cash flows in future periods.
ITEM 4. MINE SAFETY DISCLOSURES.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is listed on the New York Stock Exchange under the symbol "IT". As of January 31, 2017, there were 1,341 holders of record of our common stock. Our 2017 Annual Meeting of Stockholders will be held on June 1, 2017 at the Company’s corporate headquarters in Stamford, Connecticut. We did not submit any matter to a vote of our stockholders during the fourth quarter of 2016.
The following table sets forth the high and low sale prices for our common stock as reported on The New York Stock Exchange for the periods indicated:
We currently do not pay cash dividends on our common stock. In addition, our 2016 Credit Agreement contains a negative covenant which may limit our ability to pay dividends.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The equity compensation plan information set forth in Part III, Item 12 of this Form 10-K is hereby incorporated by reference into this Part II, Item 5.
The Company has a $1.2 billion board authorization to repurchase the Company's common stock. The Company may repurchase its common stock from time-to-time in amounts and at prices the Company deems appropriate, subject to the availability of stock, prevailing market conditions, the trading price of the stock, the Company’s financial performance and other conditions. Repurchases may be made through open market purchases, private transactions or other transactions and will be funded from cash on hand and borrowings under the Company’s 2016 Credit Agreement. Repurchases may also be made from time-to-time in connection with the settlement of the Company's share-based compensation awards.
The following table summarizes the repurchases of our outstanding common stock in the three months ended December 31, 2016 pursuant to our $1.2 billion share repurchase authorization and pursuant to the settlement of share-based compensation awards:
ITEM 6. SELECTED FINANCIAL DATA
The fiscal years presented below are for the respective twelve-month period from January 1 through December 31. Data for all years was derived or compiled from our audited consolidated financial statements included herein or from submissions of our Form 10-K in prior years. The selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes contained in this Annual Report on Form 10-K.
The following items impact the comparability and presentation of our consolidated data:
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The purpose of the following Management’s Discussion and Analysis (“MD&A”) is to help facilitate the understanding of significant factors influencing the operating results, financial condition and cash flows of Gartner, Inc. Additionally, the MD&A also conveys our expectations of the potential impact of known trends, events or uncertainties that may impact future results. You should read this discussion in conjunction with our consolidated financial statements and related notes included in this report. Historical results and percentage relationships are not necessarily indicative of operating results for future periods. References to “the Company,” “we,” “our,” and “us” are to Gartner, Inc. and its consolidated subsidiaries.
We acquired other businesses in 2016, 2015, and 2014, which is described in Note 2 — Acquisitions in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K. The operating results of these acquired businesses have been included in our consolidated and segment operating results beginning on their respective dates of acquisition. These results were not material to our consolidated or segment results.
In addition to historical information, this Annual Report on Form 10-K contains certain 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. Forward-looking statements are any statements other than statements of historical fact, including statements regarding our expectations, beliefs, hopes, intentions or strategies regarding the future. In some cases, forward-looking statements can be identified by the use of words such as “may,” “will,” “expect,” “should,” “could,” “believe,” “plan,” “anticipate,” “estimate,” “predict,” “potential,” “continue,” or other words of similar meaning.
Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in, or implied by, the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Part 1, Item 1A, Risk Factors included in this Annual Report on Form 10-K. Readers should not place undue reliance on these forward-looking statements, which reflect management’s opinion only as of the date on which they were made. Except as required by law, we disclaim any obligation to review or update these forward-looking statements to reflect events or circumstances as they occur.
Gartner is the world’s leading information technology research and advisory company. We deliver the technology-related insight necessary for our clients to make the right decisions, every day. From CIOs and senior information technology (IT) leaders in corporations and government agencies, to business leaders in high-tech and telecom enterprises and professional services firms, to supply chain professionals, marketing professionals and technology investors, we are the valuable partner to clients in 11,122 distinct enterprises. We work with clients to research, analyze, and interpret the business of IT within the context of their individual roles. Gartner is headquartered in Stamford, Connecticut, U.S.A., and as of December 31, 2016, we had 8,813 employees, including 1,922 research analysts and consultants, and clients in over 90 countries.
The foundation for all Gartner products and services is our independent research on IT, supply chain, and digital marketing initiatives. The findings from this research are delivered through our three business segments – Research, Consulting and Events:
For more information regarding Gartner and our products and services, visit gartner.com.
We believe the following business measurements are important performance indicators for our business segments:
EXECUTIVE SUMMARY OF OPERATIONS AND FINANCIAL POSITION
We have executed a consistent growth strategy since 2005 to drive double-digit annual revenue and earnings growth. The fundamentals of our strategy include a focus on creating extraordinary research insight, delivering innovative and highly differentiated product offerings, building a strong sales capability, providing world class client service with a focus on client engagement and retention, and continuously improving our operational effectiveness.
We had total revenues of $2.4 billion in 2016, an increase of 13% over 2015 on a reported basis and 14% adjusted for the impact of foreign currency exchange. Diluted earnings per share was $2.31 in 2016 compared to $2.06 in 2015, a 12% increase, primarily driven by higher net income, which increased 10% in 2016, and to a lesser extent, a lower weighted-average share count, which declined 1%.
Research revenues increased 16% year-over-year, to $1.83 billion in 2016, and adjusted for the impact of foreign currency, Research revenues increased 17%. The contribution margin was 69%, the same as 2015. At December 31, 2016, total contract value was $1.93 billion, an increase of 9% over December 31, 2015 on a reported basis and 14% adjusted for the impact of foreign currency exchange. Both client and wallet retention remained strong, at 84% and 104%, respectively, at December 31, 2016.
Consulting revenues increased 6% in 2016, to $346.2 million, while the impact of foreign currency exchange was not significant. The gross contribution margin was 31% in 2016 compared to 33% in 2015. Consultant utilization was 66% in both periods. We had 628 billable consultants at December 31, 2016 compared to 606 at year-end 2015. Backlog was $103.8 million at December 31, 2016.
