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Gartner 10-Q 2014

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
IT - 09.30.2014 - 10Q



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
 
 
For the quarterly period ended September 30, 2014
 
 
 
OR
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission File Number 1-14443
Gartner, Inc.
(Exact name of Registrant as specified in its charter)
Delaware
04-3099750
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)
 
 
P.O. Box 10212
06902-7700
56 Top Gallant Road
(Zip Code)
Stamford, CT
 
(Address of principal executive offices)
 

Registrant’s telephone number, including area code: (203) 316-1111

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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
 
(Do not check if a smaller reporting company)

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

As of October 31, 2014, 88,027,698 shares of the registrant’s common shares were outstanding.




Table of Contents


 
Page
 
 
 


2



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GARTNER, INC.

Condensed Consolidated Balance Sheets

(Unaudited; in thousands)  
 
September 30,
 
December 31,
 
2014
 
2013
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
341,220

 
$
423,990

Fees receivable, net of allowances of $6,900 and $7,000, respectively
449,923

 
490,923

Deferred commissions
80,599

 
106,287

Prepaid expenses and other current assets
87,492

 
63,682

Total current assets
959,234

 
1,084,882

Property, equipment and leasehold improvements, net
93,625

 
91,759

Goodwill
593,212

 
519,203

Intangible assets, net
33,515

 
6,107

Other assets
89,367

 
81,631

Total Assets
$
1,768,953

 
$
1,783,582

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
266,545

 
$
325,059

Deferred revenues
847,327

 
766,114

Current portion of long-term debt
245,000

 
68,750

Total current liabilities
1,358,872

 
1,159,923

Long-term debt
125,000

 
136,250

Other liabilities
132,558

 
126,093

Total Liabilities
1,616,430

 
1,422,266

Stockholders’ Equity
 

 
 

Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued or outstanding

 

Common stock, $.0005 par value, 250,000,000 shares authorized; 156,234,415 shares issued for both periods
78

 
78

Additional paid-in capital
754,827

 
718,644

Accumulated other comprehensive income, net
(2,001
)
 
8,345

Accumulated earnings
1,215,905

 
1,091,283

Treasury stock, at cost, 68,213,874 and 64,268,863 common shares, respectively
(1,816,286
)
 
(1,457,034
)
Total Stockholders’ Equity
152,523

 
361,316

Total Liabilities and Stockholders’ Equity
$
1,768,953

 
$
1,783,582

 

See the accompanying notes to the condensed consolidated financial statements.

3



GARTNER, INC.

Condensed Consolidated Statements of Operations

(Unaudited; in thousands, except per share data)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 

 
 

Research
$
365,334

 
$
316,518

 
$
1,071,943

 
$
938,082

Consulting
82,300

 
70,149

 
260,059

 
228,710

Events
23,306

 
24,038

 
105,460

 
96,714

Total revenues
470,940

 
410,705

 
1,437,462

 
1,263,506

Costs and expenses:
 
 
 
 
 

 
 

Cost of services and product development
188,059

 
161,735

 
562,058

 
503,376

Selling, general and administrative
217,025

 
181,546

 
640,179

 
547,653

Depreciation
7,945

 
7,258

 
23,125

 
21,375

Amortization of intangibles
2,505

 
1,351

 
5,763

 
4,089

Acquisition and integration charges
6,015

 
72

 
16,015

 
278

Total costs and expenses
421,549

 
351,962

 
1,247,140

 
1,076,771

Operating income
49,391

 
58,743

 
190,322

 
186,735

Interest expense, net
(2,656
)
 
(2,124
)
 
(7,586
)
 
(6,704
)
Other (expense) income, net
(287
)
 
5

 
(341
)
 
(64
)
Income before income taxes
46,448

 
56,624

 
182,395

 
179,967

Provision for income taxes
12,602

 
18,430

 
57,773

 
58,584

Net income
$
33,846

 
$
38,194

 
$
124,622

 
$
121,383

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 

 
 

Basic
$
0.38

 
$
0.41

 
$
1.39

 
$
1.30

Diluted
$
0.38

 
$
0.40

 
$
1.37

 
$
1.28

Weighted average shares outstanding:
 
 
 
 
 

 
 

Basic
88,513

 
92,689

 
89,901

 
93,286

Diluted
89,708

 
94,355

 
91,273

 
95,100


See the accompanying notes to the condensed consolidated financial statements.

4



GARTNER, INC.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited; in thousands)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
33,846

 
$
38,194

 
$
124,622

 
$
121,383

Other comprehensive (loss) income, net of tax:
 
 
 
 
 

 
 

Foreign currency translation adjustments
(12,588
)
 
4,109

 
(11,990
)
 
(900
)
Interest rate hedge – gain
619

 
261

 
1,600

 
1,636

Pension – actuarial gain
15

 
6

 
44

 
30

Other comprehensive (loss) income
(11,954
)
 
4,376

 
(10,346
)
 
766

Comprehensive income
$
21,892

 
$
42,570

 
$
114,276

 
$
122,149


See the accompanying notes to the condensed consolidated financial statements.

5



GARTNER, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited; in thousands)

 
Nine Months Ended
 
September 30,
 
2014
 
2013
Operating activities:
 

 
 

Net income
$
124,622

 
$
121,383

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

 
 

Depreciation and amortization
28,888

 
25,464

Stock-based compensation expense
29,425

 
27,049

Excess tax benefits from stock-based compensation
(19,275
)
 
(18,412
)
Deferred taxes
(1,299
)
 
4,989

Amortization and write-off of debt issue costs
1,572

 
2,107

Changes in assets and liabilities, net of acquisitions:
 

 
 

Fees receivable, net
37,365

 
69,732

Deferred commissions
24,546

 
10,055

Prepaid expenses and other current assets
(23,831
)
 
(20,840
)
Other assets
(1,303
)
 
(3,064
)
Deferred revenues
92,593

 
64,662

Accounts payable, accrued, and other liabilities
(17,694
)
 
(41,056
)
Cash provided by operating activities
275,609

 
242,069

Investing activities:
 

 
 

Additions to property, equipment and leasehold improvements
(25,516
)
 
(27,772
)
Acquisitions - cash paid (net of cash acquired)
(107,528
)
 

Acquisitions - increase in restricted cash (escrow)
(14,363
)
 

Cash used in investing activities
(147,407
)
 
(27,772
)
Financing activities:
 

 
 

Proceeds from stock issued under stock plans
6,365

 
4,539

Proceeds from debt issuance
174,375

 
203,750

Payments for debt issuance costs

 
(3,553
)
Payments on debt
(9,375
)
 
(203,750
)
Purchases of treasury stock
(387,126
)
 
(157,251
)
Excess tax benefits from stock-based compensation
19,275

 
18,412

Cash used in financing activities
(196,486
)
 
(137,853
)
Net (decrease) increase in cash and cash equivalents
(68,284
)
 
76,444

Effects of exchange rates on cash and cash equivalents
(14,486
)
 
(1,775
)
Cash and cash equivalents, beginning of period
423,990

 
299,852

Cash and cash equivalents, end of period
$
341,220

 
$
374,521


See the accompanying notes to the condensed consolidated financial statements.

