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Gartner 10-Q 2016
Document



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 June 30, 2016
 
 
 
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 July 31, 2016, 82,621,699 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)  
 
June 30,
 
December 31,
 
2016
 
2015
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
445,053

 
$
372,976

Fees receivable, net of allowances of $7,350 and $6,900, respectively
613,795

 
580,763

Deferred commissions
111,083

 
124,831

Prepaid expenses and other current assets
63,725

 
62,427

Total current assets
1,233,656

 
1,140,997

Property, equipment and leasehold improvements, net
117,255

 
108,733

Goodwill
742,752

 
715,359

Intangible assets, net
99,267

 
96,544

Other assets
111,591

 
113,053

Total Assets
$
2,304,521

 
$
2,174,686

Liabilities and Stockholders’ Deficit
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
287,476

 
$
387,691

Deferred revenues
1,029,765

 
900,801

Current portion of long-term debt
70,000

 
35,000

Total current liabilities
1,387,241

 
1,323,492

Long-term debt
756,015

 
790,000

Other liabilities
214,093

 
193,594

Total Liabilities
2,357,349

 
2,307,086

Stockholders’ Deficit
 

 
 

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
847,451

 
818,546

Accumulated other comprehensive loss, net
(48,003
)
 
(44,402
)
Accumulated earnings
1,538,762

 
1,450,684

Treasury stock, at cost, 73,614,148 and 73,896,245 common shares, respectively
(2,391,116
)
 
(2,357,306
)
Total Stockholders’ Deficit
(52,828
)
 
(132,400
)
Total Liabilities and Stockholders’ Deficit
$
2,304,521

 
$
2,174,686

 

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
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 

 
 

Research
$
449,170

 
$
385,718

 
$
889,441

 
$
766,808

Consulting
94,068

 
88,336

 
179,008

 
165,128

Events
66,760

 
73,882

 
98,815

 
87,186

Total revenues
609,998

 
547,936

 
1,167,264

 
1,019,122

Costs and expenses:
 
 
 
 
 

 
 

Cost of services and product development
231,422

 
210,495

 
443,463

 
388,257

Selling, general and administrative
272,009

 
237,991

 
529,420

 
467,513

Depreciation
9,025

 
8,440

 
17,859

 
16,429

Amortization of intangibles
6,210

 
2,107

 
12,393

 
4,246

Acquisition and integration charges
8,033

 
3,683

 
16,401

 
8,775

Total costs and expenses
526,699

 
462,716

 
1,019,536

 
885,220

Operating income
83,299

 
85,220

 
147,728

 
133,902

Interest expense, net
(7,356
)
 
(5,240
)
 
(13,362
)
 
(8,720
)
Other income (expense), net
1,248

 
(468
)
 
3,132

 
(1,430
)
Income before income taxes
77,191

 
79,512

 
137,498

 
123,752

Provision for income taxes
29,280

 
28,357

 
49,420

 
44,246

Net income
$
47,911

 
$
51,155

 
$
88,078

 
$
79,506

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 

 
 

Basic
$
0.58

 
$
0.61

 
$
1.07

 
$
0.94

Diluted
$
0.57

 
$
0.61

 
$
1.05

 
$
0.92

Weighted average shares outstanding:
 
 
 
 
 

 
 

Basic
82,559

 
83,203

 
82,505

 
84,871

Diluted
83,476

 
84,271

 
83,498

 
86,064


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
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
47,911

 
$
51,155

 
$
88,078

 
$
79,506

Other comprehensive income (loss), net of tax:
 
 
 
 
 

 
 

Foreign currency translation adjustments
3,335

 
6,224

 
5,403

 
(13,883
)
Interest rate hedges – net change in deferred loss
(1,946
)
 
434

 
(9,079
)
 
(670
)
Pension – net change in actuarial deferred loss
38

 
53

 
75

 
106

Other comprehensive income (loss), net of tax
1,427

 
6,711

 
(3,601
)
 
(14,447
)
Comprehensive income
$
49,338

 
$
57,866

 
$
84,477

 
$
65,059


See the accompanying notes to the condensed consolidated financial statements.

5



GARTNER, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited; in thousands)

 
Six Months Ended
 
June 30,
 
2016
 
2015
Operating activities:
 

 
 

Net income
$
88,078

 
$
79,506

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

 
 

Depreciation and amortization
30,252

 
19,734

Stock-based compensation expense
26,607

 
27,392

Excess tax benefits from stock-based compensation
(8,469
)
 
(11,117
)
Deferred taxes
(845
)
 
2,298

Amortization and write-off of deferred financing fees
2,158

 
1,595

Changes in assets and liabilities:
 

 
 

Fees receivable, net
(20,380
)
 
13,582

Deferred commissions
15,321

 
15,539

Prepaid expenses and other current assets
667

 
(17,193
)
Other assets
(1,537
)
 
11,164

Deferred revenues
106,771

 
93,454

Accounts payable, accrued, and other liabilities
(85,309
)
 
(86,551
)
Cash provided by operating activities
153,314

 
149,403

Investing activities:
 

 
 

Additions to property, equipment and leasehold improvements
(25,337
)
 
(23,614
)
Acquisitions - cash paid (net of cash acquired)
(29,896
)
 

Cash used in investing activities
(55,233
)
 
(23,614
)
Financing activities:
 

 
 

Proceeds from employee stock purchase plan
4,702

 
3,824

Proceeds from borrowings
830,000

 
320,000

Payments for debt issuance costs
(4,975
)
 

Payments on borrowings
(820,000
)
 
(10,000
)
Purchases of treasury stock
(51,967
)
 
(441,442
)
Excess tax benefits from stock-based compensation
8,469

 
11,117

Cash used in financing activities
(33,771
)
 
(116,501
)
Net increase in cash and cash equivalents
64,310

 
9,288

Effects of exchange rates on cash and cash equivalents
7,767

 
(17,009
)
Cash and cash equivalents, beginning of period
372,976

 
365,302

Cash and cash equivalents, end of period
$
445,053

 
$
357,581


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, 2015. 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 six months ended June 30, 2016 may not be indicative of the results of operations for the remainder of 2016 or beyond.