Events revenues increased 7% year-over-year, to $268.6 million in 2016. Adjusted for the impact of foreign currency exchange, Events revenues increased 6%. The segment contribution margin was 51% in 2016 compared to 52% in 2015. We held 66 events in 2016 compared to 65 in 2015, while the number of attendees increased 4% in 2016, to 54,602.
For a more detailed discussion of our results, see the Segment Results section below.
Cash flow from our operating activities was $365.6 million in 2016, an increase of 6% compared to 2015. Our 2016 cash flow from operating activities benefited from the early adoption of FASB ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," which changed the accounting for stock-based compensation awards (see Note 1 — Business and Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information). We ended 2016 with $474.2 million in cash and cash equivalents while $1.1 billion was available for borrowing under the revolving credit line.
We continue to focus on maximizing shareholder value. During 2016 we repurchased 0.6 million shares of our outstanding common stock and we also acquired two businesses. In addition, in January 2017 we announced that we have entered into a definitive agreement whereby Gartner will acquire all of the outstanding shares of CEB Inc., an industry leader in providing best practice and talent management insights (see Note 16 — Subsequent Events in the Notes to the Consolidated Financial Statements for additional information).
FLUCTUATIONS IN QUARTERLY RESULTS
Our quarterly and annual revenue, operating income, and cash flow fluctuate as a result of many factors, including: the timing of our Symposium/ITxpo series, which are normally held during the fourth calendar quarter, as well as other events; the timing and amount of new business generated; the mix between domestic and international business; changes in market demand for our products and services; changes in foreign currency rates; the timing of the development, introduction and marketing of our new products and services; competition in the industry; acquisitions; general economic conditions; and other factors which are beyond our control. The potential fluctuations in our operating income could cause period-to-period comparisons of operating results not to be meaningful and could provide an unreliable indication of future operating results and cash flows.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our consolidated financial statements requires the application of appropriate accounting policies and the use of estimates. Our significant accounting policies are described in Note 1 in the Notes to the Consolidated Financial Statements included in this Form 10-K. Management considers the policies discussed below to be critical to an understanding of our financial statements because their application requires complex and subjective management judgments and estimates. Specific risks for these critical accounting policies are described below.
The preparation of our consolidated financial statements requires us to make estimates and assumptions about future events. We develop our estimates using both current and historical experience, as well as other factors, including the general economic environment and actions we may take in the future. We adjust such estimates when facts and circumstances dictate. However, our estimates may involve significant uncertainties and judgments and cannot be determined with precision. In addition, these estimates are based on our best judgment at a point in time and as such these estimates may ultimately differ materially from actual results. On-going changes to our estimates could be material and would be reflected in the Company’s consolidated financial statements in future periods.
Our critical accounting policies are as follows:
Revenue recognition — Revenue is recognized in accordance with the requirements of U.S. GAAP as well as SEC Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB No. 104”). Revenue is only recognized once all required criteria for revenue recognition have been met. Revenue by significant source is accounted for as follows:
The majority of research contracts are billable upon signing, absent special terms granted on a limited basis from time to time. All research contracts are non-cancelable and non-refundable, except for government contracts that may have cancellation or fiscal funding clauses. It is our policy to record the amount of the contract that is billable as a fee receivable at the time the contract is signed with a corresponding amount as deferred revenue, since the contract represents a legally enforceable claim.
Uncollectible fees receivable — We maintain an allowance for losses which is composed of a bad debt allowance and a sales reserve. Provisions are charged against earnings, either as a reduction in revenues or an increase to expense. The determination of the allowance for losses is based on historical loss experience, an assessment of current economic conditions, the aging of outstanding receivables, the financial health of specific clients, and probable losses. This evaluation is inherently judgmental and requires estimates. These valuation reserves are periodically re-evaluated and adjusted as more information about the ultimate collectability of fees receivable becomes available. Circumstances that could cause our valuation reserves to increase include changes in our clients’ liquidity and credit quality, other factors negatively impacting our clients’ ability to pay their obligations as they come due, and the effectiveness of our collection efforts.
The following table provides our total fees receivable and the related allowance for losses (in thousands) as of:
Goodwill and other intangible assets — The Company evaluates recorded goodwill in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic No. 350, which requires goodwill to be assessed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In addition, an impairment evaluation of our amortizable intangible assets may also be performed if events or circumstances indicate potential impairment. Among the factors that could trigger an impairment review are our current operating results relative to our annual plan or historical performance; changes in our strategic plan or use of our assets; restructuring charges or other changes in our business segments; competitive pressures and changes in the general economy or in the markets in which we operate; and a significant decline in our stock price and our market capitalization relative to our net book value.
ASC Topic No. 350 requires an annual assessment of the recoverability of recorded goodwill, which can be either quantitative or qualitative in nature, or a combination of the two. Both methods require the use of estimates which in turn contain judgments and assumptions regarding future trends and events. As a result, both the precision and reliability of the resulting estimates are subject to uncertainty. If our annual goodwill impairment evaluation determines that the fair value of a reporting unit is less than its related carrying amount, we may recognize an impairment charge against earnings. Among the factors we consider in a qualitative assessment are general economic conditions and the competitive environment; actual and projected reporting unit financial performance; forward-looking business measurements; and external market assessments. A quantitative analysis requires management to consider all of the factors relevant to a qualitative assessment, as well as the utilization of detailed financial projections, to include the rate of revenue growth, profitability, and cash flows, as well as assumptions regarding discount rates, the Company's weighted-average cost of capital, and other data, in order to determine a fair value for our reporting units.
We conducted a qualitative assessment of the fair values of all of the Company's reporting units during the third quarter of 2016. The results of this test concluded that the fair values of the Company's reporting units continue to exceed their respective carrying amounts. See Note 1 — Business and Significant Accounting Policies in the Notes to the Consolidated Financial Statements for additional information regarding goodwill and amortizable intangible assets.