6



GARTNER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
Note 1 — Business and Basis of Presentation

Business. Gartner, Inc. is a global information technology research and advisory company with its headquarters in Stamford, Connecticut. Gartner delivers its products and services globally through three business segments: Research, Consulting, and Events. When used in these notes, the terms “Gartner,” “Company,” “we,” “us,” or “our” refer to Gartner, Inc. and its consolidated subsidiaries.

Basis of presentation. The accompanying interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”), as defined in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (“ASC”) Topic 270 for interim financial information and with the applicable instructions of the U.S. Securities & Exchange Commission (“SEC”) Rule 10-01 of Regulation S-X on Form 10-Q and should be read in conjunction with the consolidated financial statements and related notes of the Company filed in its Annual Report on Form 10-K for the year ended December 31, 2013.

The fiscal year of Gartner is the twelve-month calendar period from January 1 through December 31. In the opinion of management, all normal recurring accruals and adjustments considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented herein have been included. The results of operations for the three and nine months ended September 30, 2014 may not be indicative of the results of operations for the remainder of 2014.

Principles of consolidation. The accompanying interim condensed consolidated financial statements include the accounts of the Company and its wholly- and majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated.

Use of estimates. The preparation of the accompanying interim condensed consolidated financial statements requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the valuation of fees receivable, goodwill, intangible assets, and other long-lived assets, as well as tax accruals and other liabilities. In addition, estimates are used in revenue recognition, income tax expense, performance-based compensation expenses, depreciation and amortization, and the allowance for losses. Management believes its use of estimates in these interim condensed consolidated financial statements to be reasonable.

Management continually evaluates and revises its estimates using historical experience and other factors, including the general economic environment and actions it may take in the future. Management adjusts these estimates when facts and circumstances dictate. However, these estimates may involve significant uncertainties and judgments and cannot be determined with precision. In addition, these estimates are based on management’s best judgment at a point in time. As a result, differences between our estimates and actual results could be material and would be reflected in the Company’s consolidated financial statements in future periods.

Adoption of new accounting rules. Effective January 1, 2014, the Company adopted two new accounting rules issued by the FASB, as follows:

The Company adopted ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" ("ASU No. 2013-11"). ASU No. 2013-11 addresses the balance sheet presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU No. 2013-11 requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The balance sheet impact from the adoption of ASU No. 2013-11 was not material to the Company.

The Company adopted ASU No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity ("ASU No. 2013-05"). ASU No. 2013-05 provides updated guidance to resolve diversity in practice concerning the release of the cumulative foreign currency translation adjustment into net income when a parent sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. When a company ceases to have a controlling financial interest, the company should recognize any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary had

7



resided. Upon a partial sale, the company should release into earnings a pro rata portion of the cumulative translation adjustment. The adoption of ASU No. 2013-05 did not impact the Company's financial statements and will only have an impact upon the occurrence of a transaction within its scope.

Acquisitions. The Company made three acquisitions during the nine months ended September 30, 2014 (the "2014 Acquisitions"), which are discussed below.

In June 2014, the Company acquired 100% of the outstanding shares of SircleIT Inc., a developer of cloud-based knowledge automation software, for $5.7 million in cash. SircleIT Inc. is a domestic company that conducts its operations principally through Senexx Israel Ltd., its wholly-owned subsidiary in Israel with 2 employees. Gartner paid $4.9 million in cash at close and an additional $0.9 million was placed in escrow as security for certain indemnity claims, which is payable 18 months from the date of close.

In May 2014, the Company acquired 100% of the outstanding shares of Market-Visio Oy ("Market-Visio"), a privately-owned Finnish company with 68 employees, now named Gartner Finland Oy. Market-Visio was previously an independent sales agent of Gartner research products, as well as locally-created research content, in Finland and Russia. Gartner Finland Oy conducts its operations in Russia through a wholly-owned operating subsidiary. The Company paid a total of $6.5 million in cash for Market-Visio, which included $4.1 million paid at close and $2.5 million paid in October 2014 for working capital adjustments.

In March 2014, the Company acquired Software Advice, Inc., (“Software Advice”), a privately-owned company based in Austin, Texas with 120 employees. Software Advice assists customers with software purchases. At closing, the Company paid $103.2 million in cash for 100% of the outstanding shares of Software Advice. The Company is also obligated to pay up to an additional $31.9 million in cash related to the acquisition. This includes $13.5 million placed in escrow as security for potential losses. Release of the escrowed funds is also subject to the achievement of certain employment conditions. The escrow amount is considered restricted cash and is recorded in Other Assets in the Condensed Consolidated Balance Sheets. An additional $18.4 million is also payable contingent on the achievement of certain employment conditions. This amount is also subject to any indemnified losses in excess of the escrowed funds. The $31.9 million obligation (adjusted for any indemnified losses) will be recognized as compensation expense over the two-year service period of the relevant employees in Acquisition and integration charges in the Condensed Consolidated Statements of Operations. If the employment conditions are not met, any expense previously accrued will be reversed in the period employment terminates.

The Company's financial statements include the operating results of these businesses beginning from their respective dates of acquisition. The operating results of these businesses were not material to the Company's consolidated and segment operating results for the three and nine month periods ending September 30, 2014. Had the Company acquired these businesses in prior periods the impact to the Company's operating results for prior periods would not have been material, and as a result pro forma financial information for prior periods has not been presented. The Company recorded $6.0 million and $16.0 million of pre-tax acquisition and integration charges in the three and nine months ended September 30, 2014, respectively, which are classified in Acquisition and integration charges in the Condensed Consolidated Statements of Operations. Included in these charges are legal, consulting, retention, severance, and other direct acquisition and integration costs.

The Company accounts for acquisitions in accordance with the acquisition method of accounting as prescribed by FASB ASC Topic 805, Business Combinations. The acquisition method of accounting requires the consideration paid to be allocated to the net assets and liabilities acquired based on their estimated fair values as of the acquisition date, and any excess of the purchase price over the estimated fair value of the net assets acquired, including identifiable intangible assets, must be allocated to goodwill.