Principles of consolidation. The accompanying interim condensed consolidated financial statements include the accounts of the Company and its wholly-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 charges, depreciation and amortization. Management believes its use of estimates in these interim condensed consolidated financial statements to be reasonable.

Management continuously 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.

Accounting standards issued but not yet adopted. The FASB has issued several accounting standards that have not yet become effective and that may impact the Company’s consolidated financial statements or related disclosures in future periods. These standards and their potential impact are discussed below:

Financial Instrument Credit Losses—In June 2016, the FASB issued Accounting Standards Update (“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 the Company's consolidated financial statements.
Stock-Based CompensationIn March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting" ("ASU No. 2016-09"). ASU No. 2016-09 modifies several aspects of the accounting for employee share-based payment awards, to include the accounting for award forfeitures, the amount of employer tax withholding on awards that vest or settle, and the financial statement impact of excess tax benefits or deficiencies. ASU No. 2016-09 also modifies the statement of cash flows presentation for certain components of share-based payment awards. The provisions of the new rule will be effective for Gartner on January 1, 2017, with early adoption permitted. We are currently evaluating the potential impact of ASU No. 2016-09 on the Company's consolidated financial statements.


7



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 of lease arrangements. Among the significant changes required by ASU No. 2016-02 is that almost all lease obligations will be recorded on the balance sheet as a liability, along with a corresponding right of use asset. Currently under U.S. GAAP, lease arrangements that meet certain criteria are considered operating leases and are not recorded on the balance sheet. ASU No. 2016-02 also requires certain key information about leasing arrangements be disclosed. 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 the Company's consolidated financial statements.

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 require 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 revenue disclosures. ASU No. 2014-09 will be effective for Gartner on January 1, 2018, and the Company expects to complete its assessment of the estimated impact of ASU No. 2014-09 on its consolidated financial statements by the end of 2016.
  
The FASB also continues to work on a number of other significant accounting standards which if issued could materially impact the Company's accounting policies and disclosures in future periods. However, since these standards have not yet been issued, the effective dates and potential impact are unknown.

Acquisitions. The Company accounts for business 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 Company to record the net assets and liabilities acquired based on their estimated fair values as of the acquisition date, with any excess of the consideration transferred over the estimated fair value of the net assets acquired, including identifiable intangible assets, to be recorded to goodwill. Under the acquisition method, the operating results of acquired companies are included in the Company's consolidated financial statements beginning on the date of acquisition.

On June 28, 2016, the Company acquired 100% of the outstanding capital stock of Newco 5CL Limited (which operates under the trade name "SCM World"), a privately-held firm based in London with 60 employees. SCM World is a leading cross-industry peer network and learning community providing subscription-based research and conferences for supply chain executives. The Company paid $34.2 million of its cash held overseas at close and may also be required to pay up to an additional $15.0 million in cash for potential earn-out payments tied to the performance of SCM World through December 31, 2016. Any estimated earn-out payments determined as of the acquisition date will be recorded as part of the cost of the acquisition and will be adjusted to fair value at each reporting period through income until the amount is settled.

The Company may also be required to pay up to an additional $8.0 million in cash contingent on the achievement of certain employment conditions by several key employees (who are also former shareholders) of SCM World, which will be recognized as compensation expense. The Company recorded $37.0 million of goodwill and amortizable intangible assets for SCM World (see Note 5—Goodwill and Intangible Assets for additional information) and $2.8 million of liabilities on a net basis on the acquisition date. These amounts and the overall allocation of the purchase price is preliminary. The Company anticipates completing the valuation of the acquired assets and liabilities and the allocation of the purchase price in the third quarter of 2016. The operating results and the related goodwill will likely be reported as part of the Company's Research segment and goodwill resulting from the acquisition will not be deductible for tax purposes. Had the Company acquired SCM World in a prior period, the impact to the Company's results would not have been material, and as a result pro forma financial information for prior periods has not been provided.

The Company recognized $8.0 million and $3.7 million of acquisition and integration charges in the three months ended June 30, 2016 and 2015, respectively, and $16.4 million and $8.8 million of acquisition and integration charges in the six months ended June 30, 2016 and 2015, respectively. These charges are classified in Acquisition and integration charges in the Condensed Consolidated Statements of Operations and include amounts accrued for payments contingent on the achievement of certain employment conditions, legal, consulting, and severance costs. The Company paid $22.7 million in cash during the six months ended June 30, 2016 for the achievement of certain employment conditions related to an acquisition completed in 2014, of which $13.6 million was paid from escrow and $9.1 million was paid from existing Company cash. On a net basis, and for cash flow reporting purposes, the Company paid $28.9 million in cash at close for SCM World, which represents the gross cash paid of $34.2 million less cash held by SCM World at the acquisition date. During the six months ended June 30, 2016, the Company also paid $1.0 million for a working capital settlement related to a 2015 acquisition.