Accounting for income taxes — The Company uses the asset and liability method of accounting for income taxes. We estimate our income taxes in each of the jurisdictions where we operate. This process involves estimating our current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. In assessing the realizability of deferred tax assets, management considers if it is more likely than not that some or all of the deferred tax assets will not be realized. We consider the availability of loss carryforwards, projected reversal of deferred tax liabilities, projected future taxable income, and ongoing prudent and feasible tax planning strategies in making this assessment. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained based on the technical merits of the position.
Accounting for stock-based compensation — The Company accounts for stock-based compensation in accordance with FASB ASC Topic No. 505 and 718 and SEC Staff Accounting Bulletins No. 107 (“SAB No. 107”) and No. 110 (“SAB No. 110”). The Company recognizes stock-based compensation expense, which is based on the fair value of the award on the date of grant, over the related service period (see Note 8 — Stock-Based Compensation in the Notes to the Consolidated Financial Statements for additional information). Determining the appropriate fair value model and calculating the fair value of stock compensation awards requires the input of certain complex and subjective assumptions, including the expected life of the stock compensation award and the Company’s common stock price volatility. In addition, determining the appropriate amount of associated periodic expense requires management to estimate the likelihood of the achievement of certain performance targets. The assumptions used in calculating the fair value of stock compensation awards and the associated periodic expense represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change and the Company deems it necessary in the future to modify the assumptions it made or to use different assumptions, or if the quantity and nature of the Company’s stock-based compensation awards changes, then the amount of expense may need to be adjusted and future stock-based compensation expense could be materially different from what has been recorded in the current period. In 2016 the Company early adopted FASB ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting," ASU No. 2016-09 requires certain changes in accounting for stock compensation under FASB ASC Topic No. 718. Note 1 — Business and Significant Accounting Policies in the Notes to the Consolidated Financial Statements provides additional information regarding the adoption of ASU No. 2016-09.
Restructuring and other accruals — We may record accruals for severance costs, costs associated with excess facilities that we have leased, contract terminations, asset impairments, and other costs as a result of on-going actions we undertake to streamline our organization, reposition certain businesses and reduce ongoing costs. Estimates of costs to be incurred to complete these actions, such as future lease payments, sublease income, the fair value of assets, and severance and related benefits, are based on assumptions at the time the actions are initiated. These accruals may need to be adjusted to the extent actual costs differ from such estimates. In addition, these actions may be revised due to changes in business conditions that we did not foresee at the time such plans were approved. We also record accruals during the year for our various employee cash incentive programs. Amounts accrued at the end of each reporting period are based on our estimates and may require adjustment as the ultimate amount paid for these incentives are sometimes not known with certainty until the end of our fiscal year.
RESULTS OF OPERATIONS
2016 VERSUS 2015
The following table presents the changes in selected line items in our Consolidated Statements of Operations for the two years ended December 31, 2016 (in thousands):
TOTAL REVENUES for the year ended December 31, 2016 increased $281.5 million, or 13%, compared to the year ended December 31, 2015. Excluding the impact of foreign currency exchange, total revenues increased 14% in 2016 compared to 2015. Year-over-year reported segment revenues increased by 16% in our Research segment, 6% in Consulting and 7% in Events.
The following table presents total revenues by geographic region for the years ended (in thousands):
The following table presents our revenues by segment for the years ended (in thousands):
Please see the section of this MD&A below entitled “Segment Results” for a further discussion of revenues and results by segment.
COST OF SERVICES AND PRODUCT DEVELOPMENT (“COS") expense increased $106.6 million, or 13%, in 2016 compared to 2015, to $945.6 million compared to $839.1 million in 2015. COS expense increased 14% in 2016 when compared to 2015 adjusted for the impact of foreign exchange. The year-over-year increase in COS expense was due to $88.0 million in higher
payroll and related benefits costs from additional headcount and merit salary increases, and $28.6 million in higher charges in 2016 for events costs and other program related expenses. Partially offsetting these increased expenses was approximately $10.0 million in foreign exchange impact. Overall COS headcount increased 13%, which was primarily in our Research segment. COS as a percentage of revenues was 39% in both the 2016 and 2015 periods.
SELLING, GENERAL AND ADMINISTRATIVE (“SG&A”) expense increased by $126.5 million in 2016, or 13%, to $1,089.2 million compared to $962.7 million in 2015. Excluding the impact of foreign currency exchange, SG&A expense increased 15% year-over-year. The increase was primarily due to $115.0 million in higher payroll and related benefits costs from additional headcount, higher sales commissions, and merit salary increases, and we also had $27.5 million in additional legal, recruiting and training, and workplace costs. Partially offsetting these additional charges was approximately $16.0 million in foreign exchange impact. SG&A headcount increased 13% overall, with the majority of the increase in additional quota-bearing sales associates and related support staff. Quota-bearing sales associates increased 12% year-over-year, to 2,423 at December 31, 2016 from 2,171 at year-end 2015.
DEPRECIATION expense increased 10% in 2016 compared to 2015, which reflects our additional investment in fixed assets.
AMORTIZATION OF INTANGIBLES increased to $24.8 million in 2016 from $13.3 million in 2015 due to the additional intangibles resulting from our acquisitions.
ACQUISITION AND INTEGRATION CHARGES was $42.6 million in 2016 compared to $26.2 million in 2015. These charges are directly-related to our acquisitions and primarily include amounts accrued for payments contingent on the achievement of certain employment conditions, legal, consulting and severance costs.
OPERATING INCOME increased 6% in 2016 compared to 2015, to $305.1 million in 2016 from $288.0 million in 2015. Operating income as a percentage of revenues was 12% in 2016 and 13% in 2015 with the decline due to a number of factors, to include lower gross contribution margins in our Consulting and Events segments and higher charges from acquisitions.
INTEREST EXPENSE, NET increased 21% year-over-year due to higher average borrowings in the 2016 period.