8



The following table summarizes the preliminary allocation of the purchase price to the fair value of the assets acquired and liabilities assumed in the 2014 Acquisitions (in thousands):
 
Software Advice
 
Other Acquisitions (1)
 
Total
Assets:
 
 
 
 
 
Cash
$
1,450

 
$
3,203

 
$
4,653

Fees receivable and other current assets
3,606

 
3,547

 
7,153

Property, equipment, and leasehold improvements
235

 
169

 
404

Amortizable intangible assets (2)
26,928

 
5,047

 
31,975

Goodwill (3), (4)
73,663

 
4,929

 
78,592

Total assets
$
105,882

 
$
16,895

 
$
122,777

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Accounts payable and accrued liabilities
$
2,657

 
$
4,554

 
$
7,211

Total liabilities
$
2,657

 
$
4,554

 
$
7,211

 
 
 
 
 
 
Net assets acquired (5)
$
103,225

 
$
12,341

 
$
115,566

 

(1)
Includes the SircleIT Inc. and Market-Visio acquisitions.
  
(2)
See Note 6 - Goodwill and Intangible Assets for additional information regarding the types and amounts of amortizable intangibles recorded from the 2014 Acquisitions.

(3)
During the third quarter of 2014 certain tax, working capital and other minor adjustments were recorded which decreased the recorded goodwill resulting from the Market-Visio acquisition by approximately $0.1 million on a net basis.

(4)
During the second quarter of 2014, the recorded amount of an amortizable intangible asset resulting from the Software Advice acquisition was reduced by $2.7 million and goodwill was increased by the same amount. This measurement period adjustment was based on a change in the underlying assumptions used to value the amortizable intangible asset and was due to the consideration of new information.

(5)
The Company paid $112.2 million in cash on a gross basis for the net assets acquired through September 30, 2014. On a net basis, and for cash flow reporting, the Company paid $107.5 million through September 30, which represents the $112.2 million in cash paid on a gross basis minus the $4.7 million of cash acquired from the purchased companies. The Company has also recorded a liability for an additional $3.4 million to be paid for the 2014 Acquisitions, of which $2.5 million was paid in late October 2014.

The determination of the fair value of the amortizable intangibles required management judgment and the consideration of a number of factors, significant among them the historical financial performance of the acquired businesses and projected performance, estimates surrounding customer turnover, as well as assumptions regarding the level of competition and the cost to reproduce certain assets. In determining the fair value of the intangibles, management primarily relied on income methodologies, in particular the discounted cash flow approach. Establishing the useful lives of the amortizable intangibles also required management judgment and the evaluation of a number of factors, among them projected cash flows and the likelihood of competition.

The Company considers the allocation of the purchase price for the 2014 Acquisitions to be preliminary with respect to certain tax and other contingencies, as well as the finalization of certain working capital and other adjustments. The majority of the recorded goodwill and intangibles from these transactions will be deductible for tax purposes over 15 years. All of the recorded goodwill from the 2014 Acquisitions was included in the Company’s Research segment. The Company believes the recorded goodwill is supported by the anticipated revenue synergies, customer retention, and cost savings resulting from the combined operations.


9




Note 2 — Comprehensive Income

The following tables disclose information about changes in accumulated other comprehensive income (“AOCI") by component and amounts reclassified out of AOCI to income during the periods indicated (net of tax, in thousands) (1):

For the three months ended September 30, 2014:
 
Interest Rate
Swap
 
Defined
Benefit
Pension Plans
 
Foreign
Currency
Translation
Adjustments
 
Total
Balance – June 30, 2014
$
(2,922
)
 
$
(1,782
)
 
$
14,657

 
$
9,953

Changes during the period:
 

 
 

 
 

 
 

Other comprehensive income (loss) before reclassifications
(1
)
 

 
(12,588
)
 
(12,589
)
Reclassifications from AOCI to income (2), (3)
620

 
15

 

 
635

Other comprehensive income (loss) for the period
619

 
15

 
(12,588
)
 
(11,954
)
Balance – September 30, 2014
$
(2,303
)
 
$
(1,767
)
 
$
2,069

 
$
(2,001
)

For the three months ended September 30, 2013:
 
Interest Rate
Swap
 
Defined
Benefit
Pension Plans
 
Foreign
Currency
Translation
Adjustments
 
Total
Balance – June 30, 2013
$
(4,635
)
 
$
(1,554
)
 
$
8,547

 
$
2,358

Changes during the period:
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
(360
)
 

 
4,109

 
3,749

Reclassifications from AOCI to income (2), (3)
621

 
6

 

 
627

Other comprehensive income (loss) for the period
261

 
6

 
4,109

 
4,376

Balance – September 30, 2013
$
(4,374
)
 
$
(1,548
)
 
$
12,656

 
$
6,734


For the nine months ended September 30, 2014:
 
Interest Rate
Swap
 
Defined
Benefit
Pension Plans
 
Foreign
Currency
Translation
Adjustments
 
Total
Balance – December 31, 2013
$
(3,903
)
 
$
(1,811
)
 
$
14,059

 
$
8,345

Changes during the period:
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
(236
)
 

 
(11,990
)
 
(12,226
)
Reclassifications from AOCI to income (2), (3)
1,836

 
44

 

 
1,880

Other comprehensive income (loss) for the period
1,600

 
44

 
(11,990
)
 
(10,346
)
Balance – September 30, 2014
$
(2,303
)
 
$
(1,767
)
 
$
2,069

 
$
(2,001
)


10



For the nine months ended September 30, 2013:
 
Interest Rate
Swap
 
Defined
Benefit
Pension Plans
 
Foreign
Currency
Translation
Adjustments
 
Total
Balance – December 31, 2012
$
(6,010
)
 
$
(1,578
)
 
$
13,556

 
$
5,968

Changes during the period:
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
(153
)
 
17

 
(900
)
 
(1,036
)
Reclassifications from AOCI to income (2), (3)
1,789

 
13

 

 
1,802

Other comprehensive income (loss) for the period
1,636

 
30

 
(900
)
 
766

Balance – September 30, 2013
$
(4,374
)
 
$
(1,548
)
 
$
12,656

 
$
6,734

 
(1)
Amounts in parentheses represent debits (deferred losses).

(2)
The reclassifications related to the interest rate swap (cash flow hedge) were recorded in Interest expense and exclude a related tax benefit reflected in the Provision for income taxes. See Note 10 – Derivatives and Hedging for information regarding the hedge.

(3)
The reclassifications related to defined benefit pension plans were recorded in Selling, general and administrative expense and had an immaterial tax effect for both periods. See Note 12 – Employee Benefits for information regarding the Company’s defined benefit pension plans.

Note 3 — Earnings per Share

The following table sets forth the calculations of basic and diluted earnings per share (in thousands, except per share data):

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Numerator:
 

 
 

 
 

 
 

Net income used for calculating basic and diluted earnings per share
$
33,846

 
$
38,194

 
$
124,622

 
$
121,383

Denominator:
 

 
 

 
 

 
 

Weighted average number of common shares used in the calculation of basic earnings per share
88,513

 
92,689

 
89,901

 
93,286

Common stock equivalents associated with stock-based compensation plans (1)
1,195

 
1,666

 
1,372

 
1,814

Shares used in the calculation of diluted earnings per share
89,708

 
94,355

 
91,273

 
95,100

Basic earnings per share
$
0.38

 
$
0.41

 
$
1.39

 
$
1.30

Diluted earnings per share
$
0.38

 
$
0.40

 
$
1.37

 
$
1.28


 
(1)
Certain common stock equivalents were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive. These shares totaled less than 0.4 million in each of the periods presented.


