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Gartner 10-Q 2017
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 March 31, 2017
 
 
 
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, a smaller reporting company, or an emerging growth company (check one):
 
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
 
 
Smaller reporting company ¨
Emerging growth company ¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of April 30, 2017, 90,432,223 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, except per share data)  
 
March 31,
 
December 31,
 
2017
 
2016
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
1,227,891

 
$
474,233

Fees receivable, net of allowances of $7,900 and $7,400, respectively
716,487

 
643,013

Deferred commissions
139,771

 
141,410

Prepaid expenses and other current assets
91,546

 
84,540

Total current assets
2,175,695

 
1,343,196

Property, equipment and leasehold improvements, net
126,419

 
121,606

Goodwill
855,330

 
738,453

Intangible assets, net
81,209

 
76,801

Other assets
126,647

 
87,279

Total Assets
$
3,365,300

 
$
2,367,335

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
331,828

 
$
440,771

Deferred revenues
1,109,162

 
989,478

Current portion of long-term debt
29,366

 
30,000

Total current liabilities
1,470,356

 
1,460,249

Long-term debt, net of deferred financing fees
1,599,331

 
664,391

Other liabilities
192,796

 
181,817

Total Liabilities
3,262,483

 
2,306,457

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
880,877

 
863,127

Accumulated other comprehensive loss, net
(47,832
)
 
(49,683
)
Accumulated earnings
1,680,439

 
1,644,005

Treasury stock, at cost, 73,215,696 and 73,583,172 common shares, respectively
(2,410,745
)
 
(2,396,649
)
Total Stockholders’ Equity
102,817

 
60,878

Total Liabilities and Stockholders’ Equity
$
3,365,300

 
$
2,367,335

 

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
 
March 31,
 
2017
 
2016
Revenues:
 
 
 
Research
$
504,652

 
$
440,271

Consulting
85,248

 
84,940

Events
35,269

 
32,055

Total revenues
625,169

 
557,266

Costs and expenses:
 
 
 
Cost of services and product development
237,609

 
212,041

Selling, general and administrative
304,244

 
257,411

Depreciation
10,240

 
8,834

Amortization of intangibles
6,290

 
6,183

Acquisition and integration charges
13,272

 
8,368

Total costs and expenses
571,655

 
492,837

Operating income
53,514

 
64,429

Interest expense, net
(5,906
)
 
(6,006
)
Other income, net
889

 
1,884

Income before income taxes
48,497

 
60,307

Provision for income taxes
12,064

 
15,320

Net income
$
36,433

 
$
44,987

 
 
 
 
Net income per share:
 
 
 
Basic
$
0.44

 
$
0.55

Diluted
$
0.43

 
$
0.54

Weighted average shares outstanding:
 
 
 
Basic
82,835

 
82,451

Diluted
84,095

 
83,464


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
 
March 31,
 
2017
 
2016
Net income
$
36,433

 
$
44,987

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments
4,371

 
2,068

Interest rate swaps – net change in deferred loss
(2,568
)
 
(7,133
)
Pension – net change in deferred actuarial loss
48

 
37

Other comprehensive income (loss), net of tax
1,851

 
(5,028
)
Comprehensive income
$
38,284

 
$
39,959


See the accompanying notes to the condensed consolidated financial statements.

5



GARTNER, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited; in thousands)

 
Three Months Ended
 
March 31,
 
2017
 
2016
Operating activities:
 

 
 

Net income
$
36,433

 
$
44,987

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 

 
 

Depreciation and amortization
16,530

 
15,017

Stock-based compensation expense
22,576

 
15,495

Deferred taxes
(11,998
)
 
(2,191
)
Amortization and write-off of debt issuance costs
468

 
411

Changes in assets and liabilities:
 

 
 

     Fees receivable, net
(57,919
)
 
(19,089
)
Deferred commissions
3,002

 
7,047

Prepaid expenses and other current assets
(5,315
)
 
8,205

Other assets
(16,730
)
 
5,436

Deferred revenues
92,373

 
79,141

Accounts payable, accrued, and other liabilities
(109,025
)
 
(141,128
)
Cash (used in) provided by operating activities
(29,605
)
 
13,331

Investing activities:
 

 
 

     Additions to property, equipment and leasehold improvements
(10,700
)
 
(6,560
)
     Business acquisitions - cash paid (net of cash acquired)
(129,315
)
 
(800
)
Cash used in investing activities
(140,015
)
 
(7,360
)
Financing activities:
 

 
 

     Proceeds from employee stock purchase plan
3,022

 
2,580

     Proceeds from borrowings
955,000

 
70,000

     Payments for debt issuance costs
(18,773
)
 

     Payments on borrowings

 
(5,000
)
     Purchases of treasury stock
(21,978
)
 
(45,487
)
Cash provided by financing activities
917,271

 
22,093

Net increase in cash and cash equivalents
747,651

 
28,064

Effects of exchange rates on cash and cash equivalents
6,007

 
2,903

Cash and cash equivalents, beginning of period
474,233

 
372,976

Cash and cash equivalents, end of period
$
1,227,891

 
$
403,943


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 the world's leading 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, 2016. 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 months ended March 31, 2017 may not be indicative of the results of operations for the remainder of 2017 or beyond.

Principles of consolidation. The accompanying interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All 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 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.

Subsequent Event. On April 5, 2017, the Company completed its previously announced acquisition of CEB Inc. ("CEB"). Note 14 — Subsequent Events provides information regarding the CEB acquisition.

Impact of Stock-Based Compensation Accounting Rule Change. In the third quarter of 2016, the Company early adopted FASB Accounting Standards Update No. 2016-09, "Improvements to Employee Share-Based Payment Accounting" ("ASU No. 2016-09"), which changed the accounting for stock-based compensation awards. The accounting changes required by ASU No. 2016-09 were applied to the beginning of the Company's 2016 fiscal year, and as a result certain previously reported financial results for the three months ended March 31, 2016 were revised. These changes included a $4.8 million increase in net income, and a $0.06 increase in each of basic earnings per share and diluted earnings per share. In addition, our previously reported operating cash flow for the three months ended March 31, 2016 increased by $4.8 million.

Adoption of new accounting standards. The Company did not adopt any new accounting standards in the first quarter of 2017.
   
Accounting standards issued but not yet adopted. The FASB has issued 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:

Retirement Benefits Presentation — In March 2017, the FASB issued ASU No. 2017-07, "Compensation—Retirement Benefits" ("ASU No. 2017-07"). ASU No. 2017-07 improves the reporting of net benefit cost in the financial statements, and provides additional guidance on the presentation of net benefit cost in the income statement and clarifies the components eligible

7



for capitalization. ASU No. 2017-07 is effective for Gartner on January 1, 2018. We are currently evaluating the potential impact of ASU No. 2017-07 on the Company's consolidated financial statements.

Defined Benefit Pension Plans Disclosure — In February 2017, the FASB issued ASU No. 2017-06, "Employee Benefit Plan Master Trust Reporting" ("ASU No. 2017-06"). ASU No. 2017-06 clarifies presentation requirements for a plan’s interest in certain trust arrangements as well as other changes. ASU No. 2017-06 is effective for Gartner on January 1, 2019. We are currently evaluating the potential impact of ASU No. 2017-06 on the Company's consolidated financial statements.