OTHER INCOME (EXPENSE), NET was $8.4 million in 2016, which included a gain of $2.5 million from the extinguishment of a portion of an economic development loan from the State of Connecticut, the sale of certain state tax credits and the recognition of other tax incentives, and the net impact of gains and losses from our foreign currency hedging activities. Other income (expense), net was $5.0 million in 2015, which consisted of a $6.8 million gain from the sale of certain state tax credits partially offset by a net loss from foreign currency hedging activities.
PROVISION FOR INCOME TAXES was $94.8 million in 2016 compared to $96.6 million in 2015 and the effective tax rate was 32.9% in 2016 compared to 35.5% in 2015. The decrease in the effective income tax rate was primarily attributable to the early adoption of ASU No. 2016-09 in 2016, partially offset by increases in non-deductible expenses relating to acquisitions.
NET INCOME was $193.6 million in 2016 and $175.6 million in 2015, an increase of 10%. Diluted earnings per share increased 12% year-over-year, to $2.31 in 2016 compared to $2.06 in 2015 due to the higher net income and to a lesser extent, a decrease in the number of weighted-average shares in the 2016 period.
2015 VERSUS 2014
The following table presents the changes in selected line items in our Consolidated Statements of Operations for the two years ended December 31, 2015 (in thousands):
TOTAL REVENUES for the year ended December 31, 2015 increased $141.6 million, or 7%, compared to the year ended December 31, 2014. Revenues increased by double-digits in our Research and Events businesses but declined 6% in Consulting. Excluding the impact of foreign currency exchange, total revenues increased 13% in 2015 compared to 2014.
The following table presents total revenues by geographic region for the years ended (in thousands):
The following table presents our revenues by segment for the years ended (in thousands):
Please refer to the section of this MD&A below entitled “Segment Results” for a further discussion of revenues and results by segment.
COST OF SERVICES AND PRODUCT DEVELOPMENT (“COS") expense increased $41.1 million, or 5%, in 2015 compared to 2014, to $839.1 million compared to $797.9 million in 2014. Foreign exchange had a favorable impact on COS expense during 2015, and adjusted for this impact, COS expense increased 11% in 2015 when compared to 2014. The year-over-year increase in COS expense was due to $56.0 million in higher payroll and related benefits costs from additional headcount and merit salary increases, and $31.0 million in higher charges in 2015 for events costs, travel, and other corporate expenses. Partially offsetting these increased expenses was approximately $46.0 million in favorable foreign exchange impact. The additional headcount was
primarily in our Research business which includes the additional employees resulting from our 2015 acquisitions, and to a lesser extent, an increase in headcount in our Consulting business. COS as a percentage of revenues was 39% in both the 2015 and 2014 periods.
SELLING, GENERAL AND ADMINISTRATIVE (“SG&A”) expense increased by $86.6 million in 2015, or 10%, to $962.7 million compared to $876.1 million in 2014. Excluding the impact of foreign currency exchange, SG&A expense increased 16% year-over-year. The increase was primarily due to $111.0 million in higher payroll and related benefits costs from additional headcount, higher sales commissions, and merit salary increases, and we also had $27.0 million in additional travel and training, recruiting, and other costs. Partially offsetting these additional charges was $51.0 million in foreign exchange impact. SG&A headcount increased 17% overall, with the majority of the increase in additional quota-bearing sales associates and related support staff. Quota-bearing sales associates increased 15% year-over-year, to 2,171 at December 31, 2015 from 1,881 at year-end 2014.
DEPRECIATION expense increased 8% in 2015 compared to 2014, which reflects our additional investment in fixed assets.
AMORTIZATION OF INTANGIBLES increased to $13.3 million in 2015 from $8.2 million 2014, an increase of 62% year-over-year due to the additional intangibles resulting from our acquisitions.
ACQUISITION AND INTEGRATION CHARGES was $26.2 million in 2015 compared to $21.9 million in 2014. These charges are directly-related to our acquisitions and primarily include amounts accrued for payments contingent on the achievement of certain employment conditions, legal, consulting, and severance costs.
OPERATING INCOME increased 1% in 2015 compared to 2014, to $288.0 million in 2015 from $286.2 million in 2014. Operating income as a percentage of revenues was 13% in 2015 and 14% in 2014, with the decrease primarily driven by higher year-over-year SG&A costs, and to a lesser extent a lower gross contribution in the Consulting business and additional charges from acquisitions.
INTEREST EXPENSE, NET increased 91% year-over-year due to additional borrowings in the 2015 period.
OTHER INCOME (EXPENSE), NET was $5.0 million in 2015 which included a $6.8 million gain from the sale of certain state tax credits partially offset by a net loss resulting from foreign currency hedging activities. The $0.6 million expense in 2014 was due to a net loss from foreign currency hedging activities.
PROVISION FOR INCOME TAXES was $96.6 million in 2015 compared to $90.9 million in 2014 and the effective tax rate was 35.5% for 2015 compared to 33.1% for 2014. The higher effective tax rate in 2015 was primarily due to decreases in foreign tax credit benefits, increases in non-deductible expenses relating to acquisitions, and increases in valuation allowances on foreign net operating losses.
NET INCOME was $175.6 million in 2015 and $183.8 million in 2014, a decrease of 4%. Diluted earnings per share increased 1% year-over-year, to $2.06 in 2015 compared to $2.03 in 2014, due to a 6% decrease in the number of weighted-average shares in the 2015 period.
We evaluate reportable segment performance and allocate resources based on gross contribution margin. Gross contribution is defined as operating income excluding certain Cost of services and product development charges, SG&A, Depreciation, Acquisition and integration charges, and Amortization of intangibles. Gross contribution margin is defined as gross contribution as a percentage of revenues.