11



Note 4 — Stock-Based Compensation

The Company grants stock-based compensation awards as an incentive for employees and directors to contribute to the Company’s long-term success. The Company currently awards stock-settled stock appreciation rights, service-based and performance-based restricted stock units, and common stock equivalents. On May 29, 2014, the Company's shareholders approved the 2014 Long-Term Incentive Plan (the "2014 Plan") which replaces the 2003 Long-Term Incentive Plan (the "2003 Plan"). All 5.8 million shares remaining available under the 2003 Plan were transferred to the 2014 Plan, and an additional 2.2 million shares were made available for awards under the 2014 Plan, for a total availability of 8.0 million shares. At September 30, 2014, the Company had a total of 7.96 million shares of its common stock, par value $.0005 per share (the “Common Stock”), remaining available for awards of stock-based compensation under its 2014 Plan.

The Company accounts for stock-based compensation awards in accordance with FASB ASC Topics 505 and 718, as interpreted by SEC Staff Accounting Bulletins No. 107 (“SAB No. 107”) and No. 110 (“SAB No. 110”). Stock-based compensation expense is based on the fair value of the award on the date of grant, which is then recognized as expense over the related service period, net of estimated forfeitures. The service period is the period over which the related service is performed, which is generally the same as the vesting period. The Company currently issues treasury shares upon the exercise, release or settlement of stock-based compensation awards.

Determining the appropriate fair value model and calculating the fair value of stock-based compensation awards requires the input of certain complex and subjective assumptions, including the expected life of the stock compensation awards and the Common Stock price volatility. In addition, determining the appropriate amount of associated periodic expense requires management to estimate the amount of employee forfeitures and the likelihood of the achievement of certain performance targets. The assumptions used in calculating the fair value of stock-based 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.

Stock-Based Compensation Expense

The Company recognized the following amounts of stock-based compensation expense by award type and expense category in the periods indicated (in millions):

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Award type:
 
2014
 
2013
 
2014
 
2013
Stock appreciation rights
 
$
1.0

 
$
1.1

 
$
3.9

 
$
4.1

Common stock equivalents
 
0.2

 
0.1

 
0.5

 
0.4

Restricted stock units
 
7.6

 
6.2

 
25.0

 
22.5

Total stock-based compensation expense (1), (2)
 
$
8.8

 
$
7.4

 
$
29.4

 
$
27.0


 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Amount recorded in:
 
2014
 
2013
 
2014
 
2013
Cost of services and product development
 
$
4.0

 
$
3.2

 
$
13.5

 
$
12.0

Selling, general and administrative
 
4.8

 
4.2

 
15.9

 
15.0

Total stock-based compensation expense (1), (2)
 
$
8.8

 
$
7.4

 
$
29.4

 
$
27.0

 
(1)
Includes charges of $2.9 million and $1.8 million for the three months ended September 30, 2014 and 2013, respectively, and $12.7 million and $10.6 million for the nine months ended September 30, 2014 and 2013, respectively, for awards to retirement-eligible employees since these awards vest on an accelerated basis.


12



(2)
The nine months ended September 30, 2014 includes a reversal of $1.9 million of expense from forfeited awards related to the departure of the Company's former chief financial officer.

As of September 30, 2014, the Company had $51.7 million of total unrecognized stock-based compensation cost, which is expected to be expensed over the remaining weighted-average service period of approximately 2.3 years.

Stock-Based Compensation Awards

The following disclosures provide information regarding the Company’s stock-based compensation awards, all of which are classified as equity awards in accordance with FASB ASC Topic 505:

Stock Appreciation Rights

Stock-settled stock appreciation rights (SARs) permit the holder to participate in the appreciation of the Common Stock. SARs are settled in shares of Common Stock once the applicable vesting criteria have been met. SARs vest ratably over a four-year service period and expire seven years from the grant date. The fair value of SARs awards is determined on the date of grant and is recognized as compensation expense on a straight-line basis over four years. SARs have only been awarded to the Company’s executive officers.
 
When SARs are exercised, the number of shares of Common Stock issued is calculated as follows: (1) the total proceeds from the SARs exercise (calculated as the closing price of the Common Stock on the date of exercise less the exercise price of the SARs, multiplied by the number of SARs exercised) is divided by (2) the closing price of the Common Stock as reported on the New York Stock Exchange on the exercise date. The Company withholds a portion of the shares of Common Stock issued upon exercise to satisfy minimum statutory tax withholding requirements. SARs recipients do not have any stockholder rights until after actual shares of Common Stock are issued in respect of the award, which is subject to the prior satisfaction of the vesting and other criteria relating to such grants.

The following table summarizes changes in SARs outstanding during the nine months ended September 30, 2014:

 
SARs
(in millions)
 
Per Share
Weighted-
Average
Exercise Price
 
Per Share
Weighted-
Average
Grant Date
Fair Value
 
Weighted
Average
Remaining
Contractual
Term
Outstanding at December 31, 2013
1.6

 
$
34.14

 
$
11.63

 
4.34 years
Granted
0.4

 
64.64

 
14.99

 
6.36 years
Forfeited
(0.1
)
 
52.15

 
n/a

 
n/a
Exercised
(0.4
)
 
23.72

 
8.73

 
n/a
Outstanding at September 30, 2014 (1), (2)
1.5

 
$
44.01

 
$
13.17

 
4.48 years
Vested and exercisable at September 30, 2014 (2)
0.6

 
$
33.05

 
$
11.51

 
3.27 years

n/a=not applicable.
 
(1)
As of September 30, 2014, 0.9 million of the SARs outstanding were unvested. The Company expects that substantially all of these unvested awards will vest in future periods.

(2)
Total SARs outstanding had an intrinsic value of $43.2 million. SARs vested and exercisable had an intrinsic value of $25.5 million.


13



The fair value of the SARs was estimated on the date of grant using the Black-Scholes-Merton valuation model with the following weighted-average assumptions:
 
Nine Months Ended
 
September 30,
 
2014
 
2013
Expected dividend yield (1)
%
 
%
Expected stock price volatility (2)
25
%
 
35
%
Risk-free interest rate (3)
1.3
%
 
0.8
%
Expected life in years (4)
4.4

 
4.5

 
(1)
The dividend yield assumption is based on the history and expectation of the Company’s dividend payouts. Historically, Gartner has not paid cash dividends on its Common Stock.

(2)
The determination of expected stock price volatility was based on both historical Common Stock prices and implied volatility from publicly traded options in the Common Stock.