Accounting for Partial Sales of Non-financial Assets — In February 2017, the FASB issued ASU No. 2017-05, "Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Non-financial Assets" ("ASU No. 2017-05"). ASU No. 2017-05 clarifies the scope of the FASB’s recently established guidance on non-financial asset de-recognition as well as the accounting for partial sales of non-financial assets. It conforms the de-recognition guidance on non-financial assets with the model for revenue transactions. ASU No. 2017-05 is effective for Gartner on January 1, 2018. We are currently evaluating the potential impact of ASU No. 2017-05 on the Company's consolidated financial statements.

Simplifying the Test for Goodwill Impairment — In January 2017, the FASB issued ASU No. 2017-04, "Intangibles—Goodwill and Other - Simplifying the Test for Goodwill Impairment" ("ASU No. 2017-04"). ASU No. 2017-04 simplifies the determination of the amount of goodwill to be potentially charged off by eliminating Step 2 of the goodwill impairment test. ASU No. 2017-04 is effective for Gartner on January 1, 2020. We are currently evaluating the potential impact of ASU No. 2017-04 on the Company's consolidated financial statements.

Business Combinations — In January 2017, the FASB issued ASU No. 2017-01, "Clarifying the Definition of a Business" ("ASU No. 2017-01"), which is effective for Gartner on January 1, 2018. ASU No. 2017-01 changes the GAAP definition of a business which can impact the accounting for asset purchases, acquisitions, goodwill impairment, and other assessments. We are currently evaluating the impact of ASU No. 2017-01 on the Company's consolidated financial statements.

Statement of Cash Flows — In November 2016, the FASB issued ASU No. 2016-18, "Restricted Cash" ("ASU No. 2016-18"). ASU No. 2016-18 requires that amounts generally described as restricted cash and restricted cash equivalents be presented with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. If different, a reconciliation of the cash balances reported in the cash flow statement and the balance sheet would need to be provided along with explanatory information. ASU No. 2016-18 is effective for Gartner on January 1, 2018. We are currently evaluating the impact of ASU No. 2016-18 on the Company's consolidated financial statements.

Income Taxes — In October 2016, the FASB issued ASU No. 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory" ("ASU No. 2016-16"). ASU No. 2016-16 accelerates the recognition of taxes on certain intra-entity transactions and is effective for Gartner on January 1, 2018. Current GAAP requires deferral of the income tax implications of an intercompany sale of assets until the assets are sold to a third party or recovered through use. Under the new rule, the seller’s tax effects and the buyer’s deferred taxes will be immediately recognized upon the sale. We have completed an initial evaluation of the impact of ASU No. 2016-16 and believe it could have a material impact on our consolidated financial statements depending on the nature and size of future intra-entity transfers.

Statement of Cash Flows — In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments" ("ASU No. 2016-15"). ASU No. 2016-15 sets forth classification requirements for certain cash flow transactions. ASU No. 2016-15 is effective for Gartner on January 1, 2018, but early adoption is permitted. We have completed an initial evaluation of the impact of ASU No. 2016-15 and we do not expect it will have a material impact on our consolidated financial statements.

Financial Instrument Credit Losses In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments—Credit Losses" ("ASU No. 2016-13"). ASU No. 2016-13 amends the current financial instrument impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. ASU No. 2016-13 is effective for Gartner on January 1, 2020, with early adoption permitted. We are currently evaluating the potential impact of ASU No. 2016-13 on our consolidated financial statements.

Leases — In February 2016, the FASB issued ASU No. 2016-02, "Leases" ("ASU No. 2016-02") which will require significant changes in the accounting and disclosure for lease arrangements. Currently under U.S. GAAP, lease arrangements that meet certain criteria are considered operating leases and are not recorded on the balance sheet. All of the Company's existing lease arrangements are accounted for as operating leases and are thus not recorded on the Company's balance sheet. ASU No. 2016-02 will significantly change the accounting for leases since a right-of-use ("ROU") model must be used in which the lessee must record a ROU asset and a lease liability on the balance sheet for leases with terms longer than 12 months. Leases will be classified as either finance

8



or operating arrangements, with classification affecting the pattern of expense recognition in the income statement. ASU No. 2016-02 also requires expanded disclosures about leasing arrangements. ASU No. 2016-02 will be effective for Gartner on January 1, 2019. We are currently evaluating the impact of ASU No. 2016-02 on our consolidated financial statements.

Financial Instruments Recognition and Measurement In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments Overall - Recognition and Measurement of Financial Assets and Liabilities" ("ASU No. 2016-01") to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among the significant changes required by ASU No. 2016-01 is that equity investments will be measured at fair value with changes in fair value recognized in net income. ASU No. 2016-01 will be effective for Gartner on January 1, 2018. We have completed an initial evaluation of the impact of ASU No. 2016-01 and we do not expect it will have a material impact on our consolidated financial statements but may require additional disclosures.

Revenue — In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" ("ASU No. 2014-09"). ASU No. 2014-09 and related amendments require changes in revenue recognition policies as well as enhanced disclosures. ASU No. 2014-09 is intended to clarify the principles for recognizing revenue by removing inconsistencies and weaknesses in existing revenue recognition rules; provide a more robust framework for addressing revenue recognition issues; improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; and provide more useful information to users of financial statements through improved disclosures. The Company has completed an initial assessment of the impact of ASU No. 2014-09 on its existing revenue recognition policies and plans to adopt the rule on January 1, 2018 using the cumulative effect method of adoption. ASU No. 2014-09 also requires significantly expanded disclosures around the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, which the Company is currently compiling. While the Company has not fully completed its assessment of the impact of ASU No. 2014-09, based on the analysis completed to date, the Company does not currently anticipate that the new rule will have a material impact on its consolidated financial statements.
  
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.

Note 2 — Acquisitions

On March 9, 2017, the Company acquired 100% of the outstanding capital stock of L2, Inc., ("L2"), a privately-held firm based in New York City with 150 employees, for a total purchase price of $155.0 million. L2 is a subscription-based research business that benchmarks the digital performance of brands. The Company paid $134.2 million in cash at close; but net of cash acquired with the business and for cash flow reporting purposes, the Company paid $129.3 million in cash. In addition, the Company may also be required to pay up to an additional $20.8 million in cash contingent on the achievement of certain employment conditions by several key employees of L2, which will be recognized as compensation expense over approximately three years.

The Company recorded $124.7 million of goodwill and amortizable intangible assets for L2 and $9.5 million of other assets on a net basis. The operating results and the related goodwill are being reported as part of the Company's Research segment and goodwill resulting from the acquisition will not be deductible for tax purposes. The allocation of the purchase price is preliminary with respect to the valuation of finite-lived intangible assets, which the Company expects to complete in the second quarter of 2017. The Company believes the recorded goodwill is supported by the anticipated revenue synergies resulting from the acquisition. The Company's financial statements include the operating results of L2 beginning on its acquisition date, which were not material to either the Company's consolidated operating results or segment results for the first quarter of 2017. Had the Company acquired this business 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.

9



 

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
 
March 31,
 
2017
 
2016
Numerator:
 

 
 

Net income used for calculating basic and diluted earnings per common share
$
36,433

 
$
44,987

 
 
 
 
Denominator:
 

 
 

Weighted average number of common shares used in the calculation of basic earnings per share
82,835

 
82,451

Common stock equivalents associated with stock-based compensation plans (1)
1,260

 
1,013

Shares used in the calculation of diluted earnings per share
84,095

 
83,464

 
 
 
 
Basic earnings per share
$
0.44

 
$
0.55

Diluted earnings per share
$
0.43

 
$
0.54

 
(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 0.4 million in each of the periods presented.

