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, 2018
 
 
 
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, 2018, 91,240,213 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 share data)  
 
March 31,
 
December 31,
 
2018
 
2017
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
189,979

 
$
538,908

Fees receivable, net of allowances of $7,100 and $12,700 respectively
1,134,964

 
1,176,843

Deferred commissions
207,161

 
205,260

Prepaid expenses and other current assets
175,204

 
124,632

Assets held-for-sale
603,354

 
542,965

Total current assets
2,310,662

 
2,588,608

Property, equipment and leasehold improvements, net
223,086

 
221,507

Goodwill
2,956,642

 
2,987,294

Intangible assets, net
1,247,771

 
1,292,022

Other assets
176,867

 
193,742

Total Assets
$
6,915,028

 
$
7,283,173

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
532,538

 
$
666,821

Deferred revenues
1,719,637

 
1,630,198

Current portion of long-term debt
789,724

 
379,721

Liabilities held-for-sale
143,957

 
145,845

Total current liabilities
3,185,856

 
2,822,585

Long-term debt, net of deferred financing fees
2,186,061

 
2,899,124

Other liabilities
555,540

 
577,999

Total Liabilities
5,927,457

 
6,299,708

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; 163,602,067 shares issued for both periods
82

 
82

Additional paid-in capital
1,788,045

 
1,761,383

Accumulated other comprehensive income, net
32,225

 
1,508

Accumulated earnings
1,613,980

 
1,647,284

Treasury stock, at cost, 72,391,175 and 72,779,205 common shares, respectively
(2,446,761
)
 
(2,426,792
)
Total Stockholders’ Equity
987,571

 
983,465

Total Liabilities and Stockholders’ Equity
$
6,915,028

 
$
7,283,173

 

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,
 
2018
 
2017
Revenues:
 
 
 
Research
$
763,924

 
$
511,306

Events
46,087

 
35,269

Consulting
82,896

 
78,594

Talent Assessment & Other
70,658

 

Total revenues
963,565

 
625,169

Costs and expenses:
 
 
 
Cost of services and product development
357,209

 
237,609

Selling, general and administrative
487,745

 
304,244

Depreciation
16,410

 
10,240

Amortization of intangibles
51,646

 
6,290

Acquisition and integration charges
59,266

 
13,272

Total costs and expenses
972,276

 
571,655

Operating (loss) income
(8,711
)
 
53,514

Interest expense, net
(35,059
)
 
(5,906
)
Other income, net
899

 
889

(Loss) income before income taxes
(42,871
)
 
48,497

(Benefit) provision for income taxes
(23,284
)
 
12,064

Net (loss) income
$
(19,587
)
 
$
36,433

 
 
 
 
Net (loss) income per share:
 
 
 
Basic
$
(0.22
)
 
$
0.44

Diluted
$
(0.22
)
 
$
0.43

Weighted average shares outstanding:
 
 
 
Basic
91,005

 
82,835

Diluted
91,005

 
84,095


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,
 
2018
 
2017
Net (loss) income
$
(19,587
)
 
$
36,433

Other comprehensive income, net of tax:
 
 
 
Foreign currency translation adjustments
20,547

 
4,371

Interest rate swaps – net change in deferred gain or loss
10,114

 
(2,568
)
Pension plans – net change in deferred actuarial loss
56

 
48

Other comprehensive income, net of tax
30,717

 
1,851

Comprehensive income
$
11,130

 
$
38,284


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,
 
2018
 
2017
Operating activities:
 

 
 

Net (loss) income
$
(19,587
)
 
$
36,433

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

 
 

Depreciation and amortization
68,056

 
16,530

Stock-based compensation expense
30,958

 
22,576

Deferred taxes
(39,175
)
 
(11,998
)
Amortization and write-off of deferred financing fees
1,868

 
468

Changes in assets and liabilities, net of acquisitions:
 

 
 

     Fees receivable, net
56,771

 
(57,919
)
Deferred commissions
(512
)
 
3,002

Prepaid expenses and other current assets
(53,851
)
 