8



Note 2 — 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Numerator:
 

 
 

 
 

 
 

Net income used for calculating basic and diluted earnings per common share
$
47,911

 
$
51,155

 
$
88,078

 
$
79,506

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Weighted average number of common shares used in the calculation of basic earnings per share
82,559

 
83,203

 
82,505

 
84,871

Common stock equivalents associated with stock-based compensation plans (1)
917

 
1,068

 
993

 
1,193

Shares used in the calculation of diluted earnings per share
83,476

 
84,271

 
83,498

 
86,064

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.58

 
$
0.61

 
$
1.07

 
$
0.94

Diluted earnings per share
$
0.57

 
$
0.61

 
$
1.05

 
$
0.92

 
(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 common share equivalents totaled less than 0.3 million in each of the periods presented.

Note 3 — 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. At June 30, 2016, the Company had a total of 6.2 million shares of its common stock, par value $.0005 per share (the “Common Stock”), available for stock-based compensation awards under its 2014 Long-Term Incentive 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. Currently, the Company 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-based 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, which 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.


9



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
 
Six Months Ended
 
 
June 30,
 
June 30,
Award type:
 
2016
 
2015
 
2016
 
2015
Stock appreciation rights
 
$
1.3

 
$
1.2

 
$
3.0

 
$
3.4

Common stock equivalents
 
0.2

 
0.2

 
0.3

 
0.3

Restricted stock units
 
9.6

 
9.3

 
23.3

 
23.7

Total (1)
 
$
11.1

 
$
10.7

 
$
26.6

 
$
27.4


 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
Amount recorded in:
 
2016
 
2015
 
2016
 
2015
Cost of services and product development
 
$
4.9

 
$
4.7

 
$
12.5

 
$
11.6

Selling, general and administrative
 
6.2

 
6.0

 
14.1

 
15.8

Total (1)
 
$
11.1

 
$
10.7

 
$
26.6

 
$
27.4

 
(1)
Includes charges of $3.8 million and $3.9 million for the three months ended June 30, 2016 and 2015, respectively, and $14.1 million and $14.4 million for the six months ended June 30, 2016 and 2015, respectively, for awards to retirement-eligible employees since these awards vest on an accelerated basis.

As of June 30, 2016, the Company had $69.8 million of total unrecognized stock-based compensation cost, which is expected to be expensed over the remaining weighted-average service period of approximately 2.6 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 by the employee 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 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.


10



The following table summarizes changes in SARs outstanding during the six months ended June 30, 2016:

 
SARs
(in millions)
 
Per Share
Weighted-
Average
Exercise Price
 
Per Share
Weighted-
Average
Grant Date
Fair Value
 
Weighted
Average
Remaining
Contractual
Term (Years)
Outstanding at December 31, 2015
1.3

 
$
56.47

 
$
14.92

 
4.46
Granted
0.4

 
80.06

 
16.50

 
6.61
Exercised
(0.3
)
 
43.19

 
13.65

 
n/a
Outstanding at June 30, 2016 (1), (2)
1.4

 
$
64.48

 
$
15.52

 
4.74
Vested and exercisable at June 30, 2016 (2)
0.6

 
$
52.45

 
$
14.44

 
3.52
 

(1) As of June 30, 2016, 0.8 million of the SARs outstanding were unvested. The Company expects that substantially all of these unvested awards will vest in future periods.

(2) The total SARs outstanding as of June 30, 2016 had an intrinsic value of $46.6 million. SARs vested and exercisable had an intrinsic value of $27.8 million.

The fair value of the SARs is determined on the date of grant using the Black-Scholes-Merton valuation model with the following weighted-average assumptions:
 
Six Months Ended
 
June 30,
 
2016
 
2015
Expected dividend yield (1)
%
 
%
Expected stock price volatility (2)
22
%
 
24
%
Risk-free interest rate (3)
1.1
%
 
1.5
%
Expected life in years (4)
4.4

 
4.4

 
(1)
The dividend yield assumption is based on the history and expectation of the Company’s dividend payouts. Historically, the Company 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 (that is, period between the service inception date and the expected exercise date).

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.


11



The following table summarizes the changes in RSUs outstanding during the six months ended June 30, 2016:
 
Restricted
Stock Units
(RSUs)
(in millions)
 
Per Share
Weighted
Average
Grant Date
Fair Value
Outstanding at December 31, 2015
1.4

 
$
62.80

Granted (1)
0.6

 
80.07

Vested and released
(0.6
)
 
57.94

Forfeited
(0.1
)
 
26.57

Outstanding at June 30, 2016 (2), (3)
1.3

 
$
70.99

 
(1)
The 0.6 million RSUs granted consisted of 0.3 million performance-based RSUs awarded to executives and 0.3 million service-based RSUs awarded to non-executive employees and non-management board members. The 0.3 million performance-based RSUs represents the target amount of the grant for the year, which is tied to an increase in the Company’s total contract value for 2016. The final number of performance-based RSUs that will ultimately be awarded for 2016 ranges from 0% to 200% of the target amount, with the final number dependent on the actual increase in total contract value for 2016 as measured on December 31, 2016. 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.

(3)
The weighted-average remaining contractual term of the outstanding RSUs is approximately 1.6 years.

Common Stock Equivalents

Common stock equivalents (CSEs) are convertible into Common Stock and each CSE entitles the holder to one common share. Members of our Board of Directors receive directors’ fees payable in CSEs unless they opt to receive up to 50% of the 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 fair value of the CSEs awarded 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. 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 six months ended June 30, 2016:

 
Common
Stock
Equivalents
(CSEs)
 
Per Share
Weighted
Average
Grant Date
Fair Value
Outstanding at December 31, 2015
105,664

 
$
19.57

Granted
3,376

 
97.41

Converted to common shares upon grant
(2,700
)
 
97.41

Outstanding at June 30, 2016
106,340

 
$
20.05

 

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 $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 June 30, 2016, the Company had 1.0 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 $4.7 million and $3.8 million in cash from purchases under the ESP Plan during the six months ended June 30, 2016 and 2015, respectively.