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. At March 31, 2017, the Company had a total of 5.5 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. 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 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.
 

10



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
 
 
March 31,
Award type:
 
2017
 
2016
Stock appreciation rights
 
$
2.8

 
$
1.7

Common stock equivalents
 
0.2

 
0.2

Restricted stock units
 
19.6

 
13.6

Total (1)
 
$
22.6

 
$
15.5

 
 
Three Months Ended
 
 
March 31,
Amount recorded in:
 
2017
 
2016
Cost of services and product development
 
$
9.3

 
$
7.6

Selling, general and administrative
 
13.3

 
7.9

Total (1)
 
$
22.6

 
$
15.5

 
(1)
Includes charges of $14.5 million and $10.3 million for the three months ended March 31, 2017 and 2016, respectively, for awards to retirement-eligible employees since these awards vest on an accelerated basis.

As of March 31, 2017, the Company had $83.0 million of total unrecognized stock-based compensation cost, which is expected to be expensed over the remaining weighted-average service period of approximately 2.8 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 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.


11



The following table summarizes changes in SARs outstanding during the three months ended March 31, 2017:

 
Stock Appreciation Rights (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, 2016
1.3

 
$
66.22

 
$
15.77

 
4.40
Granted
0.3

 
99.07

 
22.02

 
6.85
Exercised

 

 

 
n/a
Outstanding at March 31, 2017 (1), (2)
1.6

 
$
73.16

 
$
17.02

 
4.78
Vested and exercisable at March 31, 2017 (2)
0.8

 
$
60.70

 
$
15.36

 
3.67
 
na=not applicable.

(1) As of March 31, 2017, 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 March 31, 2017 had an intrinsic value of $54.2 million. SARs vested and exercisable had an intrinsic value of $36.4 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:
 
Three Months Ended
 
March 31,
 
2017
 
2016
Expected dividend yield (1)
%
 
%
Expected stock price volatility (2)
22
%
 
22
%
Risk-free interest rate (3)
1.8
%
 
1.1
%
Expected life in years (4)
4.5

 
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.


12



The following table summarizes the changes in RSUs outstanding during the three months ended March 31, 2017:
 
Restricted
Stock Units
(RSUs)
(in millions)
 
Per Share
Weighted
Average
Grant Date
Fair Value
Outstanding at December 31, 2016
1.3

 
$
73.19

Granted (1)
0.5

 
99.14

Vested and released
(0.5
)
 
68.11

Forfeited

 
81.85

Outstanding at March 31, 2017 (2), (3)
1.3

 
$
84.40

 
(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. The 0.2 million of 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 2017. The final number of performance-based RSUs that will ultimately be awarded for 2017 ranges from 0% to 200% of the target amount, with the final number dependent on the actual increase in total contract value for 2017 as measured on December 31, 2017. 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 1.8 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 three months ended March 31, 2017:
 
Common
Stock
Equivalents
(CSEs)
 
Per Share
Weighted
Average
Grant Date
Fair Value
Outstanding at December 31, 2016
107,338

 
$
20.74

Granted
1,592

 
108.95

Converted to common shares upon grant
(1,161
)
 
108.95

Outstanding at March 31, 2017
107,769

 
$
21.09

 

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 March 31, 2017, the Company had 0.9 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 $3.0 million and $2.6 million in cash from purchases under the ESP Plan during the three months ended March 31, 2017 and 2016, respectively.


13



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 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 expenses, 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 March 31, 2017
Research
 
Consulting
 
Events
 
Consolidated
Revenues
$
504,652

 
$
85,248

 
$
35,269

 
$
625,169

Gross contribution
346,708

 
28,342

 
13,567

 
388,617

Corporate and other expenses
 

 
 

 
 

 
(335,103
)
Operating income
 

 
 

 
 

 
$
53,514

Three Months Ended March 31, 2016
Research
 
Consulting
 
Events
 
Consolidated
Revenues
$
440,271

 
$
84,940

 
$
32,055

 
$
557,266

Gross contribution
308,186

 
29,378

 
12,983

 
350,547

Corporate and other expenses
 

 
 

 
 

 
(286,118
)
Operating income
 

 
 

 
 

 
$
64,429


The following table provides a reconciliation of total segment gross contribution to net income for the periods indicated (in thousands):
 
Three Months Ended
 
March 31,
 
2017
 
2016
Total segment gross contribution
$
388,617

 
$
350,547

Costs and expenses:
 
 
 
Cost of services and product development - unallocated (1)
1,057

 
5,322

Selling, general and administrative
304,244

 
257,411

Depreciation and amortization
16,530

 
15,017

Acquisition and integration charges
13,272

 
8,368

Operating income
53,514

 
64,429

Interest expense and other, net
5,017

 
4,122

Provision for income taxes
12,064

 
15,320

Net income
$
36,433

 
$
44,987

 
(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.

14




Note 6 — 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 during the quarter ended September 30, 2016, the Company utilized the qualitative approach in assessing the fair values of its reporting units relative to their respective carrying values, which indicated no impairment of recorded goodwill.
 
The following table presents changes to the carrying amount of goodwill by reportable segment during the three months ended March 31, 2017 (in thousands):
 
Research
 
Consulting
 
Events
 
Total
Balance, December 31, 2016 (1)
$
595,450

 
$
96,480

 
$
46,523

 
$
738,453

Additions due to acquisitions (2)
114,222

 

 

 
114,222

Foreign currency translation adjustments
2,376

 
197

 
82

 
2,655

Balance, March 31, 2017
$
712,048

 
$
96,677

 
$
46,605

 
$
855,330

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

(2)
The addition to goodwill was due to the acquisition of L2 in March 2017.

Finite-Lived Intangible Assets

The following tables present reconciliations of the carrying amounts of the Company's finite-lived intangible assets as of the dates indicated (in thousands):
March 31, 2017
 
Trade
Names
 
Customer
Relationships
 
Content
 
Software
 
Non-Compete
 
Total
Gross cost
 
$
4,337

 
$
63,369

 
$
3,728

 
$
16,025

 
$
29,308

 
$
116,767

Additions due to acquisition (1)
 
500

 
9,000

 

 
1,000

 

 
10,500

Foreign currency translation impact
 
20

 
190

 
37

 
42

 
25

 
314

Gross cost
 
4,857

 
72,559

 
3,765

 
17,067

 
29,333

 
127,581

Accumulated amortization (2), (3)
 
(2,046
)
 
(19,469
)
 
(2,521
)
 
(10,266
)
 
(12,070
)
 
(46,372
)
Balance, March 31, 2017
 
$
2,811

 
$
53,090

 
$
1,244

 
$
6,801

 
$
17,263

 
$
81,209


December 31, 2016
 
Trade
Names
 
Customer
Relationships
 
Content
 
Software
 
Non-Compete
 
Total
Gross cost
 
$
4,337

 
$
63,369

 
$
3,728

 
$
16,025

 
$
29,308

 
$
116,767

Accumulated amortization (2), (3)
 
(1,737
)
 
(16,744
)
 
(2,033
)
 
(8,904
)
 
(10,548
)
 
(39,966
)
Balance, December 31, 2016
 
$
2,600

 
$
46,625

 
$
1,695

 
$
7,121

 
$
18,760

 
$
76,801

 

(1) The additions are due to the acquisition of L2 in March 2017.