(3)
The risk-free interest rate is based on the yield of a U.S. Treasury security with a maturity similar to the expected life of the award.

(4)
The expected life represents the Company’s weighted-average estimate of the period of time the SARs are expected to be outstanding (defined as the period between the service inception date and the expected exercise date), which is based on historical exercise data.

Restricted Stock Units

Restricted stock units (RSUs) give the awardee the right to receive shares of Common Stock when the vesting conditions are met and the restrictions lapse, and each RSU that vests entitles the awardee to one common share. RSU awardees do not have any of the rights of a Gartner stockholder, including voting rights and the right to receive dividends and distributions, until the shares are released. The fair value of RSUs is determined on the date of grant based on the closing price of the Common Stock as reported by the New York Stock Exchange on that date. Service-based RSUs vest ratably over four years and are expensed on a straight-line basis over four years. Performance-based RSUs are subject to the satisfaction of both performance and service conditions, vest ratably over four years, and are expensed on an accelerated basis.

The following table summarizes the changes in RSUs outstanding during the nine months ended September 30, 2014:
 
Restricted
Stock Units
(RSUs)
(in millions)
 
Per Share
Weighted
Average
Grant Date
Fair Value
Outstanding at December 31, 2013
1.8

 
$
38.83

Granted (1)
0.5

 
65.30

Vested and released
(0.8
)
 
34.15

Forfeited
(0.1
)
 

Outstanding at September 30, 2014 (2), (3)
1.4

 
$
50.67

 
(1)
The 0.5 million RSUs granted consisted of 0.2 million performance-based RSUs awarded to executives and 0.3 million service-based RSUs awarded to non-executive employees and certain board members. The 0.2 million performance-based RSUs represents the target amount of the grant for the year, which is tied to an increase in the Company’s subscription-based research contract value (“CV”) for 2014. The final number of performance-based RSUs that will ultimately be awarded for 2014 ranges from 0% to 200% of the target amount, with the final number dependent on the actual increase in CV for 2014 as measured on December 31, 2014. If the specified minimum level of achievement is not met, the performance-based RSUs will be forfeited in their entirety, and any compensation expense previously recorded will be reversed.

(2)
The Company expects that substantially all of the outstanding awards will vest in future periods.


14



(3)
The weighted-average remaining contractual term of the outstanding RSUs is approximately 1.3 years.

Common Stock Equivalents

Common stock equivalents (CSEs) are convertible into Common Stock and each CSE entitles the holder to one common share. CSEs are only awarded to members of our Board of Directors who receive directors’ fees payable in CSEs unless they opt to receive up to 50% of the directors' fees in cash. Generally, the CSEs have no defined term and are converted into common shares when service as a director terminates, unless the director has elected an accelerated release. The number of CSEs awarded is determined by dividing directors' fees owing for the quarter and not payable in cash by the closing price of the Common Stock as reported by the New York Stock Exchange on that date. CSEs vest immediately and as a result are recorded as expense on the date of grant.

The following table summarizes the changes in CSEs outstanding during the nine months ended September 30, 2014:

 
Common
Stock
Equivalents
(CSEs)
 
Per Share
Weighted
Average
Grant Date
Fair Value
Outstanding at December 31, 2013
102,479

 
$
17.71

Granted
6,614

 
71.86

Converted to common shares
(5,274
)
 
71.86

Outstanding at September 30, 2014
103,819

 
$
18.41

 

Employee Stock Purchase Plan

The Company has an employee stock purchase plan (the “ESP Plan”) under which eligible employees are permitted to purchase Common Stock through payroll deductions, which may not exceed 10% of an employee’s compensation (or a maximum of $23,750 in any calendar year), at a price equal to 95% of the closing price of the Common Stock as reported by the New York Stock Exchange at the end of each offering period.

At September 30, 2014, the Company had 1.1 million shares available for purchase under the ESP Plan. The ESP Plan is considered non-compensatory under FASB ASC Topic 718, and as a result the Company does not record stock-based compensation expense for employee share purchases. The Company received $6.4 million and $4.5 million in cash from purchases under the ESP Plan and exercises of stock options during the nine months ended September 30, 2014 and 2013, respectively.

Note 5 — Segment Information

The Company manages its business through three reportable segments: Research, Consulting and Events. Research consists primarily of subscription-based research products, access to research inquiry, peer networking services, and membership programs. Consulting consists primarily of consulting, measurement engagements, and strategic advisory services. Events consists of various symposia, conferences, and exhibitions.

The Company evaluates reportable segment performance and allocates resources based on gross contribution margin. Gross contribution, as presented in the table below, is defined as operating income excluding certain Cost of services and product development expenses, Selling, general and administrative expense, depreciation, amortization of intangibles, and acquisition and integration charges. Certain bonus and fringe benefit costs included in consolidated Cost of services and product development are not allocated to segment expense. The accounting policies used by the reportable segments are the same as those used by the Company. There are no intersegment revenues. The Company does not identify or allocate assets, including capital expenditures, by reportable segment. Accordingly, assets are not reported by segment because the information is not available by segment and is not reviewed in the evaluation of segment performance or in making decisions in the allocation of resources.


15



The following tables present information about the Company’s reportable segments for the periods indicated (in thousands):
Three Months Ended September 30, 2014
Research
 
Consulting
 
Events
 
Consolidated
Revenues
$
365,334

 
$
82,300

 
$
23,306

 
$
470,940

Gross contribution
251,113

 
24,774

 
6,946

 
282,833

Corporate and other expenses
 

 
 

 
 

 
(233,442
)
Operating income
 

 
 

 
 

 
$
49,391

Three Months Ended September 30, 2013
Research
 
Consulting
 
Events
 
Consolidated
Revenues
$
316,518

 
$
70,149

 
$
24,038

 
$
410,705

Gross contribution
220,329

 
21,114

 
7,095

 
248,538

Corporate and other expenses
 

 
 

 
 

 
(189,795
)
Operating income
 

 
 

 
 

 
$
58,743

Nine Months Ended September 30, 2014
Research
 
Consulting
 
Events
 
Consolidated
Revenues
$
1,071,943

 
$
260,059

 
$
105,460

 
$
1,437,462

Gross contribution
745,477

 
91,347

 
44,141

 
880,965

Corporate and other expenses
 

 
 

 
 

 
(690,643
)
Operating income
 

 
 

 
 

 
$
190,322

Nine Months Ended September 30, 2013
Research
 
Consulting
 
Events
 
Consolidated
Revenues
$
938,082

 
$
228,710

 
$
96,714

 
$
1,263,506

Gross contribution
648,954

 
76,836

 
37,318

 
763,108

Corporate and other expenses
 

 
 

 
 

 
(576,373
)
Operating income
 

 
 

 
 

 
$
186,735


The following table provides a reconciliation of total segment gross contribution to net income for the periods indicated (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Total segment gross contribution
$
282,833