12



Note 4 — 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 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.

The following tables present operating information about the Company’s reportable segments for the periods indicated (in thousands):
Three Months Ended June 30, 2016
Research
 
Consulting
 
Events
 
Consolidated
Revenues
$
449,170

 
$
94,068

 
$
66,760

 
$
609,998

Gross contribution
313,688

 
33,274

 
36,062

 
383,024

Corporate and other expenses
 

 
 

 
 

 
(299,725
)
Operating income
 

 
 

 
 

 
$
83,299

Three Months Ended June 30, 2015
Research
 
Consulting
 
Events
 
Consolidated
Revenues
$
385,718

 
$
88,336

 
$
73,882

 
$
547,936

Gross contribution
269,846

 
33,255

 
39,442

 
342,543

Corporate and other expenses
 

 
 

 
 

 
(257,323
)
Operating income
 

 
 

 
 

 
$
85,220


Six Months Ended June 30, 2016
Research
 
Consulting
 
Events
 
Consolidated
Revenues
$
889,441

 
$
179,008

 
$
98,815

 
$
1,167,264

Gross contribution
621,874

 
62,651

 
49,045

 
733,570

Corporate and other expenses
 

 
 

 
 

 
(585,842
)
Operating income
 

 
 

 
 

 
$
147,728


Six Months Ended June 30, 2015
Research
 
Consulting
 
Events
 
Consolidated
Revenues
$
766,808

 
$
165,128

 
$
87,186

 
$
1,019,122

Gross contribution
536,911

 
59,582

 
41,884

 
638,377

Corporate and other expenses
 

 
 

 
 

 
(504,475
)
Operating income
 

 
 

 
 

 
$
133,902












13



The following table provides a reconciliation of total segment gross contribution to net income for the periods indicated (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Total segment gross contribution
$
383,024

 
$
342,543

 
$
733,570

 
$
638,377

Costs and expenses:
 
 
 
 
 
 
 
Cost of services and product development - unallocated (1)
4,448

 
5,102

 
9,769

 
7,512

Selling, general and administrative
272,009

 
237,991

 
529,420

 
467,513

Depreciation and amortization
15,235

 
10,547

 
30,252

 
20,675

Acquisition and integration charges
8,033

 
3,683

 
16,401

 
8,775

Operating income
83,299

 
85,220

 
147,728

 
133,902

Interest expense and other
6,108

 
5,708

 
10,230

 
10,150

Provision for income taxes
29,280

 
28,357

 
49,420

 
44,246

Net income
$
47,911

 
$
51,155

 
$
88,078

 
$
79,506

 
(1)
The unallocated amounts consist of certain bonus and related fringe costs 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.

Note 5 — Goodwill and Intangible Assets

Goodwill

Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair values of the tangible and identifiable intangible net assets acquired. The evaluation of the recoverability of goodwill is performed in accordance with FASB ASC Topic 350, which requires an annual assessment of potential goodwill impairment at the reporting unit level and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. The annual assessment of the recoverability of recorded goodwill can be based on either a qualitative or quantitative assessment or a combination of the two. Both methods utilize estimates which in turn require judgments and assumptions regarding future trends and events. As a result, both the precision and reliability of the resulting estimates are subject to uncertainty. In connection with its most recent annual impairment test of goodwill performed as of September 30, 2015, the Company utilized the quantitative approach in assessing the fair value of its reporting units relative to their respective carrying value, which indicated no impairment of recorded goodwill. No triggering events or other circumstances have occurred since that annual testing date that would have necessitated an interim impairment test of goodwill.
 
The following table presents changes to the carrying amount of goodwill by reportable segment during the six months ended June 30, 2016 (in thousands):
 
Research
 
Consulting
 
Events
 
Total
Balance, December 31, 2015 (1)
$
575,292

 
$
98,412

 
$
41,655

 
$
715,359

Additions due to acquisitions (2)
24,128

 

 

 
24,128

Foreign currency translation adjustments
3,049

 
164

 
52

 
3,265

Balance, June 30, 2016
$
602,469

 
$
98,576

 
$
41,707

 
$
742,752

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

(2)
The additions to goodwill include the acquisition of SCM World in June 2016 and certain measurement period working capital adjustments from a prior acquisition.

14




Amortizable Intangible Assets

The following tables present reconciliations of the carrying amounts of amortizable intangible assets as of the dates indicated (in thousands):
June 30, 2016
 
Trade
Name
 
Customer
Relationships
 
Content
 
Software
 
Non-Compete
 
Total
Gross cost, December 31, 2015
 
$
4,144

 
$
62,860

 
$
5,450

 
$
16,219

 
$
29,330

 
$
118,003

Additions due to acquisitions (1)
 
740

 
7,399

 
4,439

 
740

 
1,480

 
14,798

Foreign currency translation impact
 
29

 
310

 
(140
)
 
(56
)
 
25

 
168

Gross cost
 
4,913

 
70,569

 
9,749

 
16,903

 
30,835

 
132,969

Accumulated amortization (2), (3)
 
(1,209
)
 
(14,228
)
 
(4,434
)
 
(6,280
)
 
(7,551
)
 
(33,702
)
Balance, June 30, 2016
 
$
3,704

 
$
56,341

 
$
5,315

 
$
10,623

 
$
23,284

 
$
99,267


December 31, 2015
 
Trade
Name
 
Customer
Relationships
 
Content
 
Software
 
Non-Compete
 
Total
Gross cost
 
$
4,144

 
$
62,860

 
$
5,450

 
$
16,219

 
$
29,330

 
$
118,003

Accumulated amortization (2), (3)
 
(681
)
 
(9,028
)
 
(3,525
)
 
(3,699
)
 
(4,526
)
 
(21,459
)
Balance, December 31, 2015
 
$
3,463

 
$
53,832

 
$
1,925

 
$
12,520

 
$
24,804

 
$
96,544

 

(1) The additions are for the acquisition of SCM World in June 2016.