(5,315
)
Other assets
14,421

 
(16,730
)
Deferred revenues
76,854

 
92,373

Accounts payable, accrued, and other liabilities
(133,079
)
 
(109,025
)
Cash provided by (used in) operating activities
2,724

 
(29,605
)
Investing activities:
 

 
 

     Additions to property, equipment and leasehold improvements
(17,679
)
 
(10,700
)
     Acquisitions - cash paid (net of cash acquired)

 
(111,165
)
Other
1,000

 

Cash used in investing activities
(16,679
)
 
(121,865
)
Financing activities:
 

 
 

     Proceeds from employee stock purchase plan
4,124

 
3,022

     Proceeds from borrowings

 
955,000

     Payments for deferred financing fees

 
(18,773
)
     Payments on borrowings
(304,813
)
 

     Purchases of treasury stock
(28,394
)
 
(21,978
)
Cash (used in) provided by financing activities
(329,083
)
 
917,271

Net (decrease) increase in cash and cash equivalents and restricted cash
(343,038
)
 
765,801

Effects of exchange rates on cash and cash equivalents and restricted cash
3,610

 
6,007

Cash and cash equivalents and restricted cash, beginning of period
567,058

 
499,354

Cash and cash equivalents and restricted cash, end of period
$
227,630

 
$
1,271,162


See the accompanying notes to the condensed consolidated financial statements.

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GARTNER, INC.

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

Business. Gartner, Inc. (NYSE: IT) is the world’s leading research and advisory company and a member of the S&P 500. We equip business leaders with indispensable insights, advice and tools to achieve their mission-critical priorities and build the successful organizations of tomorrow. We believe that we have an unmatched combination of expert-led, practitioner-sourced and data-driven research that steers clients toward the right decisions on the issues that matter most. We're trusted as an objective resource and critical partner by more than 15,000 organizations in more than 100 countries - across all major functions, in every industry and enterprise size. To learn more about how we help decision makers fuel the future of business, visit gartner.com.

Gartner delivers its principal products and services globally through four business segments: Research, Events, Consulting and Talent Assessment & Other. Our revenues by business segment are discussed below under the heading "Revenue Recognition." 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 and 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, 2017. The fiscal year of Gartner is the twelve-month 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, 2018 may not be indicative of the results of operations for the remainder of 2018 or beyond.

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

Use of estimates. The preparation of the accompanying interim condensed consolidated financial statements requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the valuation of fees receivable, goodwill, intangible assets, and other long-lived assets, as well as tax accruals and other liabilities. In addition, estimates are used in revenue recognition, income tax expense or benefit, 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.

Adoption of new accounting standards. The Company adopted the accounting standards described below during the three months ended March 31, 2018:

Stock Compensation Award Modifications — On January 1, 2018, the Company adopted ASU No. 2017-09, "Compensation—Stock Compensation - Scope of Modification Accounting" ("ASU No. 2017-09"). ASU No. 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The adoption of ASU No. 2017-09 had no impact on the Company's consolidated financial statements.

Retirement Benefits Cost Presentation — On January 1, 2018, the Company adopted 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

7



eligible for capitalization. The adoption of ASU No. 2017-07 had an immaterial impact on the classification of benefit expense on the Company's Condensed Consolidated Statements of Operations.

Partial Sales of Non-financial Assets — On January 1, 2018, the Company adopted 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. The adoption of ASU No. 2017-05 had no impact on the Company's consolidated financial statements.

Definition of a Business — On January 1, 2018, the Company adopted ASU No. 2017-01, "Clarifying the Definition of a Business" ("ASU No. 2017-01"). ASU No. 2017-01 changes the U.S. GAAP definition of a business. Such change can impact the accounting for asset purchases, acquisitions, goodwill impairment and other assessments. The adoption of ASU No. 2017-01 had no impact on the Company's consolidated financial statements.

Presentation of Restricted Cash — On January 1, 2018, the Company adopted 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 presented on an entity's statement of cash flows. ASU No. 2016-18 must be applied using a retrospective transition method to each comparative period presented in an entity's financial statements.