(2) Intangible assets are amortized against earnings over the following periods: Trade names—2 to 4 years; Customer relationships—4 to 8 years; Content—1.5 to 2 years; Software—3 years; Non-compete—3 to 5 years.

15




(3) Aggregate amortization expense related to intangible assets was $6.3 million and $6.2 million for the three months ended March 31, 2017 and 2016, respectively.
 
The estimated future amortization expense by year from finite-lived intangibles will be as follows (in thousands):
2017 (remaining nine months)
$
18,508

2018
21,836

2019
16,624

2020
14,116

2021
6,533

Thereafter
3,592

 
$
81,209


Note 7 — Debt

2016 Credit Agreement

The Company entered into the 2016 Credit Agreement on June 17, 2016, which provided for a $600.0 million Term loan A facility and a $1.2 billion revolving credit facility. As of March 31, 2017, the Company had $585.0 million outstanding under the Term loan A facility and $270.0 million of outstanding revolver loans under the 2016 Credit Agreement.

The 2016 Credit Agreement contains certain customary restrictive loan covenants, including, among others, financial covenants that apply a maximum leverage ratio and a minimum interest expense coverage ratio, and covenants limiting Gartner’s ability to incur indebtedness, grant liens, make acquisitions, merge, dispose of assets, pay dividends, repurchase stock, make investments and enter into certain transactions with affiliates. The Company was in full compliance with the loan covenants as of March 31, 2017. As discussed below, the 2016 Credit Agreement was amended twice in the first quarter of 2017 to permit the acquisition of CEB and the incurrence of additional debt, as well as to extend the maturity date of the Term loan A facility and revolving credit facility through March 20, 2022 and to revise the interest rate and repayment schedule.

On January 20, 2017, the Company entered into a First Amendment of the 2016 Credit Agreement, which was entered into to permit the acquisition of CEB and the incurrence of additional debt to finance, in part, the acquisition and repay certain debt of CEB, and to modify certain covenants. On March 20, 2017, the Company entered into a Second Amendment of the 2016 Credit Agreement. The Second Amendment was also entered into in connection with the acquisition of CEB and was executed primarily to extend the maturity date of the Term loan A facility and revolving credit facility through March 20, 2022 and to revise the interest rate and amortization schedule. The Term loan A facility will be repaid in 16 consecutive quarterly installments commencing on June 30, 2017, plus a final payment to be made on March 20, 2022. The revolving credit facility may be borrowed, repaid, and re-borrowed through March 20, 2022, at which time all amounts must be repaid. Loans will bear interest at a rate equal to, at the Company's option, either:

(i) the greatest of: (x) the Administrative Agent’s prime rate; (y) the average rate on Federal Reserve Board of New York rate plus 1/2 of 1%; and (z) the eurodollar rate (adjusted for statutory reserves) plus 1%, in each case plus a margin equal to between 0.125% and 1.50% depending on Gartner’s consolidated 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 1.125% and 2.50%, depending on Gartner’s leverage ratio as of the end of the four consecutive fiscal quarters most recently ended.

$800.0 million Principal Amount Senior Notes

On March 30, 2017, in conjunction with the acquisition of CEB, the Company issued $800.0 million aggregate principal amount of 5.125% Senior Notes due 2025 (the “Senior Notes”). The Senior Notes were issued at an issue price of 100.00% and bear interest at a fixed rate of 5.125% per annum. Interest on the Senior Notes is payable on April 1 and October 1 of each year, beginning on October 1, 2017.
 
The Senior Notes will mature on April 1, 2025. The Company may redeem some or all of the Senior Notes at any time on or after April 1, 2020 for cash at the redemption prices set forth in the Note Indenture, plus accrued and unpaid interest to, but not including,

16



the redemption date. Prior to April 1, 2020, the Company may redeem up to 40% of the aggregate principal amount of the Senior Notes with the proceeds of certain equity offerings at a redemption price of 105.125% plus accrued and unpaid interest to, but not including, the redemption date. In addition, the Company may redeem some or all of the Senior Notes prior to April 1, 2020, at a redemption price of 100% of the principal amount of the Senior Notes plus accrued and unpaid interest to, but not including, the redemption date, plus a “make-whole” premium. If the Company experiences specific kinds of change of control, it will be required to offer to purchase the Senior Notes at a price equal to 101% of the principal amount thereof plus accrued and unpaid interest. The Senior Notes are the Company’s general unsecured senior obligations, and are effectively subordinated to all of the Company’s existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness, structurally subordinated to all existing and future indebtedness and other liabilities of the Company’s non-guarantor subsidiaries, equal in right of payment to all of the Company’s and Company’s guarantor subsidiaries’ existing and future senior indebtedness and senior in right of payment to all of the Company’s future subordinated indebtedness, if any.

Acquisition of CEB

On April 5, 2017, the Company completed the CEB acquisition and borrowed in total approximately $2.8 billion to complete the transaction, including the Senior Notes discussed above. The Company also entered into a third amendment to the 2016 Credit Agreement in conjunction with and on the same date as the CEB acquisition. The Company's total indebtedness after the close of the CEB acquisition was approximately $3.6 billion. Note 14 — Subsequent Events provides additional information regarding the CEB acquisition and the third amendment to the 2016 Credit Agreement.

Outstanding Borrowings March 31, 2017

The following table summarizes the Company’s total outstanding borrowings (in thousands):
 
 
Balance
 
Balance
 
 
March 31,
 
December 31,
Description:
 
2017
 
2016
2016 Credit Agreement - Term loan A facility (1)
 
$
585,000

 
$
585,000

2016 Credit Agreement - Revolving credit facility (1), (2)
 
270,000

 
115,000

Senior Notes, $800.0 million principal amount (3)
 
800,000

 

Other (4)
 
2,500

 
2,500

Subtotal (5)
 
1,657,500

 
702,500

  Less: deferred financing fees (6)
 
(28,803
)
 
(8,109
)
Net carrying amount (7)
 
$
1,628,697

 
$
694,391

 
(1)
The contractual annualized interest rate as of March 31, 2017 on both the Term loan A facility and revolving credit facility was 2.23%, which consisted of a floating eurodollar base rate of 0.98% plus a margin of 1.25%. However, the Company has interest rate swap contracts, accounted for as cash flow hedges, which effectively convert the floating eurodollar base rates to a fixed base rate.

(2)
The Company had $927.0 million of available borrowing capacity on the revolver (not including the expansion feature) as of March 31, 2017.

(3)
Consists of $800.0 million principal amount of Senior Notes outstanding, which the Company issued on March 30, 2017 to finance in part the CEB acquisition. The Senior Notes pay a fixed rate of 5.125% and have an eight year maturity.

(4)
Consists of a $2.5 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.

(5)
The average annual effective rate on the Company's total debt outstanding for the three months ended March 31, 2017, including the effect of its interest rate swaps discussed below, was approximately 2.89%.

(6)
The deferred financing fees are being amortized to Interest Expense, net over the term of the respective debt obligation.


17



(7)
On April 5, 2017, the Company completed the acquisition of CEB. The Company had approximately $3.6 billion in total debt outstanding after the close of the acquisition. Note 14 — Subsequent Events provides additional information regarding the CEB acquisition and the additional amounts borrowed.