(2) Intangible assets are being amortized against earnings over the following periods: Trade name—2 to 4 years; Customer relationships—4 to 7 years; Content—1.5 to 4 years; Software—3 years; Non-compete—3 to 5 years.

(3) Aggregate amortization expense related to intangible assets was $6.2 million and $2.1 million for the three months ended June 30, 2016 and 2015, respectively, and $12.4 million and $4.2 million for the six months ended June 30, 2016 and 2015, respectively.
 
The estimated future amortization expense by year from amortizable intangibles is as follows (in thousands):
2016 (remaining six months)
$
14,467

2017
26,896

2018
20,911

2019
15,903

2020
13,812

2021
6,668

Thereafter
610

 
$
99,267


Note 6 — Debt

2016 Credit Agreement

On June 17, 2016, the Company entered into a new credit arrangement (the "2016 Credit Agreement”) with several lenders to take advantage of favorable financing conditions and to obtain greater flexibility through a larger revolving credit facility. The 2016 Credit Agreement provides for a $600.0 million secured five-year term loan and a $1.2 billion secured five-year revolving credit facility. The term loan and revolving credit facility may be increased, at the Company's option and under certain conditions, by up to an additional $500.0 million in the aggregate plus additional amounts subject to the satisfaction of certain conditions, including a maximum secured leverage ratio. The term loan will be repaid in 16 consecutive quarterly installments commencing September 30, 2016, plus a final payment due on June 17, 2021, and may be prepaid at any time without penalty or premium (other than applicable breakage costs) at the option of the Company. The revolving credit facility may be used for loans, and up to $50.0

15



million may be used for letters of credit. The revolving loans may be borrowed, repaid and re-borrowed until June 17, 2021, at which time all amounts borrowed must be repaid.

The 2016 Credit Agreement contains certain customary restrictive loan covenants, which the Company was in full compliance with as of June 30, 2016. In addition, the Company’s obligations under the 2016 Credit Agreement are guaranteed by certain existing and future direct and indirect U.S. subsidiaries (the “Subsidiary Guarantors”). The Company’s obligations and the Subsidiary Guarantor’s obligations are secured by first priority security interests in substantially all of the assets of the Company and the Subsidiary Guarantors, including pledges of all stock and other equity interests in direct subsidiaries owned by the Company and the Subsidiary Guarantors (but only up to 66% of the voting stock of each direct foreign subsidiary or foreign subsidiary holding company owned by Gartner or any Subsidiary Guarantor). The security and pledges are subject to certain exceptions.

On June 17, 2016, the Company drew down $600.0 million in term loans and $200.0 million in revolving loans under the 2016 Credit Agreement which was used to pay down the amounts outstanding under the Company's prior credit arrangement, which was terminated. Additional amounts drawn down under the 2016 Credit Agreement will be used for general working capital purposes. The Company recorded $5.0 million in deferred financing fees related to the 2016 Credit Agreement, which will be amortized to Interest expense, net in the Condensed Consolidated Statement of Operations. The Company also recorded a $1.3 million charge in the six months ended June 30, 2016 in connection with the new credit arrangement for the write-off of fees from a previous financing, which was recorded in Interest expense, net.
 
Amounts borrowed under the 2016 Credit Agreement bear interest at a rate equal to, at Gartner’s option, either:

(1) the greatest of: (i) the Administrative Agent’s prime rate; (ii) the average rate on overnight federal funds plus 1/2 of 1%; (iii) and the eurodollar rate (adjusted for statutory reserves) plus 1%, in each case plus a margin equal to between 0.125% and 1.0% depending on Gartner’s consolidated leverage ratio as of the end of the four consecutive fiscal quarters most recently ended; or

(2) the eurodollar rate (adjusted for statutory reserves) plus a margin equal to between 1.125% and 2.0%, depending on Gartner’s leverage ratio as of the end of the four consecutive fiscal quarters most recently ended.

The Company’s total outstanding borrowings for the periods indicated were as follows (in thousands):
 
 
Balance
 
Balance
 
 
June 30,
 
December 31,
Description:
 
2016
 
2015
Term loans (1)
 
$
600,000

 
$
380,000

Revolver loans (1), (2)
 
230,000

 
440,000

Other (3)
 
5,000

 
5,000

Subtotal (4)
 
$
835,000

 
$
825,000

Less: deferred financing fees (5)
 
(8,985
)
 

Net carrying amount
 
$
826,015

 
$
825,000

 
(1)
The contractual annualized interest rate as of June 30, 2016 on both the term loan and the revolver was 1.84%, which consisted of a floating eurodollar base rate of 0.46% plus a margin of 1.38%. However, the Company has outstanding interest rate swap contracts, accounted for as cash flow hedges, which effectively convert the floating eurodollar base rates to a fixed base rate on $700.0 million of borrowings (see below).

(2)
The Company had $966.0 million of available borrowing capacity on the revolver (not including the expansion feature) as of June 30, 2016.

(3)
Consists of a $5.0 million State of Connecticut economic development loan with a 3.00% fixed rate of interest. The loan was originated in 2012 and has a 10 year maturity. 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 during the first five years of the loan.

(4)
The average annual effective rate on the Company's total debt outstanding for the three months ended June 30, 2016, including the effect of the interest rate swaps discussed below, was approximately 2.75%.