As a result of the adoption of ASU No. 2016-18, the Company's restricted cash balances are now included in the beginning-of-period and end-of-period total amounts presented on the accompanying Condensed Consolidated Statements of Cash Flows. When compared to the Company's previously issued statement of cash flows for the three months ended March 31, 2017, the adoption of ASU No. 2016-18 resulted in: (i) a reduction of $18.2 million in cash used in investing activities; (ii) an increase of $43.3 million in the end-of-period total cash amount; and (iii) an increase of $25.1 million in the beginning-of-period total cash amount. Below is a table reconciling the beginning-of-period and end-of-period total cash amounts included in the Condensed Consolidated Balance Sheets to the amounts presented in the Condensed Consolidated Cash Flow Statements (in thousands).
 
 
March 31,
 
December 31,
 
 
2018
 
2017
 
2017
 
2016
Cash and cash equivalents
 
$
189,979

 
$
1,227,891

 
$
538,908

 
$
474,233

Restricted cash classified in (1), (2):
 
 
 
 
 
 
 
 
Prepaid expenses and other current assets
 
18,143

 
25,121

 
15,148

 
25,121

Other assets
 

 
18,150

 
3,002

 

Cash classified as held-for-sale (3)
 
19,508

 

 
10,000

 

Cash and cash equivalents and restricted cash per the Condensed Consolidated Statements of Cash Flows
 
$
227,630

 
$
1,271,162

 
$
567,058

 
$
499,354

 
(1)
Restricted cash pertains to escrow accounts established in connection with certain of the Company's business acquisitions. Generally, such cash is restricted to use due to provisions contained in the underlying asset purchase agreement. The Company will disburse the restricted cash to the sellers of the businesses upon satisfaction of any contingencies described in such agreements (e.g., potential indemnification claims, etc.).
(2)
Restricted cash is recorded in Prepaid expenses and other current assets and Other assets in the Company's consolidated balance sheets with the short-term or long-term classification dependent on the projected timing of disbursements to the sellers.
(3)
Represents cash classified as a held-for-sale asset for certain businesses that were acquired as part of the CEB acquisition. See Note 2 — Acquisitions and Divestitures for additional information.

Income Taxes — On January 1, 2018, the Company adopted 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. U.S. GAAP previously required deferral of the income tax implications of an intercompany sale of assets until the assets were sold to a third party or recovered through use. Under ASU No. 2016-16, the seller’s tax effects and the buyer’s deferred taxes on asset transfers are immediately recognized upon the sale.

Pursuant to the transition rules in ASU No. 2016-16, any taxes attributable to pre-2018 intra-entity transfers that were previously deferred should be accelerated and recorded to accumulated earnings on the date of adoption. As a result of this transition rule, certain of the Company's balance sheet income tax accounts pertaining to pre-2018 intra-entity transfers, which aggregated $13.7 million, were reversed against accumulated earnings on January 1, 2018. ASU No. 2016-16 could have a material post-adoption

8



impact on the Company's consolidated financial statements, depending on the nature, size and tax consequences of future intra-entity transfers, if any. However, ASU 2016-16 had no impact on the Company's operating results during the three months ended March 31, 2018.

Statement of Cash Flows — On January 1, 2018, the Company adopted 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. The adoption of ASU No. 2016-15 had no impact on the Company's consolidated financial statements.

Financial Instruments Recognition and Measurement — On January 1, 2018, the Company adopted 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 are to be measured at fair value with changes in fair value recognized in net income. The adoption of ASU No. 2016-01 had no impact on the Company's consolidated financial statements.

Revenue Recognition — On January 1, 2018, the Company adopted ASU No. 2014-09, "Revenue from Contracts with Customers" ("ASU No. 2014-09"). The adoption of the standard did not have a material impact on the Company's accounting policies or consolidated financial statements. However, as required by ASU No. 2014-09, the Company's disclosures around revenue recognition have been significantly expanded.