 
$
248,538

 
$
880,965

 
$
763,108

Costs and expenses:
 
 
 
 
 
 
 
Cost of services and product development - unallocated (1), (2)
(48
)
 
(432
)
 
5,561

 
2,978

Selling, general and administrative
217,025

 
181,546

 
640,179

 
547,653

Depreciation and amortization
10,450

 
8,609

 
28,888

 
25,464

Acquisition and integration charges
6,015

 
72

 
16,015

 
278

Operating income
49,391

 
58,743

 
190,322

 
186,735

Interest expense and other
2,943

 
2,119

 
7,927

 
6,768

Provision for income taxes
12,602

 
18,430

 
57,773

 
58,584

Net income
$
33,846

 
$
38,194

 
$
124,622

 
$
121,383

 
(1)
The unallocated amounts consist of certain bonus and related fringe expenses recorded in Consolidated cost of services and product development expense that are not allocated to segment expense. The Company's policy is to only allocate bonus and related fringe charges to segments for up to 100% of the segment employee's target bonus. Amounts above 100% are absorbed by corporate.
(2)
Amounts in parentheses in the three months ended periods result from adjustments to the year-to-date balances.

16



Note 6 — Goodwill and Intangible Assets

Goodwill

Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value of the tangible and identifiable intangible net assets acquired. Goodwill is not amortized but is periodically evaluated for impairment in accordance with FASB ASC Topic 350, which requires an annual assessment of potential goodwill impairment at the reporting unit level, which the Company completes each year in the third quarter. A reporting unit can be an operating segment or a business if discrete financial information is prepared and reviewed by management.

The following table presents changes to the carrying amount of goodwill by reportable segment during the nine months ended September 30, 2014 (in thousands):
 
Research
 
Consulting
 
Events
 
Total
Balance, December 31, 2013 (1)
$
376,568

 
$
100,677

 
$
41,958

 
$
519,203

Additions due to acquisitions (2)
78,592

 

 

 
78,592

Foreign currency translation adjustments
(4,111
)
 
(383
)
 
(89
)
 
(4,583
)
Balance, September 30, 2014
$
451,049

 
$
100,294

 
$
41,869

 
$
593,212

 
(1)
The Company does not have any accumulated goodwill impairment losses.

(2)
The Company made three acquisitions during the nine months ended September 30, 2014 (See Note 1 for additional discussion). All of the recorded goodwill from these acquisitions has been included in the Research segment.

Amortizable Intangible Assets

The following tables present reconciliations of the carrying amounts of amortizable intangible assets as of the dates indicated (in thousands):
September 30, 2014
 
Trade
Name
 
Customer
Relationships
 
Content
 
Software
 
Non-Compete
 
Total
Gross cost, December 31, 2013
 
$
6,023

 
10,146

 
3,496

 
2,143

 
$

 
$
21,808

Additions due to acquisitions (1)
 
915

 
18,054

 
206

 
5,000

 
7,800

 
31,975

Non-competition agreement (2)
 

 

 

 

 
1,500

 
1,500

Foreign currency translation adjustments
 
(9
)
 
(35
)
 
(82
)
 
(290
)
 
(14
)
 
(430
)
Gross cost
 
6,929

 
28,165

 
3,620

 
6,853

 
9,286

 
54,853

Accumulated amortization (3)
 
(5,859
)
 
(10,371
)
 
(2,041
)
 
(2,103
)
 
(964
)
 
(21,338
)
Balance, September 30, 2014
 
$
1,070

 
$
17,794

 
$
1,579

 
$
4,750

 
$
8,322

 
$
33,515


December 31, 2013
 
Trade
Name
 
Customer
Relationships
 
Content
 
Software
 
Total
Gross cost, December 31, 2012
 
$
6,023

 
$
10,146

 
$
3,496

 
$
2,143

 
$
21,808

Accumulated amortization (3)
 
(4,817
)
 
(8,372
)
 
(1,388
)
 
(1,124
)
 
(15,701
)
Balance, December 31, 2013
 
$
1,206

 
$
1,774

 
$
2,108

 
$
1,019

 
$
6,107

 

(1)
See Note 1 for additional disclosure.
 
(2)
The non-competition intangible relates to a separation agreement with the Company's former chief financial officer which was entered into in June 2014.
 
(3)
Intangible assets are being amortized against earnings over the following periods: Trade name—2 to 5 years; Customer relationships—4 to 7 years; Content—1.5 to 4 years; Software—3 years; Non-compete—4 to 5 years.

17




Aggregate amortization expense related to intangible assets was $2.5 million and $1.4 million for the three months ended September 30, 2014 and 2013, respectively, and $5.8 million and $4.1 million for the nine months ended September 30, 2014 and 2013, respectively.

The estimated future amortization expense by year from amortizable intangibles is as follows (in thousands):
2014 (remaining three months)
$
2,475

2015
8,345

2016
6,990

2017
5,570

2018
4,330

After 2018
5,805

 
$
33,515


Note 7 — Debt

2013 Credit Agreement

The Company has a credit arrangement (the “2013 Credit Agreement”) that provides for a five-year, $150.0 million term loan and a $600.0 million revolving credit facility. In addition, the 2013 Credit Agreement contains an expansion feature by which the term loan and revolving credit facility may be increased, at the Company’s option and under certain conditions, by up to an additional $250.0 million in the aggregate. The term loan will be repaid in 16 consecutive quarterly installments which commenced on June 30, 2013, plus a final payment due on March 7, 2018, and may be prepaid at any time without penalty or premium (other than applicable breakage costs) at the Company’s option. The revolving credit facility may be used for loans, and up to $40.0 million may be used for letters of credit. The revolving loans may be borrowed, repaid and re-borrowed until March 7, 2018, at which time all amounts borrowed must be repaid.

Amounts borrowed under the 2013 Credit Agreement bear interest at a rate equal to, at Gartner’s option, either (i) the greatest of: the Administrative Agent’s prime rate; the average rate on overnight federal funds plus 1/2 of 1%; and the Eurodollar rate (adjusted for statutory reserves) plus 1%, in each case plus a margin equal to between 0.25% and 0.75% depending on Gartner’s leverage ratio as of the end of the four consecutive fiscal quarters most recently ended, or (ii) the Eurodollar rate (adjusted for statutory reserves) plus a margin equal to between 1.25% and 1.75%, depending on Gartner’s leverage ratio as of the end of the four consecutive fiscal quarters most recently ended.