16



(5)
Includes $5.0 million of deferred financing fees related to the 2016 Credit Agreement and $3.9 million of fees previously classified in Other Assets. The fees are being amortized to Interest Expense, net over the period of the 2016 Credit Agreement.

Interest Rate Swaps

The Company has three fixed-for-floating interest rate swap contracts which it designates as accounting hedges of the forecasted interest payments on $700.0 million of the Company’s variable rate borrowings. The Company pays base fixed rates on these three swaps ranging from 1.53% to 1.60% and in return receives a floating eurodollar base rate on $700.0 million of 30 day notional borrowings.

The Company accounts for the interest rate swaps as cash flow hedges in accordance with FASB ASC Topic 815. Since the swaps hedge forecasted interest payments, changes in the fair value of the swaps are recorded in accumulated other comprehensive loss, a component of equity, as long as the swaps continue to be highly effective hedges of the designated interest rate risk. Any ineffective portion of change in the fair value of the hedges is recorded in earnings. All of the swaps were highly effective hedges of the forecasted interest payments as of June 30, 2016. The interest rate swaps had a total negative fair value (liability) to the Company of $20.3 million at June 30, 2016, which is deferred and recorded in accumulated other comprehensive loss, net of tax effect.

Letters of Credit

The Company had $4.0 million of letters of credit outstanding at June 30, 2016. The Company enters into these instruments in the ordinary course of business to facilitate transactions with customers and others.

Note 7 — Equity

Share Repurchase Program

The Company has a $1.2 billion board approved 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 credit arrangement.

The Company’s recent share repurchase activity is presented in the following table:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Number of shares repurchased (1)
66,087

 
1,244,010

 
532,910

 
5,328,600

Cash paid for repurchased shares (in thousands) (2)
$
6,480

 
$
117,400

 
$
51,967

 
$
441,442

 

(1) The average purchase price for repurchased shares was $98.03 and $84.00 for the three and six months ended June 30, 2016, respectively, and $84.03 and $82.34 for the three and six months ended June 30, 2015, respectively.

(2) The cash paid for the six months ended June 30, 2016 includes $7.2 million for share repurchases that were executed in late December 2015 and were settled in early January 2016.


17



Accumulated Other Comprehensive (Loss) Income ("AOCL/I")

The following tables disclose information about changes in AOCL/I by component and the related amounts reclassified out of AOCL/I to income during the periods indicated (net of tax, in thousands) (1):

For the three months ended June 30, 2016:
 
Interest Rate
Swaps
 
Defined
Benefit
Pension Plans
 
Foreign
Currency
Translation
Adjustments
 
Total
Balance - March 31, 2016
$
(10,212
)
 
$
(4,795
)
 
$
(34,423
)
 
$
(49,430
)
Changes during the period:
 

 
 

 
 

 
 

Change in AOCL/I before reclassifications to income
(3,095
)
 

 
3,335

 
240

Reclassifications from AOCL/I to income during the period (2), (3)
1,149

 
38

 

 
1,187

Other comprehensive income for the period
(1,946
)
 
38

 
3,335

 
1,427

Balance – June 30, 2016
$
(12,158
)
 
$
(4,757
)
 
$
(31,088
)
 
$
(48,003
)

For the three months ended June 30, 2015:
 
Interest Rate
Swaps
 
Defined
Benefit
Pension Plans
 
Foreign
Currency
Translation
Adjustments
 
Total
Balance – March 31, 2015
$
(2,844
)
 
$
(5,975
)
 
$
(33,509
)
 
$
(42,328
)
Changes during the period:
 
 
 
 
 
 
 
Change in AOCL/I before reclassifications to income
(596
)
 

 
6,224

 
5,628

Reclassifications from AOCL/I to income during the period (2), (3)
1,030

 
53

 

 
1,083

Other comprehensive income for the period
434

 
53

 
6,224

 
6,711

Balance – June 30, 2015
$
(2,410
)
 
$
(5,922
)
 
$
(27,285
)
 
$
(35,617
)

For the six months ended June 30, 2016:
 
Interest Rate
Swaps
 
Defined
Benefit
Pension Plans
 
Foreign
Currency
Translation
Adjustments
 
Total
Balance – December 31, 2015
$
(3,079
)
 
$
(4,832
)
 
$
(36,491
)
 
$
(44,402
)
Changes during the period:
 
 
 
 
 
 
 
Change in AOCL/I before reclassifications to income
(11,452
)
 

 
5,403

 
(6,049
)
Reclassifications from AOCL/I to income during the period (2), (3)
2,373

 
75

 

 
2,448

Other comprehensive loss for the period
(9,079
)
 
75

 
5,403

 
(3,601
)
Balance – June 30, 2016
$
(12,158
)
 
$
(4,757
)
 
$
(31,088
)
 
$
(48,003
)














18



For the six months ended June 30, 2015:

 
Interest Rate
Swaps
 
Defined
Benefit
Pension Plans
 
Foreign
Currency
Translation
Adjustments
 
Total
Balance – December 31, 2014
$
(1,740
)
 
$
(6,028
)
 
$
(13,402
)
 
$
(21,170
)
Changes during the period:
 
 
 
 
 
 
 
Change in AOCL/I before reclassifications to income
(2,453
)
 

 
(13,883
)
 
(16,336
)
Reclassifications from AOCL/I to income during the period (2), (3)
1,783

 
106

 

 
1,889

Other comprehensive loss for the period
(670
)
 
106

 
(13,883
)
 
(14,447
)
Balance – June 30, 2015
$
(2,410
)
 
$
(5,922
)
 
$
(27,285
)
 
$
(35,617
)
 

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

(2)
The reclassifications related to interest rate swaps (cash flow hedges) were recorded in Interest expense, net of tax effect. See Note 9 – Derivatives and Hedging for information regarding the hedges.