The following sections provide an overview of the Company's revenues by segment along with the required disclosures under the new standard:

Our business and our revenues

Gartner delivers its principal products and services globally through four business segments: Research, Events, Consulting and Talent Assessment & Other. Our revenues by business segment are discussed below:

Research
 
Research provides trusted, objective insights and advice on the mission-critical priorities of leaders across all functional areas of an enterprise through research and other reports, briefings, proprietary tools, access to our analysts, peer networking services and membership programs that enable our clients to make better decisions. Gartner's traditional strengths in information technology (“IT”), marketing and supply chain research were enhanced in 2017 with Gartner's acquisition of CEB Inc. ("CEB"), which added CEB's best practice and talent management research insights across a range of business functions, to include human resources, finance, sales and legal.

Research revenues are mainly derived from subscription contracts for research products, representing approximately 90% of the segment’s revenue. The related revenues are deferred and recognized ratably over the applicable contract term (i.e., as we provide the service over the contract period). Fees derived from assisting organizations in selecting the right business software for their needs are recognized at a point in time (i.e., when the lead is provided to the vendor).

The Company enters into subscription contracts for research products that generally are for twelve-month periods or longer. Approximately 65% of our annual and multi-year Research subscription contracts provide for billing of the first annual period upon signing. In subsequent years, multi-year subscription contracts are normally billed prior to the contract’s anniversary date. Our other Research subscription contracts are usually invoiced in advance, commencing with the contract signing, on (i) a quarterly, monthly or other recurring basis or (ii) in accordance with a customized invoicing schedule. Research contracts are generally non-cancelable and non-refundable, except for government contracts that may have cancellation or fiscal funding clauses, which historically have not produced material cancellations. It is our policy to record the amount of a subscription contract that is billable as a fee receivable at the time the contract is signed with a corresponding amount as deferred revenue because the contract represents a legally enforceable claim.

Events

Events provides business professionals across an organization with the opportunity to learn, share and network. From our flagship Chief Information Officer event, Gartner Symposium/ITxpo, to industry-leading conferences focused on specific business roles and topics, to member-driven sessions, our events enable attendees to experience the best of Gartner insight and advice live.

We earn revenues from both the attendees and exhibitors at our events. Attendees are generally invoiced for the full attendance fee upon their completion of an online registration form or their signing of a contract, while exhibitors typically make several

9



individual payments commencing with the signing of a contract. We collect almost all of the invoiced amounts in advance of the related event, resulting in the recording of deferred revenue. We recognize both the attendee and exhibitor revenue as we satisfy our related performance obligations (i.e., when the related symposium, conference, summit or exhibition is held).

The Company defers certain costs directly related to its events and expenses those costs in the period during which the related symposium, conference or exhibition occurs. The Company's policy is to defer only those costs, primarily prepaid site and production services costs, which are incremental and are directly attributable to a specific event. Other costs of organizing and producing our events, primarily Company personnel and non-event specific expenses, are expensed in the period incurred. At the end of each fiscal quarter, the Company assesses, on an event-by-event basis, whether the expected direct costs of producing a scheduled event will exceed the expected revenues. If such costs are expected to exceed revenues, the Company records the expected loss in the period determined.

Consulting
 
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, and contract optimization services.

Consulting revenues, primarily derived from custom consulting and measurement services, are principally generated from fixed fee or time and materials engagements. Revenues from fixed fee engagements are recognized on a proportional performance basis, while revenues from time and material engagements are recognized as work is delivered and/or services are provided. In both of these circumstances, we satisfy our performance obligations and control of the services are passed to our customers over time (i.e., during the duration of the contract or consulting engagement). On a contract-by-contract basis, we typically use actual labor hours incurred compared to total expected labor hours to measure the Company’s proportional performance in respect of our fixed fee engagements. If our labor and other costs on an individual contract are expected to exceed the total contract value or the contract’s funded ceiling amount, the Company reflects an adjustment to the contract’s overall profitability in the period determined. Revenues related to contract optimization engagements are contingent in nature and are only recognized at a point in time when all of the conditions related to their payment have been satisfied.