The following table presents the financial results and business measurements of our Research segment as of and for the year ended December 31:
2016 VERSUS 2015
Research segment revenues increased 16% in 2016 compared to 2015. Excluding the impact of foreign currency exchange, Research revenues increased 17% in 2016. The segment gross contribution margin was 69% in both annual periods. The contribution margin remained at 69% in spite of a 14% increase in segment headcount, mostly driven by new hires and to a lesser extent the additional employees resulting from our acquisitions. The headcount increase reflects our continuing investment in this business. Total contract value increased 9% on a reported basis in 2016 to $1.93 billion, and increased 14% year-over-year adjusted for the impact of foreign currency exchange. The growth in contract value was broad-based, with every region and client size and virtually every industry sector growing at double-digit percentage rates. We increased the number of our research client enterprises by 3% in 2016, to 11,122. Both client retention and wallet retention remained strong, at 84% and 104% respectively, as of December 31, 2016.
2015 VERSUS 2014
Research segment revenues increased 10% in 2015 compared to 2014. Excluding the impact of foreign currency, Research revenues increased 16% in 2015. The segment gross contribution margin was 69% in both annual periods. Total contract value increased 10% in 2015 to $1.77 billion. Adjusted for the impact of foreign currency exchange, total contract value increased 14% year-over-year. The number of research client enterprises increased by 8% in 2015, to 10,796. Client retention and wallet retention were 84% and 105% respectively, as of December 31, 2015.
The following table presents the financial results and business measurements of our Consulting segment as of and for the year ended December 31:
2016 VERSUS 2015
Consulting revenue increased 6% year-over-year, to $346.2 million, with the increase mostly in our core consulting practice. Revenue in our contract optimization practice increased slightly but declined in our strategic advisory service ("SAS") practice. The impact of foreign currency exchange was not significant. The year-over-year gross contribution margin declined by 2 points, due to several factors, including higher payroll costs resulting from higher headcount and severance, as well as the revenue decline in our SAS practice, which has a higher contribution margin than core consulting. Backlog decreased by $13.9 million year-over-year, or 12%, mostly due to a large individual contract booked in 2015. Excluding that contract, backlog decreased by about 4% year-over-year. The $103.8 million of backlog at year-end 2016 represents approximately 4 months of forward backlog, which is in line with the Company's operational target.
2015 VERSUS 2014
Consulting revenue decreased 6% year-over-year but was essentially flat excluding the impact of foreign exchange. The revenue decline was primarily in our core consulting practice, which was mainly driven by the foreign exchange impact. We also had lower revenues in our contract optimization practice, which can fluctuate from period to period. The year-over-year gross contribution margin declined by 1 point, primarily driven by costs resulting from higher headcount. Backlog increased by $15.1 million year-over-year, or 15%, to $117.7 million at December 31, 2015.
The following table presents the financial results and business measurements of our Events segment as of and for the year ended December 31:
2016 VERSUS 2015
Events revenues increased $16.8 million when comparing 2016 to 2015, or 7%. Excluding the impact of foreign currency exchange, revenues increased 6% year-over-year. We held 66 events in 2016, consisting of 59 ongoing events and 7 new events, compared to 65 events in 2015. The year-over-year revenue increase was primarily attributable to higher exhibitor revenue at our on-going events, which increased 9%, while attendee revenue increased 2%. The number of attendees in 2016 increased 4% to 54,602. Average revenue per attendee declined slightly while average revenue per exhibitor increased 9%. The gross contribution margin decreased 1 point year-over-year.
2015 VERSUS 2014
Events revenues increased $24.1 million when comparing 2015 to 2014, or 11%, and increased 18% adjusted for the impact of foreign exchange. We held 65 events in 2015, consisting of 61 ongoing events and 4 new events, compared to 61 events in 2014. The revenue increase was primarily due to higher attendee revenue at our ongoing events and to a lesser extent, higher exhibitor revenue. The number of attendees increased 7% in 2015, and the number of exhibitors increased 4%. Average revenue per attendee rose 9% and average revenue per exhibitor increased 2%. The gross contribution margin increased 3 points year-over-year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a five-year credit arrangement that it entered into in June 2016 that provides for a $600.0 million term loan and a $1.2 billion revolving credit facility (the “2016 Credit Agreement”). As of December 31, 2016, the Company had $585.0 million outstanding under the term loan and $115.0 million under the revolver and $1.1 billion of available revolver borrowing capacity under the 2016 Credit Agreement. We had $474.2 million of cash and cash equivalents at December 31, 2016.
The 2016 Credit Agreement was amended on January 20, 2017 to permit the acquisition of CEB and the incurrence of an additional $1.375 billion senior secured term loan B facility, a $300.0 million 364-day senior unsecured bridge facility and a senior unsecured high-yield bridge facility of up to $600.0 million (or the issuance of a corresponding amount of debt securities) to finance, in part, the acquisition and repay certain debt of CEB and to modify certain covenants.
We have historically generated significant cash flows from our operating activities. Our operating cash flow has been continuously maintained and enhanced by the leverage characteristics of our subscription-based business model in our Research segment, which is our largest business segment. Revenues in our Research segment increased 16% in 2016 compared to 2015, and constituted 75% and 73% of our total revenues in 2016 and 2015, respectively. The majority of our Research customer contracts are paid in advance, and combined with a strong customer retention rate and high incremental margins, has resulted in continuously strong operating cash flow. Our cash flow generation has also benefited from our continuing efforts to improve the operating efficiencies of our businesses as well as a focus on the optimal management of our working capital as we increase our sales volume.
We had operating cash flow of $365.6 million in 2016 compared to $345.6 million in 2015. During 2016 we used $125.0 million in cash to pay down debt and related fees and we used almost $50.0 million in cash for capital expenditures. We also used $34.2 million in cash in 2016 to acquire other businesses and $59.0 million to repurchase our common stock. The amount of cash used in 2016 to acquire other businesses and for stock repurchases was significantly less than 2015. We currently have a $1.2 billion board approved authorization to repurchase the Company's common stock, and as of December 31, 2016, approximately $1.1 billion of this authorization remains.
Definitive Agreement to Acquire CEB Inc.
On January 5, 2017, the Company and CEB announced that they entered into a definitive agreement whereby Gartner will acquire all of the outstanding shares of CEB in a transaction valued at approximately $2.6 billion. The aggregate consideration to be paid by Gartner is expected to be approximately $1.8 billion in cash and $0.8 billion of Gartner common stock. Gartner will also assume (and refinance) approximately $0.9 billion in CEB debt. Closing of the transaction is expected to be completed in the first half of 2017.