Interest Rate Swaps

The Company has fixed-for-floating interest rate swap contracts which it designates as accounting hedges of the forecasted interest payments on the Company’s variable rate borrowings. The Company pays base fixed rates on the swaps and in return receives a floating eurodollar base rate on 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 income (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 March 31, 2017. The interest rate swaps had a total negative fair value (liability) to the Company of $6.6 million at March 31, 2017, which is deferred and recorded in Accumulated other comprehensive loss, net of tax effect.

Note 8 — Equity

Share Repurchase Program

The Company has a $1.2 billion board approved authorization to repurchase the Company's common stock, of which $1.1 billion remained available as of March 31, 2017. 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
 
March 31,
 
2017
 
2016
Number of shares repurchased (1)
218,752

 
466,823

Cash paid for repurchased shares (in thousands) (2)
$
21,978

 
$
45,487

 

(1) The average purchase price for repurchased shares was $100.47 and $82.02 for the three months ended March 31, 2017 and 2016, respectively.

(2) The cash paid for the three months ended March 31, 2016 included $7.2 million for share repurchases that were executed in late December 2015 and were settled in early January 2016.

Acquisition of CEB

On April 5, 2017, the Company completed the CEB acquisition and issued 7.4 million common shares. Note 14 — Subsequent Events provides additional information regarding the CEB acquisition.


18



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 March 31, 2017:
 
Interest Rate
Swaps
 
Defined
Benefit
Pension Plans
 
Foreign
Currency
Translation
Adjustments
 
Total
Balance - December 31, 2016
$
(1,409
)
 
$
(5,797
)
 
$
(42,477
)
 
$
(49,683
)
Changes during the period:
 

 
 

 
 

 
 

Change in AOCL/I before reclassifications to income
(3,393
)
 

 
4,371

 
978

Reclassifications from AOCL/I to income during the period (2), (3)
825

 
48

 

 
873

Other comprehensive (loss) income for the period
(2,568
)
 
48

 
4,371

 
1,851

Balance – March 31, 2017
$
(3,977
)
 
$
(5,749
)
 
$
(38,106
)
 
$
(47,832
)

For the three months ended March 31, 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
(8,357
)
 

 
2,068

 
(6,289
)
Reclassifications from AOCL/I to income during the period (2), (3)
1,224

 
37

 

 
1,261

Other comprehensive (loss) income for the period
(7,133
)
 
37

 
2,068

 
(5,028
)
Balance – March 31, 2016
$
(10,212
)
 
$
(4,795
)
 
$
(34,423
)
 
$
(49,430
)
 
(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 10 – 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 12 – Employee Benefits for information regarding the Company’s defined benefit pension plans.
 
Note 9 — Income Taxes

The provision for income taxes was $12.1 million for the three months ended March 31, 2017 compared to $15.3 million in the three months ended March 31, 2016. The effective income tax rate was 24.9% for the three months ended March 31, 2017 and 25.4% for the same period in 2016. The quarter-over-quarter decrease in the effective income tax rate was primarily attributable to an increase in stock-based compensation benefits partially offset by an increase in unrecognized tax benefits.

As of March 31, 2017 and December 31, 2016, the Company had gross unrecognized tax benefits of $42.6 million and $37.1 million, respectively. It is reasonably possible that gross unrecognized tax benefits will decrease by approximately $3.8 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 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 statement 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 consolidated financial statements.

19



Note 10 — 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):
March 31, 2017
 
 
 
 
 
 
 
 
 
 
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)
 
5

 
$
1,400,000

 
$
(6,630
)
 
Other liabilities
 
(3,977
)
Foreign currency forwards (2)
 
23

 
45,425

 
(159
)
 
Accrued liabilities
 

Total
 
28

 
$
1,445,425

 
$
(6,789
)
 
 
 
(3,977
)

December 31, 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

 
$
(2,349
)
 
Other liabilities
 
$
(1,409
)
Foreign currency forwards (2)
 
84

 
86,946

 
(320
)
 
Accrued liabilities
 

Total
 
87

 
$
786,946

 
$
(2,669
)
 
 
 
$
(1,409
)
 
 
(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 7 — 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 March 31, 2017 matured by the end of April 2017.

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

At March 31, 2017, 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
 
 
March 31,
Amount recorded in:
 
2017
 
2016
Interest expense, net (1)
 
$
1,375

 
$
1,987

Other expense, net (2)
 
219

 
335

Total expense, net
 
$
1,594

 
$
2,322

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

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


20



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 these 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 Condensed 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 6 — 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:
 
March 31,
2017
 
December 31,
2016
Assets:
 
 

 
 

Values based on Level 1 inputs:
 
 
 
 
Deferred compensation plan assets (1)
 
$
11,211

 
$
10,247

Total Level 1 inputs
 
11,211

 
10,247

Values based on Level 2 inputs:
 
 
 
 
Deferred compensation plan assets (1)
 
29,174

 
27,847

Foreign currency forward contracts (2)
 
39

 
165

Total Level 2 inputs
 
29,213

 
28,012

Total Assets
 
$
40,424

 
$
38,259

Liabilities:
 
 

 
 

Values based on Level 2 inputs:
 
 
 
 
Deferred compensation plan liabilities (1)
 
$
45,595

 
$
43,075

Foreign currency forward contracts (2)
 
198

 
485

Interest rate swap contracts (3)
 
6,630

 
2,349

Total Level 2 inputs
 
52,423

 
45,909

Total Liabilities
 
$
52,423

 
$
45,909

 
(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.


21



(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 7 — 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 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 $0.7 million for both the three months ended March 31, 2017 and March 31, 2016.

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.

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 March 31, 2017, the Company did not have any material payment obligations under any such indemnification agreements.

Note 14 — Subsequent Event

On April 5, 2017, the Company completed the previously announced acquisition of CEB. Gartner acquired all of the outstanding shares of CEB in a cash and stock transaction with a total enterprise value of approximately $3.5 billion gross. Gartner paid $2.7 billion in cash at close and issued 7.4 million of its common shares.
The Company borrowed approximately $2.8 billion in conjunction with the acquisition, which included $800.0 million of principal amount Senior Notes (see Note 7 — Debt) issued on March 30, 2017; approximately $1.7 billion borrowed on April 5, 2017 under the 2016 Credit Agreement, which was amended for a third time on April 5, 2017; and $300.0 million borrowed under a 364-day Bridge Credit Facility, entered into on April 5, 2017. The Company had $3.6 billion in total debt outstanding after the close of the acquisition. The third amendment to the 2016 Credit Agreement and the 364-day Bridge Credit Facility, and the amounts borrowed under those borrowing arrangements in conjunction with the acquisition, are discussed in more detail below.
Third Amendment to the 2016 Credit Agreement

On April 5, 2017, in conjunction with the closing of the CEB acquisition, the Company entered into a third amendment to the 2016 Credit Agreement with its lenders (the "Incremental Amendment"). The Incremental Amendment increased the aggregate principal amount of the existing Term loan A facility by $900.0 million and added a new incremental Term loan B facility in an aggregate principal amount of $500.0 million. Immediately upon entry into the Incremental Amendment, the Company drew down $900.0 million under the increased Term loan A facility and $500.0 million under the new Term loan B facility and made an additional draw of $275.0 million on its existing revolving credit facility. Along with the funds raised through the issuance of the Senior Notes and the 364-Bridge Credit Facility, the amounts drawn under the 2016 Credit Agreement were used to fund the cash paid for the CEB acquisition.
 