Consulting customers are invoiced based on the specific terms and conditions in their underlying contracts. We typically invoice our Consulting customers after we have satisfied some or all of the related performance obligation and the related revenue has been recognized. We record fees receivable for amounts that are billed or billable. We also record contract assets, which represent amounts for which we have recognized revenue but lack the unconditional right to payment as of the balance sheet date due to our required continued performance under the relevant contract, progress billing milestones, or other billing-related restrictions. The Company’s contract assets are discussed below.

Talent Assessment & Other

The Talent Assessment & Other segment helps organizations assess, engage, manage and improve talent. These services are provided through knowledge and skills assessments, training programs, workshops, and survey and questionnaire services.

Talent Assessment & Other segment revenues arising from knowledge and skills assessment services are recognized based on the nature of the underlying contract: (i) ratably over the term of the service period; (ii) upon delivery; or (iii) on a proportional performance basis. Revenues from training programs, workshops, and survey and questionnaire products are primarily recognized upon delivery of the service.

In April 2018, the Company sold its CEB Talent Assessment and CEB Workforce Survey and Analytics businesses, which were reported in the Talent Assessment & Other segment. Note 2 - Acquisitions and Divestitures provides additional information regarding these divestitures.

Overview of ASU No. 2014-09

ASU No. 2014-09 requires a five-step evaluative process that consists of:

(1)
Identifying the contract with the customer;
(2)
Identifying the performance obligations in the contract;
(3)
Determining the transaction price for the contract;
(4)
Allocating the transaction price to the performance obligations in the contract; and
(5)
Recognizing revenue when (or as) performance obligations are satisfied.

10




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 adopted ASU No. 2014-09 using the modified retrospective method of adoption. Under this method of adoption, the cumulative effect of applying the new standard is recorded at the date of initial application, with no restatement of the comparative prior periods presented. The adoption of ASU No. 2014-09 did not result in a cumulative effect adjustment to the Company's Accumulated earnings in its consolidated financial statements. However, the adoption of the new standard required reclassifications of certain amounts presented in the Company’s consolidated balance sheet. As of January 1, 2018, these items were (i) the reclassification of certain fees receivable that met the definition of a contract asset, aggregating $26.7 million, from Fees receivable, net to Prepaid expenses and other current assets; and (ii) the reclassification of a refund liability, aggregating $6.2 million, from the allowance for fees receivable to Accounts payable and accrued liabilities.

Related to our adoption of ASU No. 2014-09, we elected to (i) apply the provisions of this new accounting guidance only to contracts that were not completed at the date of initial application and (ii) utilize a practical expedient whereby we reflected the aggregate effect of all contract modifications that occurred prior to January 1, 2018 (rather than retrospectively restating the affected contracts) when identifying our satisfied and unsatisfied performance obligations, determining the transaction prices with our customers, and allocating such transaction prices to our satisfied and unsatisfied performance obligations. These two elections had no financial impact.

Prior to January 1, 2018, the Company recognized revenue in accordance with then-existing U.S. GAAP and SEC Staff Accounting Bulletin No. 104, "Revenue Recognition" (“prior GAAP”). Under both ASU No. 2014-09 and prior GAAP, revenue can only be recognized when all of the required criteria are met. Although there were some minor changes to the Company’s revenue recognition policies and procedures effective January 1, 2018 with the adoption of ASU No. 2014-09, there were no material differences between the timing and amount of revenues recognized under ASU No. 2014-09 and prior GAAP. The accompanying Condensed Consolidated Statements of Operations present revenues net of any sales or value-added taxes that we collect from customers and remit to government authorities.

ASU No. 2014-09 requires that we assess at inception all of the promises in a customer contract to determine if a promise is a separate performance obligation. To identify our performance obligations, we consider all of the services promised in a customer contract, regardless of whether they are explicitly stated or are implied by customary business practices. If we conclude that a service is separately identifiable and distinct from the other offerings in a contract, we account for such a promise as a separate performance obligation.

If a customer contract has more than one performance obligation, then the total contract consideration is allocated among the separate deliverables based on their stand-alone selling prices, which are determined based on the prices at which the Company discretely sells the stand-alone services. If a contract includes a discount or other pricing concession, the transaction price is allocated among the performance obligations on a proportionate basis using the relative stand-alone selling prices of the individual deliverables being transferred to the customer, unless the discount or other pricing concession can be ascribed to specifically identifiable performance obligations.