(3)
The reclassifications related to defined benefit pension plans were recorded in Selling, general and administrative expense, net of tax effect. See Note 11 – Employee Benefits for information regarding the Company’s defined benefit pension plans.

Note 8 — Income Taxes

The provision for income taxes was $29.3 million for the three months ended June 30, 2016 compared to $28.4 million in the three months ended June 30, 2015. The effective income tax rate was 37.9% for the three months ended June 30, 2016 and 35.7% for the same period in 2015. The quarter-over-quarter increase in the effective income tax rate was primarily attributable to increases in non-deductible expenses relating to acquisitions and unrecognized tax benefits partially offset by an estimated greater percentage of 2016 pretax income being earned in lower tax countries and favorable tax law changes.

The provision for income taxes was $49.4 million for the six months ended June 30, 2016 compared to $44.2 million in the six months ended June 30, 2015. The effective income tax rate was 35.9% for the six months ended June 30, 2016 and 35.8% for the same period in 2015. The increase in the effective income tax rate was primarily attributable to increases in non-deductible expenses relating to acquisitions and unrecognized tax benefits mostly offset by an estimated greater percentage of 2016 pretax income being earned in lower tax countries and favorable tax law changes.

As of June 30, 2016 and December 31, 2015, the Company had gross unrecognized tax benefits of $31.6 million and $25.9 million, respectively. It is reasonably possible that gross unrecognized tax benefits will decrease by approximately $2.7 million within the next 12 months, due to the anticipated closure of audits and the expiration of certain statutes of limitation.

In July 2015, the United States Tax Court (the “Court”) issued an opinion relating to the treatment of stock-based compensation expense in an inter-company cost-sharing arrangement. In its opinion, the Court held that affiliated companies may exclude stock-based compensation expense from their cost-sharing arrangement. The Internal Revenue Service is currently appealing the decision. Because of uncertainty related to the final resolution of this litigation and the recognition of potential benefits to the Company, the Company has not recorded any financial benefit associated with this decision. The Company will monitor developments related to this case and the potential impact of those developments on the Company’s current and future consolidated financial statements.



19




Note 9 — Derivatives and Hedging

The Company enters into a limited number of derivative contracts to mitigate the cash flow risk associated with changes in interest rates on variable rate debt and changes in foreign exchange rates on forecasted foreign currency transactions. 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 and recognized 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):
June 30, 2016
 
 
 
 
 
 
 
 
 
 
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 swaps (1)
 
3

 
$
700,000

 
$
(20,263
)
 
Other liabilities
 
$
(12,158
)
Foreign currency forwards (2)
 
22

 
31,900

 
(93
)
 
Accrued liabilities
 

Total
 
25

 
$
731,900

 
$
(20,356
)
 
 
 
$
(12,158
)
December 31, 2015
 
 
 
 
 
 
 
 
 
 
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 swaps (1)
 
3

 
$
700,000

 
$
(5,132
)
 
Other liabilities
 
$
(3,079
)
Foreign currency forwards (2)
 
102

 
193,610

 
235

 
Accrued liabilities
 

Total
 
105

 
$
893,610

 
$
(4,897
)
 
 
 
$
(3,079
)
 
 
(1)
The swaps have been designated and are accounted for as cash flow hedges of the forecasted interest payments on borrowings. As a result, changes in fair value of the swaps are deferred and are recorded in AOCL/I, net of tax effect (see Note 6 — Debt for additional information).

(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 mitigate the cash flow risk associated with changes in foreign currency rates on forecasted foreign currency transactions. These contracts are accounted for at fair value with realized and unrealized gains and losses recognized in Other expense, net since the Company does not designate these contracts as hedges for accounting purposes. All of the contracts outstanding at June 30, 2016 matured by the end of July 2016.

(3)
See Note 10 — Fair Value Disclosures for the determination of the fair value of these instruments.

At June 30, 2016, all of the Company’s derivative counterparties were 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 related contingent features. The following table provides information regarding amounts recognized in the Condensed Consolidated Statements of Operations for derivative contracts for the periods indicated (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
Amount recorded in:
 
2016
 
2015
 
2016
 
2015
Interest expense, net (1)
 
$
1,969

 
$
2,084

 
$
3,956

 
$
3,338

Other expense (income), net (2)
 
240

 
185

 
575

 
442

Total expense, net
 
$
2,209

 
$
2,269

 
$
4,531

 
$
3,780

 
 
(1)
Consists of interest expense from interest rate swap contracts.

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


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Note 10 — 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 these variable rate borrowings reflect current market rates of interest for similar instruments with comparable maturities.

The Company enters into a limited number of derivatives transactions but does not enter into repurchase agreements, securities lending transactions, or master netting arrangements. Receivables or payables that result from derivatives transactions are recorded gross in the Company’s Consolidated Balance Sheets.

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 does not currently utilize Level 3 valuation inputs to remeasure any of its assets or liabilities. However, level 3 inputs may be used by the Company in its required annual impairment review of recorded goodwill. Information regarding the periodic assessment of the Company’s goodwill is included in Note 5 — Goodwill and Intangible Assets. The Company does not typically transfer assets or liabilities between different levels of the fair value hierarchy.