22



The additional amount drawn under the Term loan A facility has the same maturity date and is subject to the same interest, repayment terms, amortization schedules, representations and warranties, affirmative and negative covenants and events of default as the amounts outstanding under such facility prior to entry by the Company into the Incremental Amendment.
 
The Term loan B facility contains representations and warranties, affirmative and negative covenants and events of default that are the same as the Term loan A facility and revolving credit facility, except that a breach of financial maintenance covenants will not result in an event of default under the Term loan B facility unless the lenders under the revolving credit facility and Term loan A facility have accelerated the revolving loans and Term loan A loans and terminated their commitments thereunder. Additionally, the Term loan B facility includes mandatory prepayment requirements related to asset sales (subject to reinvestment), debt incurrence (other than permitted debt) and excess cash flow, subject to certain limitations described therein. Any voluntary prepayment of the Term loan B facility made in connection with a repricing transaction in the first six months following April 5, 2017 will be subject to a 1.00% prepayment premium. The Term loan B facility will mature on April 5, 2024 and amounts outstanding thereunder will bear interest at a rate per annum equal to, at the option of Gartner, (i) adjusted LIBOR plus 2.00% or (ii) an alternate base rate plus 1.00%.
 
364-day Bridge Credit Facility

Also on April 5, 2017, and in connection with the closing of the CEB acquisition, the Company entered into a senior unsecured 364-day Bridge Credit Facility in an aggregate principal amount of $300.0 million, which amount was immediately drawn by the Company to fund a portion of the costs associated with the acquisition. The 364-day Bridge Credit Facility will mature on the 364th day after the closing date of the acquisition. Amounts outstanding under the 364-day Bridge Credit Facility will bear interest at a rate per annum equal to, at the option of the Company: (i) adjusted LIBOR plus 2.75% or (ii) an alternate base rate plus 1.75%, with the margins on both increasing by0.25% 180 days after the closing date and an additional 0.25% each 90 days thereafter. The 364-day Bridge Credit Facility contains representations and warranties, affirmative and negative covenants and events of default that are substantially the same as in the 2016 Credit Agreement. Additionally, the 364-Day Bridge Credit Facility includes mandatory prepayment requirements related to the receipt by the Company of repatriated funds from its foreign subsidiaries, subject to certain exceptions and reduced by any taxes payable or reasonably estimated by the Company to be payable upon such repatriation and proceeds from certain debt and equity issuances.


23



 
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, 2016 (the "2016 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.

Acquisition of CEB, Inc.

On April 5, 2017, after the close of our first quarter, the Company completed its previously announced acquisition of CEB, Inc. ("CEB"). Note 14 — Subsequent Events in the Notes to the Condensed Consolidated Financial Statements provides additional information regarding the CEB acquisition.

Impact of Stock-Based Compensation Accounting Rule Change

In the third quarter of 2016, the Company early adopted FASB Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU No. 2016-09"), which changed the accounting for stock-based compensation awards. The accounting changes required by ASU No. 2016-09 were applied to the beginning of the Company's 2016 fiscal year, and as a result certain previously reported financial results for the three months ended March 31, 2016 were revised. These changes included a $4.8 million increase in net income, and a $0.06 increase in each of basic earnings per share and diluted earnings per share. In addition, our previously reported operating cash flow for the three months ended March 31, 2016 increased by $4.8 million.

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 2016 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 2016 Form 10-K.


24




BUSINESS OVERVIEW

Gartner, Inc. (NYSE: IT) is the world’s leading research and advisory company. We help business leaders across all major functions in every industry and enterprise size with the objective insights they need to make the right decisions. Our comprehensive suite of services delivers strategic advice and proven best practices to help clients succeed in their mission-critical priorities. Gartner is headquartered in Stamford, Connecticut, U.S.A., and has 13,000 associates serving clients in over 11,000 enterprises in over 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.




25



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.
 
 
 
 
 
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.
 
 
 
 
 
Utilization rate represents a measure of productivity of our consultants. Utilization rates are calculated for billable headcount on a percentage basis by dividing total hours billed by total hours available to bill.
 
 
 
 
 
Billing Rate represents earned billable revenue divided by total billable hours.
 
 
 
 
 
Average annualized revenue per billable headcount represents a measure of the revenue generating ability of an average billable consultant and is calculated periodically by multiplying the average billing rate per hour times the utilization percentage times the billable hours available for one year.
 
 
 
Events
 
Number of events represents the total number of hosted events completed during the period.
 
 
 
 
 
Number of attendees represents the total number of people who attend events.
 
 
 


26



EXECUTIVE SUMMARY OF OPERATIONS AND FINANCIAL POSITION

We have executed a consistent growth strategy since 2005 to drive double-digit revenue and earnings growth. The fundamentals of our strategy include a focus on creating extraordinary research insight, delivering innovative and highly differentiated product offerings, building a strong sales capability, providing world class client service with a focus on client engagement and retention, and continuously improving our operational effectiveness.

We had total revenues of $625.2 million in the first quarter of 2017, an increase of 12% compared to the first quarter of 2016. Revenues in our Research business increased 15%, Events revenues increased 10%, and Consulting revenues were flat. For a more complete discussion of our results by segment, see Segment Results below. For the first quarter of 2017, we had net income of $36.4 million and diluted earnings per share of $0.43. We used $29.6 million of cash in our operating activities in the first quarter of 2017 compared to $13.3 million of cash provided in the first quarter of 2016. We had $1.2 billion of cash and cash equivalents at March 31, 2017 and $927.0 million of available borrowing capacity on our revolving credit facility.

On April 5, 2017, after the close of our first quarter, the Company completed its previously announced acquisition of CEB. Note 14 — Subsequent Events in the Notes to the Condensed Consolidated Financial Statements provides additional information regarding the CEB acquisition.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements requires the application of appropriate accounting policies and the use of estimates. Our significant accounting policies are described in Note 1 in the Notes to the Consolidated Financial Statements of Gartner, Inc. contained in the 2016 Form 10-K. Management considers the policies discussed below to be critical to an understanding of our financial statements because their application requires complex and subjective management judgments and estimates. Specific risks for these critical accounting policies are also described below.
 
The preparation of our financial statements requires us to make estimates and assumptions about future events. We develop our estimates using both current and historical experience, as well as other factors, including the general economic environment and actions we may take in the future. We adjust such estimates when facts and circumstances dictate. However, our estimates may involve significant uncertainties and judgments and cannot be determined with precision. In addition, these estimates are based on our best judgment at a point in time and as such these estimates may ultimately differ materially from actual results. On-going changes in our estimates could be material and would be reflected in the Company’s consolidated financial statements in future periods.

Our critical accounting policies are as follows:

Revenue recognition — Revenue is recognized in accordance with the requirements of U.S. GAAP as well as SEC Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”). Revenue is only recognized once all required criteria for revenue recognition have been met. Revenue by significant source is accounted for as follows:

Research revenues are mainly derived from subscription contracts for research products. The related revenues are deferred and recognized ratably over the applicable contract term. Fees derived from assisting organizations in selecting the right business software for their needs is recognized when the leads are provided to vendors.

Consulting revenues are principally generated from fixed fee and time and material engagements. Revenues from fixed fee contracts are recognized on a proportional performance basis. Revenues from time and materials engagements are recognized as work is delivered and/or services are provided. Revenues related to contract optimization contracts are contingent in nature and are only recognized upon satisfaction of all conditions related to their payment.