The 2013 Credit Agreement contains certain customary restrictive loan covenants, including, among others, financial covenants requiring a maximum leverage ratio, a minimum interest expense coverage ratio, and covenants limiting Gartner’s ability to incur indebtedness, grant liens, make acquisitions, be acquired, dispose of assets, pay dividends, repurchase stock, make capital expenditures, make investments and enter into certain transactions with affiliates. The 2013 Credit Agreement contains customary events of default that include, among others, non-payment of principal, interest or fees, inaccuracy of representations and warranties, violation of covenants, cross defaults to certain other indebtedness, bankruptcy and insolvency events, ERISA defaults, material judgments, and events constituting a change of control. The occurrence of an event of default will increase the applicable rate of interest by 2.0%, allows the lenders to terminate their obligations to lend under the 2013 Credit Agreement and could result in the acceleration of Gartner’s obligations under the credit facility and an obligation of any or all of the guarantors to pay the full amount of Gartner’s obligations under the credit facility. As of September 30, 2014, the Company was in full compliance with the loan covenants.

The following table provides information regarding the Company’s total outstanding borrowings (in thousands):
 
 
Balance
 
Balance
 
 
September 30,
 
December 31,
Description:
 
2014
 
2013
Term loans (1)
 
$
135,000

 
$
144,375

Revolver loans (1), (2)
 
230,000

 
55,625

Other (3)
 
5,000

 
5,000

Total
 
$
370,000

 
$
205,000


18



 
(1)
The contractual annualized interest rates as of September 30, 2014 on the term loan and the revolver ranged from 1.53% to 1.61%, which consists of a floating Eurodollar base rate ranging from 0.15% to 0.23% plus a margin of 1.38%. However, the Company has an interest rate swap contract which converts the floating Eurodollar base rates to a 2.26% fixed base rate on the first $200.0 million of Company borrowings (see below) and, combined with the 1.38% margin, results in an effective rate of approximately 3.63% on the first $200.0 million of borrowings.

The annual effective rate on the Company's total debt outstanding as of September 30, 2014, including the effect of the swap, was approximately 3.64%.

(2)
The Company had $366.6 million of available borrowing capacity on the revolver (not including the expansion feature) as of September 30, 2014.

(3)
The Company borrowed $5.0 million in 2012 through a State of Connecticut economic development program. The loan has a 10 year maturity and bears a 3.0% fixed rate of interest. Principal payments are deferred for the first five years and the loan may be repaid at any point by the Company without penalty. The loan has a principal forgiveness provision in which up to $2.5 million of the loan may be forgiven if the Company meets certain employment targets in Connecticut during the first five years of the loan.

Interest Rate Swap

The Company has a $200.0 million notional fixed-for-floating interest rate swap contract which it designates as a hedge of the forecasted interest payments on the Company’s variable rate borrowings. Under the swap terms, the Company pays a base fixed rate of 2.26% and in return receives a floating Eurodollar base rate on $200.0 million of notional borrowings. The swap matures in late 2015.

The Company accounts for the interest rate swap as a cash flow hedge in accordance with FASB ASC Topic 815. Since the swap is hedging forecasted interest payments, changes in the fair value of the swap are recorded in OCI as long as the swap continues to be a highly effective hedge of the designated interest rate risk. Any ineffective portion of change in the fair value of the hedge is recorded in earnings. The swap continued to be a highly effective hedge of the forecasted interest payments as of September 30, 2014. The interest rate swap had a negative fair value to the Company of $3.8 million at September 30, 2014, which is deferred and classified in OCI, net of tax effect.

Letters of Credit

The Company had $9.6 million of letters of credit and related guarantees outstanding at September 30, 2014. The Company enters into these instruments in the ordinary course of business to facilitate transactions with customers and others.

Note 8 — Equity

Share Repurchase Program

On February 4, 2014, the Company’s Board of Directors authorized $800.0 million to repurchase the Company's common stock. This authorization succeeds the Company’s prior $500.0 million share repurchase authorization, which was substantially utilized. 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 credit agreement.

The Company’s recent share repurchase activity is presented in the following table:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Number of shares repurchased (1)
1,124,117

 
1,016,978

 
5,350,915

 
2,859,246

Cost of repurchased shares (in thousands) (2)
$
79,678

 
$
59,252

 
$
387,126

 
$
157,251

 

19



(1)
The average purchase price for the shares was $72.94 and $70.67 for the three and nine months ended September 30, 2014, respectively, and $58.26 and $55.00 for the three and nine months ended September 30, 2013, respectively.

(2)
The cost of repurchased shares for the nine months ended September 30, 2014 includes payment for share repurchase transactions that occurred in late December 2013 but were paid in early January 2014.

Note 9 — Income Taxes

The provision for income taxes was $12.6 million for the three months ended September 30, 2014 compared to $18.4 million in the three months ended September 30, 2013. The effective income tax rate was 27.1% for the three months ended September 30, 2014 and 32.5% for the same period in 2013. The quarter-over-quarter decrease in the effective income tax rate was primarily due to the recognition of benefits associated with tax credits.

The provision for income taxes was $57.8 million for the nine months ended September 30, 2014 compared to $58.6 million in the nine months ended September 30, 2013. The effective income tax rate was 31.7% for the nine months ended September 30, 2014 and 32.6% for the same period in 2013. The decrease in the effective income tax rate was primarily due to the recognition of benefits associated with tax credits partially offset by a favorable retroactive tax law change enacted in the first quarter of 2013.

As of September 30, 2014 and December 31, 2013, the Company had gross unrecognized tax benefits of $18.9 million and $14.5 million, respectively. It is reasonably possible that gross unrecognized tax benefits will decrease by approximately $5.0 million within the next 12 months, due to the anticipated closure of audits and the expiration of certain statutes of limitation. These unrecognized tax benefits relate primarily to the utilization of tax attributes, as well as certain other unrecognized tax positions, each of which are individually insignificant.

In 2013, the Internal Revenue Service commenced an audit of the Company's federal income tax returns for the 2010 and 2011 tax years. The audits are substantially complete and the Company believes the ultimate disposition will not have a material adverse effect on its consolidated financial position, cash flows, or results of operations.

Note 10 — Derivatives and Hedging

The Company enters into a limited number of derivative contracts to offset the potentially negative economic effects of interest rate and foreign exchange movements. The Company accounts for its outstanding derivative contracts in accordance with FASB ASC Topic 815, which requires all derivatives, including derivatives designated as accounting hedges, to be recorded on the balance sheet at fair value. The following tables provide information regarding the Company’s outstanding derivatives contracts as of the dates indicated (in thousands, except for number of outstanding contracts):
September 30, 2014
 
 
 
 
 
 
 
 
 
 
Derivative Contract Type
 
Number of
Outstanding
Contracts
 
Notional
Amounts
 
Fair Value
Asset
(Liability), Net (3)
 
Balance
Sheet
Line Item
 
Unrealized
Loss Recorded
in OCI
Interest rate swap (1)
 
1

 
$
200,000

 
$
(3,839
)
 
Other liabilities
 
$
(2,303
)
Foreign currency forwards (2)
 
19

 
6,630

 
(19
)
 
Accrued liabilities
 

Total
 
20

 
$
206,630

 
$
(3,858
)
 
 
 
$
(2,303
)
December 31, 2013
 
 
 
 
 
 
 
 
 
 
Derivative Contract Type
 
Number of
Outstanding
Contracts
 
Notional
Amounts
 
Fair Value
Asset
(Liability), Net (3)
 
Balance
Sheet
Line Item
 
Unrealized
Loss Recorded
in OCI
Interest rate swap (1)
 
1

 
$
200,000

 
$
(6,505
)
 
Other liabilities
 
$
(3,903
)
Foreign currency forwards (2)
 
89

 
61,325

 
(60
)
 
Accrued liabilities
 

Total
 
90

 
$
261,325

 
$
(6,565
)
 
 
 
$
(3,903
)
 
 
(1)
This swap has been designated, and is accounted for, as a cash flow hedge of the forecasted interest payments on borrowings (see Note 7 — Debt). As a result, changes in fair value of this swap are deferred and are recorded in OCI, net of tax effect.