In connection with the proposed acquisition, the Company entered into a commitment letter for the purposes of financing the majority of the cash consideration payable and to refinance CEB’s indebtedness. The commitment letter provides for a total of $2.275 billion in additional financing, which includes a seven-year senior secured term loan B facility of up to $1.375 billion, a 364-day senior unsecured bridge facility of up to $300.0 million, and a senior unsecured high-yield bridge facility of up to $600.0 million. It is expected that on or prior to the closing of the CEB acquisition, senior unsecured notes will be issued and sold pursuant to an offering pursuant to Rule 144A or a private placement in lieu of a portion of, or all of the drawings under, the high-yield bridge facility. The Company expects that the proceeds from the additional financing described above, together with its balance sheet cash and available borrowing capacity under its revolving credit facility, will be sufficient to pay the aggregate cash consideration and refinance CEB's indebtedness, as well as pay for certain fees and expenses incurred in connection with the acquisition. The closing of the transaction and related borrowings will significantly increase the Company's outstanding debt.
Cash and cash equivalents
Our cash and cash equivalents are held in numerous locations throughout the world. At December 31, 2016, approximately $432.0 million of our total $474.2 million in cash and cash equivalents was held outside the U.S. Of the $432.0 million of cash and cash equivalents held outside the United States at December 31, 2016, approximately $340.0 million represents accumulated undistributed earnings of our non-U.S. subsidiaries. Under U.S. GAAP rules, no provision for income taxes that may result from the remittance of such earnings is required if the Company has the ability and intent to reinvest such funds overseas indefinitely. Our current plans do not demonstrate a need to repatriate these undistributed earnings to fund our U.S. operations or otherwise satisfy the liquidity needs of our U.S. operations. We intend to reinvest these earnings in our non-U.S. operations, except in instances in which the repatriation of these earnings would result in minimal additional tax. As a result, the Company has not recognized income tax expense that could result from the remittance of these earnings.
However, future events such as a change in our liquidity needs or U.S. tax laws could cause us to change our repatriation policy and decide to repatriate some or all of these undistributed earnings. As a result, we could be required to accrue additional taxes in the future which could have a material impact on our consolidated financial position, cash flows, and results of operations in future periods.
The following table summarizes and explains the changes in our cash and cash equivalents for the three-years ended December 31, 2016 (in thousands):
2016 VERSUS 2015
Operating cash flow increased by $20.1 million, or 6%, in 2016 compared to 2015. The 2016 increase was primarily due to higher net income and the adoption of ASU No. 2016-09. Partially offsetting these increases were higher cash payments for acquisition and integration costs, bonus and commissions, and interest on our borrowings.
We used $84.0 million of cash in our investing activities in 2016 compared to $242.4 million of cash used in 2015. Cash used in 2015 was substantially higher due to additional expenditures for acquisitions.
Cash used was $174.7 million in 2016, which consisted of $59.0 million paid for share repurchases and $125.0 million for payments and fees on debt, which was partially offset by $9.3 million in cash realized from employee share-related activities. In the 2015 period the Company used $67.7 million in cash in its financing activities, with $509.0 million in cash used for share repurchases, while net borrowings on debt and employee share-related activities provided cash of $441.3 million.
2015 VERSUS 2014
Operating cash flow decreased slightly when comparing 2015 to 2014. The decrease reflects the negative impact of a stronger U.S. dollar and lower 2015 net income, as well as additional cash payments for employee incentives related to our acquisitions, income taxes, and interest on our debt obligations in the 2015 period. Partially offsetting these elements were additional collections in the 2015 period.
We used an additional $79.6 million of cash in our investing activities in 2015 compared to 2014, primarily due to the acquisitions we made during 2015. In total, we used $196.2 million and $124.3 million of cash (net of the cash acquired) for acquisitions in 2015 and 2014, respectively. The Company used both existing cash and additional borrowings to finance its 2015 acquisitions. We also used an additional $7.6 million in cash for capital expenditures in the 2015 period, with a total of $46.1 million used in 2015 compared to $38.5 million in 2014.
In total, we used $67.7 million of cash in our financing activities during 2015 compared to $208.7 million of cash used in 2014. The Company used $509.0 million of cash for share repurchases in 2015 compared to $432.0 million used for share repurchases in 2014. The Company borrowed an additional $420.0 million in 2015 on a net basis compared to $200.0 million of net additional borrowings in 2014. Additions to financing cash flows from employee share-based activities were $21.4 million in 2015 and $28.0 million in 2014.
OBLIGATIONS AND COMMITMENTS
2016 Credit Agreement
The Company's 2016 Credit Agreement provides for a $600.0 million term loan and a $1.2 billion revolving credit facility. The 2016 Credit Agreement was amended on January 20, 2017 to permit the acquisition of CEB and the incurrence of an additional $1.375 billion senior secured term loan B facility, $300.0 million 364-day senior unsecured bridge facility and a senior unsecured high-yield bridge facility of up to $600.0 million (or the issuance of a corresponding amount of debt securities) to finance, in part, the acquisition and repay certain debt of CEB, and to modify certain covenants. Under the revolving credit facility, amounts may be borrowed, repaid, and re-borrowed through the maturity date of the 2016 Credit Agreement in 2021. The term and revolving facilities may be increased, at the Company's option, by up to an additional $750.0 million in the aggregate. As of December 31, 2016, the Company had $585.0 million outstanding under the term loan and $115.0 million under the revolver. See Note 5 — Debt in the Notes to the Consolidated Financial Statements for additional information regarding the 2016 Credit Agreement.
Off-Balance Sheet Arrangements
Through December 31, 2016, we have not entered into any off-balance sheet arrangements or transactions with unconsolidated entities or other persons.