Events revenues are deferred and then recognized upon the completion of the related symposium, conference or exhibition.

The majority of research contracts are billable upon signing, absent special terms granted on a limited basis from time to time. All research contracts are non-cancelable and non-refundable, except for government contracts that may have cancellation or fiscal funding clauses. It is our policy to record the amount of the contract that is billable as a fee receivable at the time the contract is signed with a corresponding amount as deferred revenue, since the contract represents a legally enforceable claim.

Uncollectible fees receivable — We maintain an allowance for losses which is composed of a bad debt allowance and a sales reserve. Provisions are charged against earnings, either as a reduction in revenues or an increase to expense. The determination of the allowance for losses is based on historical loss experience, an assessment of current economic conditions, the aging of

27



outstanding receivables, the financial health of specific clients, and probable losses. This evaluation is inherently judgmental and requires estimates. These valuation reserves are periodically re-evaluated and adjusted as more information about the ultimate collectability of fees receivable becomes available. Circumstances that could cause our valuation reserves to increase include changes in our clients’ liquidity and credit quality, other factors negatively impacting our clients’ ability to pay their obligations as they come due, and the effectiveness of our collection efforts.

The following table provides our total fees receivable and the related allowance for losses (in thousands):
 
March 31,
2017
 
December 31,
2016
Total fees receivable
$
724,387

 
$
650,413

Allowance for losses
(7,900
)
 
(7,400
)
Fees receivable, net
$
716,487

 
$
643,013


Goodwill and other intangible assets —The Company evaluates recorded goodwill in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic No. 350, which requires goodwill to be assessed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In addition, an impairment evaluation of our amortizable intangible assets may also be performed if events or circumstances indicate potential impairment. Among the factors that could trigger an impairment review are our current operating results relative to our annual plan or historical performance; changes in our strategic plan or use of our assets; restructuring charges or other changes in our business segments; competitive pressures and changes in the general economy or in the markets in which we operate; and a significant decline in our stock price and our market capitalization relative to our net book value.


ASC Topic No. 350 requires an annual assessment of the recoverability of recorded goodwill, which can be either quantitative or qualitative in nature, or a combination of the two. Both methods require the use of estimates which in turn contain judgments and assumptions regarding future trends and events. As a result, both the precision and reliability of the resulting estimates are subject to uncertainty. If our annual goodwill impairment evaluation determines that the fair value of a reporting unit is less than its related carrying amount, we may recognize an impairment charge against earnings. Among the factors we consider in a qualitative assessment are general economic conditions and the competitive environment; actual and projected reporting unit financial performance; forward-looking business measurements; and external market assessments. A quantitative analysis requires


management to consider each of the factors relevant to a qualitative assessment, as well as the utilization of detailed financial projections, to include the rate of revenue growth, profitability, and cash flows, as well as assumptions regarding discount rates, the Company's weighted-average cost of capital, and other data, in order to determine a fair value for our reporting units.

We conducted a qualitative assessment of the fair value of all of the Company's reporting units during the third quarter of 2016. The results of this test determined that the fair values of the Company's reporting units continue to exceed their respective carrying values.

Accounting for income taxes — The Company uses the asset and liability method of accounting for income taxes. We estimate our income taxes in each of the jurisdictions where we operate. This process involves estimating our current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. In assessing the realizability of deferred tax assets, management considers if it is more likely than not that some or all of the deferred tax assets will not be realized. We consider the availability of loss carryforwards, projected reversal of deferred tax liabilities, projected future taxable income, and ongoing prudent and feasible tax planning strategies in making this assessment. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained based on the technical merits of the position.

Accounting for stock-based compensation — The Company accounts for stock-based compensation in accordance with FASB ASC Topics No. 505 and 718 and SEC Staff Accounting Bulletins No. 107 (“SAB No. 107”) and No. 110 (“SAB No. 110”). The Company recognizes stock-based compensation expense, which is based on the fair value of the award on the date of grant, over the related service period (see Note 4 — Stock-Based Compensation in the Notes to the Condensed Consolidated Financial Statements for additional information). Determining the appropriate fair value model and calculating the fair value of stock compensation awards requires the input of certain complex and subjective assumptions, including the expected life of the stock compensation award and the Company’s Common Stock price volatility. In addition, determining the appropriate amount of associated periodic expense requires management to estimate the likelihood of the achievement of certain performance targets. The assumptions used in calculating the fair value of stock compensation awards and the associated periodic expense represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change and the Company deems it necessary in the future to modify the assumptions it made or to use different assumptions,

28



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.

Restructuring and other accruals — We may record accruals for severance costs, costs associated with excess facilities that we have leased, contract terminations, asset impairments, and other costs as a result of on-going actions we undertake to streamline our organization, reposition certain businesses and reduce ongoing costs. Estimates of costs to be incurred to complete these actions, such as future lease payments, sublease income, the fair value of assets, and severance and related benefits, are based on assumptions at the time the actions are initiated. These accruals may need to be adjusted to the extent actual costs differ from such estimates. In addition, these actions may be revised due to changes in business conditions that we did not foresee at the time such plans were approved. We also record accruals during the year for our various employee cash incentive programs. Amounts accrued at the end of each reporting period are based on our estimates and may require adjustment as the ultimate amount paid for these incentives are sometimes not known with certainty until the end of our fiscal year.


29



RESULTS OF OPERATIONS
Overall Results
The following table presents an analysis of selected line items and period-over-period changes in our interim Condensed Consolidated Statements of Operations for the periods indicated (in thousands):
 
Three Months Ended March 31, 2017
 
Three Months Ended March 31, 2016
 
Income
Increase
(Decrease)
$
 
Increase
(Decrease)
%
Total revenues
$
625,169

 
$
557,266

 
$
67,903

 
12
 %
Costs and expenses:
 

 
 

 
 

 
 

Cost of services and product development
237,609

 
212,041

 
(25,568
)
 
(12
)
Selling, general and administrative
304,244

 
257,411

 
(46,833
)
 
(18
)
Depreciation
10,240

 
8,834

 
(1,406
)
 
(16
)
Amortization of intangibles
6,290

 
6,183

 
(107
)
 
(2
)
Acquisition and integration charges
13,272

 
8,368

 
(4,904
)
 
(59
)
Operating income
53,514

 
64,429

 
(10,915
)
 
(17
)
Interest expense, net
(5,906
)
 
(6,006
)
 
100

 
2

Other income, net
889

 
1,884

 
(995
)
 
(53
)
Provision for income taxes
12,064

 
15,320

 
3,256

 
21

Net income (1)
$
36,433

 
$
44,987

 
$
(8,554
)
 
(19
)%
 
(1)
The Company adopted FASB Accounting Standards Update No. 2016-09, "Improvements to Employee Share-Based Payment Accounting" ("ASU No. 2016-09") in the third quarter of 2016. The accounting changes required by the standard were applied to the beginning of the Company's 2016 fiscal year. As a result, the previously reported net income for the three months ended March 31, 2016 has been revised and includes a $4.8 million increase. Note 1 — Business and Basis of Presentation in the Notes to the Condensed Consolidated Financial Statements provides additional information.

Total revenues for the three months ended March 31, 2017 increased $67.9 million, to $625.2 million, an increase of 12% compared to the three months ended March 31, 2016 and 13% adjusted for the impact of foreign currency exchange. Please refer to the section of this MD&A below entitled “Segment Results” for a discussion of revenues and results by segment.