The contracts with our customers delineate the final terms and conditions of the underlying arrangement, including product descriptions, subscription periods, deliverables, quantity and price of each service purchased. Since the transaction price of almost all of our customer contracts is typically agreed upon upfront and generally does not fluctuate during the duration of the contract, variable consideration is insignificant. The Company may engage in certain financing transactions with customers but these arrangements have been limited in number and not material.


11



Required Disclosures under ASU No. 2014-09

ASU No. 2014-09 requires significantly expanded disclosures around the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. These additional disclosures are provided below:

Disaggregated Revenues

We believe that disaggregating the Company’s revenues by primary geographic location and the timing of when revenue is recognized achieves the disclosure objectives in ASU No. 2014-09. Our disaggregated revenue information by reportable segment is presented for the periods indicated in the tables below (in thousands).
 
Three Months Ended March 31, 2018
 
Research
Events
Consulting
Talent Assessment & Other
Total
Primary Geographic Markets: (1)
 
 
 
 
 
United States and Canada
$
489,713

$
24,069

$
45,129

$
34,594

$
593,505

Europe, Middle East and Africa
184,547

16,891

29,938

28,290

259,666

Other International
89,664

5,127

7,829

7,774

110,394

Total revenues
$
763,924

$
46,087

$
82,896

$
70,658

$
963,565

 
Three Months Ended March 31, 2017
 
Research
Events
Consulting
Talent Assessment & Other
Total
Primary Geographic Markets: (1)
 
 
 
 
 
United States and Canada
$
327,492

$
17,663

$
47,832

$

$
392,987

Europe, Middle East and Africa
115,802

14,095

23,823


153,720

Other International
68,012

3,511

6,939


78,462

Total revenues
$
511,306

$
35,269

$
78,594

$

$
625,169

 
(1)
Revenues are reported based on where the sale is fulfilled.

Three Months Ended March 31, 2018
 
Research
Events
Consulting
Talent Assessment & Other
Total
Timing of Revenue Recognition:
 
 
 
 
 
Transferred over time (1)
$
701,096

$

$
74,010

$
58,946

$
834,052

Transferred at a point in time (2)
62,828

46,087

8,886

11,712

129,513

Total revenues
$
763,924

$
46,087

$
82,896

$
70,658

$
963,565


Three Months Ended March 31, 2017
 
Research
Events
Consulting
Talent Assessment & Other
Total
Timing of Revenue Recognition:
 
 
 
 
 
Transferred over time (1)
$
466,706

$

$
64,994

$

$
531,700

Transferred at a point in time (2)
44,600

35,269

13,600


93,469

Total revenues
$
511,306

$
35,269

$
78,594

$

$
625,169

 

12




(1)
These Research revenues were recognized in connection with performance obligations that were satisfied over time using a time-elapsed output method to measure progress. The corresponding Consulting revenues were recognized over time using labor hours as an input measurement basis. Talent Assessment & Other revenues in this category were recognized using either a time-elapsed output method, performance-based milestone approach or labor hours, depending on the nature of the underlying customer contract.
(2)
The revenues in this category were recognized in connection with performance obligations that were satisfied at the point in time the contractual deliverables were provided to the customer.

Determining a measure of progress for performance obligations that are satisfied over time and when control transfers for performance obligations that are satisfied at a point in time requires us to make judgments that affect the timing of when revenue is recognized. A key factor in this determination is when the customer is able to direct the use of, and can obtain substantially all of the benefits from, the deliverable.

For performance obligations recognized in accordance with a time-elapsed output method, the Company’s efforts are expended consistently throughout the contractual period and the Company transfers control evenly by providing stand-ready services. For performance obligations satisfied under our Consulting fixed fee and time and materials engagements, we believe that labor hours are the best measure of depicting the Company’s progress because labor output corresponds directly to the value of the Company’s performance to date as control is transferred. In our Talent Assessment & Other segment, we select a method to assess the completion of our performance obligations that best aligns with the specific characteristics of the individual customer contract. We believe that these methods to measure progress provide a reasonable and supportable determination as to when we transfer control over these services to our customers.