Contractual Cash Commitments
The Company has certain commitments that contractually require future cash payments. The following table summarizes the Company's contractual cash commitments as of December 31, 2016 (in thousands):
In addition to the contractual cash commitments included in the table above, the Company has other payables and liabilities that may be legally enforceable but are not considered contractual commitments. Information regarding the Company's payables and liabilities is included in Note 4 — Accounts Payable, Accrued, and Other Liabilities in the Notes to the Consolidated Financial Statements.
QUARTERLY FINANCIAL DATA
The following tables present our quarterly operating results for the two-year period ended December 31:
RECENTLY ISSUED ACCOUNTING STANDARDS
Accounting standards issued by the various U.S. standard setting and governmental authorities that have not yet become effective and may impact our consolidated financial statements in future periods are described below, together with our assessment of the potential impact they may have on our consolidated financial statements and related disclosures in future periods.
Business Combinations — In January 2017, the FASB issued ASU No. 2017-01, "Clarifying the Definition of a Business" ("ASU No. 2017-01"), which is effective for Gartner on January 1, 2018. ASU No. 2017-01 changes the GAAP definition of a business which can impact the accounting for asset purchases, acquisitions, goodwill impairment, and other assessments. We are currently evaluating the impact of ASU No. 2017-01 on our consolidated financial statements.
Statement of Cash Flows — In November 2016, the FASB issued ASU No. 2016-18, "Restricted Cash" ("ASU No. 2016-18"). ASU No. 2016-18 requires that amounts generally described as restricted cash and restricted cash equivalents be presented with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. If different, a reconciliation of the cash balances reported in the cash flow statement and the balance sheet would need to be provided along with explanatory information. ASU No. 2016-18 is effective for Gartner on January 1, 2018. We are currently evaluating the impact of ASU No. 2016-18 on our consolidated financial statements.
Income Taxes — In October 2016, the FASB issued ASU No. 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory" ("ASU No. 2016-16"). ASU No. 2016-16 accelerates the recognition of taxes on certain intra-entity transactions and is effective for Gartner on January 1, 2018. Current GAAP requires deferral of the income tax implications of an intercompany sale of assets until the assets are sold to a third party or recovered through use. Under the new rule, the seller’s tax effects and the buyer’s deferred taxes will be immediately recognized upon the sale. We have completed an initial evaluation of the impact of ASU No. 2016-16 and we do not expect it will have a material impact on our consolidated financial statements when adopted but could impact the timing of recognition of taxes on future intra-entity transfers.
Statement of Cash Flows — In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments" ("ASU No. 2016-15"). ASU No. 2016-15 sets forth classification requirements for certain cash flow transactions. ASU No. 2016-15 is effective for Gartner on January 1, 2018, but early adoption is permitted. We have completed an initial evaluation of the impact of ASU No. 2016-15 and we do not expect it will have a material impact on our consolidated financial statements.
Financial Instrument Credit Losses — In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments—Credit Losses" ("ASU No. 2016-13"). ASU No. 2016-13 amends the current financial instrument impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. ASU No. 2016-13 is effective for Gartner on January 1, 2020, with early adoption permitted. We are currently evaluating the potential impact of ASU No. 2016-13 on our consolidated financial statements.
Leases — In February 2016, the FASB issued ASU No. 2016-02, "Leases" ("ASU No. 2016-02") which will require significant changes in the accounting and disclosure for lease arrangements. Currently under U.S. GAAP, lease arrangements that meet certain criteria are considered operating leases and are not recorded on the balance sheet. All of the Company's existing lease arrangements are accounted for as operating leases and are thus not recorded on the Company's balance sheet. ASU No. 2016-02 will significantly change the accounting for leases since a right-of-use ("ROU") model must be used in which the lessee must record a ROU asset and a lease liability on the balance sheet for leases with terms longer than 12 months. Leases will be classified as either finance or operating arrangements, with classification affecting the pattern of expense recognition in the income statement. ASU No. 2016-02 also requires expanded disclosures about leasing arrangements. ASU No. 2016-02 will be effective for Gartner on January 1, 2019. We are currently evaluating the impact of ASU No. 2016-02 on our consolidated financial statements.
Financial Instruments Recognition and Measurement — In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments Overall - Recognition and Measurement of Financial Assets and Liabilities" ("ASU No. 2016-01") to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among the significant changes required by ASU No. 2016-01 is that equity investments will be measured at fair value with changes in fair value recognized in net income. ASU No. 2016-01 will be effective for Gartner on January 1, 2018. We have completed an initial evaluation of the impact of ASU No. 2016-01 and we do not expect it will have a material impact on our consolidated financial statements but may require additional disclosures.
Revenue — In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" ("ASU No. 2014-09"). ASU No. 2014-09 and related amendments require changes in revenue recognition policies as well as enhanced disclosures. ASU No. 2014-09 is intended to clarify the principles for recognizing revenue by removing inconsistencies and weaknesses in existing
revenue recognition rules; provide a more robust framework for addressing revenue recognition issues; improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; and provide more useful information to users of financial statements through improved disclosures. We have completed an initial assessment of the impact of ASU No. 2014-09 on our existing revenue recognition policies and we plan to adopt the rule on January 1, 2018 using the cumulative effect method of adoption. ASU No. 2014-09 also requires significantly expanded disclosures around the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, which we are currently compiling. While we have not completed our assessment of the impact of ASU No. 2014-09, based on the analysis completed to date, we do not currently anticipate that the new rule will have a material impact on our consolidated financial statements.
The FASB also continues to work on a number of other accounting rules which if issued could impact our accounting policies and disclosures in future periods. However, since these rules have not yet been issued, the effective dates and potential impact are unknown.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
The Company's 2016 Credit Agreement provides for a five-year, $600.0 million term loan and a $1.2 billion revolving credit facility. At December 31, 2016, we had $700.0 million outstanding under the 2016 Credit Agreement, which included $585.0 million outstanding under the term loan and $115.0 million under the revolver. The 2016 Credit Agreement was amended on January 20, 2017 to permit the acquisition of CEB and the incurrence of an additional $1.375 billion senior secured term loan B facility, $300.0 million 364-day senior unsecured bridge facility and a senior unsecured high-yield bridge facility of up to $600.0 million (or the issuance of a corresponding amount of debt securities) to finance, in part, the acquisition and repay certain debt of CEB and to modify certain covenants. In addition, in connection with financing the CEB acquisition, the Company has received a commitment with respect to $600.0 million senior unsecured bridge facilities.