Cost of services and product development increased $25.6 million, or 12%, in the first quarter of 2017 compared to the first quarter of 2016. Excluding the foreign exchange impact, costs increased 14% quarter-over-quarter. The increase was primarily attributable to higher payroll and related benefits costs resulting from increased headcount, which increased 15%. Cost of services and product development as a percentage of revenues was 38% for both the first quarter of 2017 and 2016.

Selling, general and administrative (“SG&A”) expense increased $46.8 million, or 18% quarter-over-quarter on a reported basis and 19% adjusted for the foreign exchange impact. The increase in 2017 expense was driven by several factors. We had $37.0 million in higher payroll and related benefits costs, reflecting a 15% overall headcount increase, higher commissions due to increased sales bookings, and higher stock compensation charges. We also had $9.8 million in higher program and corporate costs, such as relocation and recruiting, training, and facilities costs. The 15% overall headcount growth includes a 10% increase in quota-bearing sales associates, which increased to 2,460 at March 31, 2017.
 
Depreciation expense increased 16% in the three months ended March 31, 2017 compared to the same period in 2016 due to our additional investment in property, equipment, and leasehold improvements.

Amortization of intangibles increased 2% in the three months ended March 31, 2017 compared to the same period in 2016 due to the additional amortization resulting from the intangibles recorded from our additional acquisitions.

Acquisition and integration charges were $13.3 million in the three months ended March 31, 2017 compared to $8.4 million in the prior year period, an increase of 59%. The quarter-over-quarter increase reflects additional charges resulting from our 2016 and 2017 acquisitions.  
 

30



Operating income decreased $10.9 million, or 17%, quarter-over-quarter. As a percentage of revenues, operating income was approximately 9% for the three months ended March 31, 2017 compared to 12% in the 2016 quarter, with the decrease due to lower contribution margins in all three of our business segments in the 2017 quarter, as well as higher SG&A costs, acquisition and integration charges, and depreciation expense in the 2017 quarter.

Interest expense, net decreased 2% quarter-over-quarter due to a slight decrease in the weighted-average borrowings outstanding in the first quarter of 2017 compared to the first quarter of 2016.

Other income, net for both the three months ended March 31, 2017 and 2016 reflects the net impact of foreign currency gains and losses from our hedging activities, as well as the sale of certain state tax credits and the recognition of other tax incentives.

Provision for income taxes was $12.1 million for the three months ended March 31, 2017 compared to $15.3 million in the three months ended March 31, 2016. The effective income tax rate was 24.9% for the three months ended March 31, 2017 and 25.4% for the same period in 2016. The quarter-over-quarter decrease in the effective income tax rate was primarily attributable to an increase in stock-based compensation benefits partially offset by an increase in unrecognized tax benefits.

Net income declined 19% while diluted earnings per share declined 20% quarter-over-quarter. The declines primarily reflect lower operating income, which was partially offset by a lower provision for income taxes.

31



SEGMENT RESULTS

We evaluate reportable segment performance and allocate resources based on gross contribution margin. Gross contribution is defined as operating income excluding certain Cost of services and product development charges, SG&A expenses, Depreciation, Acquisition and integration charges, and Amortization of intangibles. Gross contribution margin is defined as gross contribution as a percentage of revenues.

The following sections present the results of our three reportable business segments:

Research
 
As Of And For The Three Months Ended March 31, 2017
 
As Of And For The Three Months Ended March 31, 2016
 
Increase
(Decrease)
 
Percentage
Increase
(Decrease)
Financial Measurements:
 

 
 

 
 

 
 

Revenues (1)
$
504,652

 
$
440,271

 
$
64,381

 
15
%
Gross contribution (1)
$
346,708

 
$
308,186

 
$
38,522

 
12
%
Gross contribution margin
69
%
 
70
%
 
(1) point

 

 
 
 
 
 
 
 
 
Business Measurements:
 

 
 

 
 

 
 

Total contract value (1), (2)
$
1,953,000

 
$
1,721,000

 
$
232,000

 
13
%
Client retention
83
%
 
84
%
 
(1) point

 

Wallet retention
104
%
 
105
%
 
(1) point

 

 

(1)
In thousands.

(2)
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 segment revenues increased 15% in the three months ended March 31, 2017 compared to the same quarter in 2016 on both a reported basis and adjusted for the foreign exchange impact. The segment gross contribution margin was 69% and 70% in the first quarters of 2017 and 2016, respectively.

Total contract value as of March 31, 2017 increased 13% compared to March 31, 2016 on a reported basis and 15% adjusted for the impact of foreign currency exchange. However, excluding the impact of L2, which the Company acquired in March 2017, total contract value increased by 12% reported and 14% adjusted for the impact of foreign currency exchange. Total contract value as of March 31, 2017 increased by double-digits across all of the Company’s sales regions and client sizes and almost every industry segment compared to March 31, 2016. At March 31, 2017, enterprise client retention was 83% and enterprise wallet retention was 104%, both of which are close to our historic highs.














32



Consulting
 
As Of And For The Three Months Ended March 31, 2017
 
As Of And For The Three Months Ended March 31, 2016
 
Increase
(Decrease)
 
Percentage
Increase
(Decrease)
Financial Measurements:
 

 
 

 
 

 
 

Revenues (1)
$
85,248

 
$
84,940

 
$
308

 
 %
Gross contribution (1)
$
28,342

 
$
29,378

 
$
(1,036
)
 
(4
)%
Gross contribution margin
33
%
 
35
%
 
(2) points

 

 
 
 
 
 
 
 
 
Business Measurements:
 

 
 

 
 

 
 

Backlog (1)
$
103,200

 
$
114,100

 
$
(10,900
)
 
(10
)%
Billable headcount
650

 
618

 
32

 
5
 %
Consultant utilization
65
%
 
67
%
 
(2) points

 

Average annualized revenue per billable headcount (1)
$
359

 
$
386

 
$
(27
)
 
(7
)%
 

(1)
Dollars in thousands.

Consulting revenues were flat quarter-over-quarter on a reported basis but adjusted for the impact of foreign currency exchange, revenues increased 2%. The gross contribution margin was 33% for the three months ended March 31, 2017 and 35% for the three months ended March 31, 2016, with the decline primarily due to lower utilization.

Backlog decreased by $10.9 million year-over-year, or 10%. As previously disclosed, backlog benefited in 2015 and early 2016 due to the booking of a large contract, which resulted in a strong increase in backlog in the first quarter of 2016. Excluding that one large contract from the first quarter of 2016, backlog decreased by about 4% year-over-year. The $103.2 million of backlog at March 31, 2017 represents approximately 4 months of backlog, which is in line with the Company's operational target.

Events
 
As Of And For The Three Months Ended March 31, 2017
 
As Of And For The Three Months Ended March 31, 2016
 
Increase
(Decrease)
 
Percentage
Increase
(Decrease)
Financial Measurements:
 

 
 

 
 

 
 

Revenues (1)
$
35,269

 
$
32,055

 
$
3,214

 
10
 %
Gross contribution (1)
$
13,567

 
$
12,983

 
$
584

 
4
 %
Gross contribution margin
38
%
 
41
%
 
(3) points

 

 
 
 
 
 
 
 
 
Business Measurements:
 

 
 

 
 

 
 

Number of events
11

 
12

 
(1
)
 
(8
)%
Number of attendees
9,035

 
7,640