The Company’s assets and liabilities that are remeasured to fair value are presented in the following table (in thousands):
 
 
Fair Value
 
Fair Value
Description:
 
June 30,
2016
 
December 31,
2015
Assets:
 
 

 
 

Values based on Level 1 inputs:
 
 
 
 
Deferred compensation plan assets (1)
 
$
9,978

 
$
8,671

Total Level 1 inputs
 
9,978

 
8,671

Values based on Level 2 inputs:
 
 
 
 
Deferred compensation plan assets (1)
 
25,856

 
25,474

Foreign currency forward contracts (2)
 
22

 
610

Total Level 2 inputs
 
25,878

 
26,084

Total Assets
 
$
35,856

 
$
34,755

Liabilities:
 
 

 
 

Values based on Level 2 inputs:
 
 
 
 
Deferred compensation plan liabilities (1)
 
$
40,664

 
$
39,071

Foreign currency forward contracts (2)
 
115

 
375

Interest rate swap contracts (3)
 
20,263

 
5,132

Total Level 2 inputs
 
61,042

 
44,578

Total Liabilities
 
$
61,042

 
$
44,578

 
(1)
The Company has a deferred compensation plan for the benefit of certain highly compensated officers, managers and other key 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 a Level 2 input.


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(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 interest rate swap contracts which hedge the risk of variability from interest payments on its borrowings (see Note 6 — Debt). The fair value of the swaps is based on mark-to-market valuations prepared by a third-party broker. The valuations are based on observable interest rates from recently executed market transactions and other observable market data, which the Company considers Level 2 inputs. The Company independently corroborates the reasonableness of the valuations prepared by the third-party broker through the use of an electronic quotation service.

Note 11 — 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 $1.5 million for the three and six months ended June 30, 2016, respectively, and $0.6 million and $1.3 million for the three and six months ended June 30, 2015, respectively.

Note 12 — 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.

The Company has various agreements that may obligate us to indemnify the other party with respect to certain matters. Generally, these indemnification clauses are included in contracts arising in the normal course of business under which we customarily agree to hold the other party harmless against losses arising from a breach of representations related to such matters as title to assets sold and licensed or certain intellectual property rights. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of the Company’s obligations and the unique facts of each particular agreement. Historically, payments made by us under these agreements have not been material. As of June 30, 2016, the Company did not have any material payment obligations under any such indemnification agreements.


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ITEM 2. 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 quarterly 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 condensed consolidated financial statements and related notes included in this report and in our Annual Report on Form 10-K for the year ended December 31, 2015 (the "2015 Form 10-K"). Historical results and percentage relationships are not necessarily indicative of operating results for future periods. References to “Gartner,” the "Company,” “we,” “our,” and “us” in this MD&A are to Gartner, Inc. and its consolidated subsidiaries.

Forward-Looking Statements

In addition to historical information, this Quarterly Report 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 “Factors That May Affect Future Performance” and elsewhere in this Quarterly Report and in the 2015 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. Readers should review carefully our risk factors described in the 2015 Form 10-K.
BUSINESS OVERVIEW
Gartner, Inc. 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, digital marketing professionals and technology investors, we are the valuable partner to clients in 10,477 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 June 30, 2016, had 8,338 associates, including 1,830 research analysts and consultants, and we operate in more than 90 countries.

The foundation for all Gartner products and services is our independent research on IT, supply chain, and digital marketing issues. The findings from this research are delivered through our three business segments – Research, Consulting and Events: 

Research provides objective insight on critical and timely technology and supply chain initiatives for CIOs and other IT professionals, supply chain leaders, digital marketing and other business professionals, as well as technology companies and the institutional investment community, through reports, briefings, proprietary tools, access to our analysts, peer networking services and membership programs that enable our clients to make better decisions about their IT, supply chain and digital marketing initiatives.

Consulting provides customized solutions to unique client needs through on-site, day-to-day support, as well as proprietary tools for measuring and improving IT performance with a focus on cost, performance, efficiency and quality.

Events provides IT, supply chain, digital marketing, and other business professionals the opportunity to attend various symposia, conferences and exhibitions to learn, contribute and network with their peers. From our flagship event Symposium/ITxpo, to summits focused on specific technologies and industries, to experimental workshop-style seminars, our events distill the latest Gartner research into applicable insight and advice.

For more information regarding Gartner and our products and services, visit gartner.com.



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BUSINESS MEASUREMENTS

We believe the following business measurements are important performance indicators for our business segments:

BUSINESS SEGMENT
 
BUSINESS MEASUREMENTS
Research
 
Total contract value represents the value attributable to all of our subscription-related contracts. It is calculated as the annualized value of all contracts in effect at a specific point in time, without regard to the duration of the contract. Total contract value primarily includes Research deliverables for which revenue is recognized on a ratable basis, as well as other deliverables (primarily Events tickets) for which revenue is recognized when the deliverable is utilized.
 
 
 
 
 
Research contract value represents the value attributable to all of our subscription-related research products that recognize revenue on a ratable basis. Contract value is calculated as the annualized value of all subscription research contracts in effect at a specific point in time, without regard to the duration of the contract.
 
 
 
 
 
Client retention rate represents a measure of client satisfaction and renewed business relationships at a specific point in time. Client retention is calculated on a percentage basis by dividing our current clients, who were also clients a year ago, by all clients from a year ago. Client retention is calculated at an enterprise level, which represents a single company or customer.
 
 
 
 
 
Wallet retention rate represents a measure of the amount of contract value we have retained with clients over a twelve-month period. Wallet retention is calculated on a percentage basis by dividing the contract value of clients, who were clients one year ago, by the total contract value from a year ago, excluding the impact of foreign currency exchange. When wallet retention exceeds client retention, it is an indication of retention of higher-spending clients, or increased spending by retained clients, or both. Wallet retention is calculated at an enterprise level, which represents a single company or customer.
 
 
 
Consulting
 
Consulting backlog represents future revenue to be derived from in-process consulting, measurement and strategic advisory services engagements.