We have cash flow exposure to changes in interest rates since amounts currently borrowed under our 2016 Credit Agreement are based on a floating base rate of interest. However, we reduce our exposure to changes in interest rates through our interest rate swap contracts which effectively convert the floating base interest rate on the first $700.0 million of our variable rate borrowings to fixed rates. Thus we are exposed to interest rate risk on borrowings under the 2016 Credit Agreement only if our borrowings exceed $700.0 million. At December 31, 2016, the amount of unhedged borrowings under the 2016 Credit Agreement was zero.
FOREIGN CURRENCY RISK
For the fiscal years ended December 31, 2016 and 2015, 42% and 41%, respectively, of our revenues were derived from sales outside of the United States. We conduct business in numerous currencies other than the U.S dollar. Among the major foreign currencies in which we conduct business are the Euro, the British Pound, the Japanese Yen, the Australian dollar, and the Canadian dollar. The reporting currency of our consolidated financial statements is the U.S. dollar. As the values of the foreign currencies in which we operate fluctuate over time relative to the U.S. dollar, the Company is exposed to both foreign currency translation and transaction risk.
Translation risk arises as our foreign currency assets and liabilities are translated into U.S. dollars since the functional currencies of our foreign operations are generally denominated in the local currency. Adjustments resulting from the translation of these assets and liabilities are deferred and recorded as a component of stockholders’ equity (deficit). A measure of the potential impact of foreign currency translation can be determined through a sensitivity analysis of our cash and cash equivalents. At December 31, 2016, we had $474.2 million of cash and cash equivalents, with a substantial portion denominated in foreign currencies. If the exchange rates of the foreign currencies we hold all changed in comparison to the U.S. dollar by 10%, the amount of cash and cash equivalents we would have reported on December 31, 2016 would have increased or decreased by approximately $21.0 million. The translation of our foreign currency revenues and expenses historically has not had a material impact on our consolidated earnings since movements in and among the major currencies in which we operate tend to impact our revenues and expenses fairly equally. However, our earnings could be impacted during periods of significant exchange rate volatility, or when some or all of the major currencies in which we operate move in the same direction against the U.S dollar.
Transaction risk arises because our foreign subsidiaries enter into transactions that are denominated in a currency that may differ from the local functional currency. As these transactions are translated into the local functional currency, a gain or loss may result, which is recorded in current period earnings. We typically enter into foreign currency forward exchange contracts to mitigate the effects of some of this foreign currency transaction risk. Our outstanding currency contracts as of December 31, 2016 had an immaterial net unrealized loss.
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of short-term, highly liquid investments classified as cash equivalents, accounts receivable, and interest rate swap contracts and foreign exchange contracts. The majority of the Company’s cash and cash equivalents, interest rate swap contracts, and its foreign exchange contracts are with large investment grade commercial banks. Accounts receivable balances deemed to be collectible from customers have a limited concentration of credit risk due to our diverse customer base and geographic dispersion.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our consolidated financial statements for 2016, 2015, and 2014, together with the reports of KPMG LLP, our independent registered public accounting firm, are included herein in this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Management conducted an evaluation, as of December 31, 2016, of the effectiveness of the design and operation of our disclosure controls and procedures, (as such term is defined in Rules 13a- 15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) under the supervision and with the participation of our chief executive officer and chief financial officer. Based upon that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective in alerting them in a timely manner to material Company information required to be disclosed by us in reports filed or submitted under the Exchange Act.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Gartner management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Gartner’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this assessment, management used the criteria set forth in the Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment was reviewed with the Audit Committee of the Board of Directors.
Based on its assessment of internal control over financial reporting, management has concluded that, as of December 31, 2016, Gartner’s internal control over financial reporting was effective. The effectiveness of management’s internal control over financial reporting as of December 31, 2016 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included in this Annual Report on Form 10-K in Part IV, Item 15.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the quarter ended December 31, 2016, we identified deficiencies in certain general information technology controls ("GITCs") that affected the use of a report-writer IT application operated in connection with the Company’s enterprise resource planning systems. Specifically, we did not have effective controls over the configuration of the reports and completeness and accuracy of information presented in the reports. Reports produced by the report-writer IT application are used in the operation of certain key internal controls. We have determined that these deficiencies in our internal control over financial reporting constituted a material weakness that originated in periods prior to the fourth quarter of 2016. The deficiencies resulted in no misstatements to the current or previously issued financial statements.
In connection with the operation of key internal controls performed during the year ended December 31, 2016, management designed and implemented effective controls over the generation of information and reports using the report-writer IT application going forward and retrospectively operated those controls for each instance that the reports were used by management as part of its internal control over financial reporting during fiscal year 2016, thereby remediating the material weakness as of December 31, 2016. Further, we have enhanced the design of our existing GITCs over the report-writer application. We will monitor these new controls going forward.
We have determined that the actions taken to date have sufficiently improved the Company’s internal control over financial reporting such that as of December 31, 2016, there is not a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Based on the remediation of the deficiencies we concluded that our internal control over financial reporting was effective as of December 31, 2016.
Other than the changes noted above, there has been no change in our internal control over financial reporting during the quarter ended December 31, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required to be furnished pursuant to this item will be set forth under the captions “Proposal One: Election of Directors,” “Executive Officers,” “Corporate Governance,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Miscellaneous — Available Information” in the Company’s Proxy Statement to be filed with the SEC no later than April 30, 2017. If the Proxy Statement is not filed with the SEC by April 30, 2017, such information will be included in an amendment to this Ann