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(2)
The Company has foreign exchange transaction risk since it typically enters into transactions in the normal course of business that are denominated in foreign currencies that differ from the local functional currency. The Company enters into short-term foreign currency forward exchange contracts to offset the economic effects of these foreign currency transaction risks. These forward exchange contracts are accounted for at fair value with realized and unrealized gains and losses recognized in Other expense, net. All of the contracts outstanding at September 30, 2014 matured by the end of October 2014.

(3)
See Note 11 — Fair Value Disclosures for the determination of the fair value of these instruments.

The Company’s derivative counterparties are all large investment grade financial institutions. The Company did not have any collateral arrangements with its derivative counterparties, and none of the derivative contracts contained credit-risk guarantees.

The following table provides information regarding derivative gains and losses that have been recognized in the Condensed Consolidated Statements of Operations for the periods indicated (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Amount recorded in:
 
2014
 
2013
 
2014
 
2013
Interest expense, net (1)
 
$
1,034

 
$
1,034

 
$
3,059

 
$
2,981

Other expense (income), net (2)
 
(12
)
 
(20
)
 
(110
)
 
138

Total expense, net
 
$
1,022

 
$
1,014

 
$
2,949

 
$
3,119

 
(1)
Consists of interest expense from an interest rate swap contract.

(2)
Consists of realized and unrealized gains and losses on foreign currency forward contracts.

Note 11 — Fair Value Disclosures
 
The Company’s financial instruments include cash equivalents, fees receivable from customers, accounts payable, and accruals which are normally short-term in nature. The Company believes the carrying amounts of these financial instruments reasonably approximate their fair value due to their short-term nature. The Company’s financial instruments also include its outstanding borrowings. The Company believes the carrying amount of the outstanding borrowings reasonably approximates their fair value since the rate of interest on the borrowings reflect current market rates of interest for similar instruments with comparable maturities.

FASB ASC Topic 820 provides a framework for the measurement of fair value and a valuation hierarchy based upon the transparency of inputs used in the valuation of assets and liabilities. Classification within the hierarchy is based upon the lowest level of input that is significant to the resulting fair value measurement. The valuation hierarchy contains three levels. Level 1 measurements consist of quoted prices in active markets for identical assets or liabilities. Level 2 measurements include significant other observable inputs such as quoted prices for similar assets or liabilities in active markets; identical assets or liabilities in inactive markets; observable inputs such as interest rates and yield curves; and other market-corroborated inputs. Level 3 measurements include significant unobservable inputs, such as internally-created valuation models.

The Company has a limited number of assets and liabilities recorded in its Consolidated Balance Sheets that are remeasured to fair value on a recurring basis, and the Company does not currently utilize Level 3 valuation inputs to remeasure any of its assets or liabilities. In addition, the Company typically does not transfer assets or liabilities between different levels of the fair value hierarchy.


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The Company’s assets and liabilities that are remeasured to fair value are presented in the following table for the periods indicated (in thousands):

 
 
Fair Value
 
Fair Value
Description:
 
September 30,
2014
 
December 31,
2013
Assets:
 
 

 
 

Values based on Level 1 inputs:
 
 
 
 
Deferred compensation plan assets (1)
 
$
7,525

 
$
7,775

Total Level 1 inputs
 
$
7,525

 
$
7,775

Values based on Level 2 inputs:
 
 
 
 
Deferred compensation plan assets (1)
 
$
26,185

 
$
24,780

Foreign currency forward contracts (2)
 
7

 
116

Total Level 2 inputs
 
$
26,192

 
$
24,896

Total Assets
 
$
33,717

 
$
32,671

Liabilities:
 
 

 
 

Values based on level 2 inputs:
 
 
 
 
Deferred compensation plan liabilities (1)
 
$
38,150

 
$
36,410

Foreign currency forward contracts (2)
 
26

 
176

Interest rate swap contract (3)
 
3,839

 
6,505

Total Level 2 inputs
 
$
42,015

 
$
43,091

Total Liabilities
 
$
42,015

 
$
43,091

 
(1)
The Company has a deferred compensation plan for the benefit of certain highly compensated employees. The assets consist of investments in money market and mutual funds, and company-owned life insurance contracts, all of which are valued based on Level 1 or Level 2 valuation inputs. The related deferred compensation plan liabilities are recorded at fair value, or the estimated amount needed to settle the liability, which the Company considers to be based on a Level 2 input.

(2)
The Company enters into foreign currency forward exchange contracts to hedge the effects of adverse fluctuations in foreign currency exchange rates. Valuation of the foreign currency forward contracts is based on observable foreign currency exchange rates in active markets, which the Company considers a Level 2 input.

(3)
The Company has an interest rate swap contract which hedges the forecasted interest payments on its borrowings (see Note 7 — Debt). To determine the fair value of this over-the-counter financial instrument, the Company relies on a mark-to-market valuation prepared by a third-party broker. The valuation is based on observable interest rates from recently executed market transactions or broker quotes corroborated by other observable market data. Accordingly, the fair value of the swap is determined under a Level 2 input. The Company independently corroborates the reasonableness of the swap valuation prepared by the third-party broker through the use of an electronic quotation service.

Note 12 — Employee Benefits
 
Defined Benefit Pension Plans

The Company has defined-benefit pension plans in several of its international locations. Benefits paid under these plans are based on years of service and level of employee compensation. The Company’s defined benefit pension plans are accounted for in accordance with FASB ASC Topics 715 and 960. Net periodic pension expense was $0.8 million and $2.3 million for the three and nine months ended September 30, 2014, respectively, and $0.8 million and $2.4 million for the three and nine months ended September 30, 2013, respectively.

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Note 13 — Commitments and Contingencies

Contingencies

The Company is involved in legal proceedings and litigation arising in the ordinary course of business. We believe that the potential liability, if any, in excess of amounts already accrued from all proceedings, claims and litigation will not have a material effect on our financial position, cash flows, or results of operations when resolved in a future period.