For customer contracts that are greater than one year in duration, the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 2018 was approximately $2.1 billion. The Company expects to recognize $1,060.6 million, $856.7 million and $209.8 million of this revenue (most of which pertains to Research) during the remainder of 2018, the year ending December 31, 2019 and thereafter, respectively. The Company applies the practical expedient allowed in ASU No. 2014-09 and, accordingly, it does not disclose such performance obligation information for customer contracts that have original durations of one year or less.

Customer Contract Assets and Liabilities

The timing of the recognition of revenues, the amount and timing of our billings and cash collections, as well as upfront customer payments, result in the recording of both assets and liabilities on our Condensed Consolidated Balance Sheets.

The payment terms and conditions in our customer contracts vary. In some cases, customers prepay and, in other cases, after we conduct a credit evaluation, payment may be due in arrears. Because the timing of the delivery of our services typically differs from the timing of customer payments, the Company recognizes either a contract asset (we perform either fully or partially under the contract but a contingency remains) or a contract liability (upfront customer payments precede our performance, resulting in deferred revenue). Amounts recorded as contract assets are reclassified to fees receivable when all of the outstanding conditions have been resolved and our right to payment becomes unconditional. Contracts with payments due in arrears are also recognized as fees receivable. As our contractual performance obligations are satisfied over time or at a point in time, the Company correspondingly relieves its contract liabilities and records the associated revenue.


13



The table below provides information regarding certain of the Company’s balance sheet accounts that pertain to its contracts with customers, to exclude our held-for-sale businesses (in thousands):

 
March 31,
December 31,
 
2018
2017
Assets:
 
 
Fees receivable, gross (1)
$
1,142,064

$
1,162,871

 
 
 
Contract assets (2)
$
27,593

$
26,672

 
 
 
Contract liabilities:
 
 
Deferred revenues (current liability) (3)
$
1,719,637

$
1,630,198

Non-current deferred revenues (3)
16,139

16,205

Total contract liabilities
$
1,735,776

$
1,646,403

 
 
 
 


(1)
Fees receivable represent the unconditional right of payment from our customers and includes both billed and unbilled amounts.
(2)
Contract assets represent recognized revenue for which we do not have an unconditional right to payment as of the balance sheet date because the project may be subject to a progress milestone or some other billing restriction. In the accompanying Condensed Consolidated Balance Sheets, contract assets are recorded in Prepaid expenses and other current assets as of March 31, 2018 and Fees receivable, net as of December 31, 2017.
(3)
Deferred revenues represent amounts (i) for which the Company has received an upfront customer payment or (ii) that pertain to recognized fees receivable. Both situations occur before the completion of our performance obligation(s).

During the three months ended March 31, 2018, the Company recognized $605.5 million of revenue that was attributable to deferred revenues that were recorded at December 31, 2017. Such amount primarily consisted of (i) Research and Talent Assessment & Other revenue that was recognized ratably as control of the goods or services passed to the customer and (ii) Events revenue pertaining to symposia, conferences, summits or exhibitions that occurred during the calendar quarter. During the three months ended March 31, 2018, the Company recorded no material impairments related to its contract assets. The Company does not in the normal course of business recognize revenues from performance obligations satisfied in prior periods.

Allowance for Losses and Revenue Reserves

As of December 31, 2017, the Company maintained an allowance for losses that included a bad debt allowance and a revenue reserve. Provisions to the Company’s allowance for losses were charged against earnings as either a reduction in revenues or an increase in expense.

Effective with the adoption of ASU No. 2014-09 on January 1, 2018, the allowance for losses, which is classified as an offset to the gross amount of fees receivable, and the related charge against earnings (i.e., bad debt expense) is now comprised solely of estimated uncollectible fees receivable due to credit and other associated risks. The revenue reserve previously reported as part of the allowance for losses has been reclassified and is now reported as a liability in accordance with ASU No. 2014-09. The revenue reserve is maintained for amounts deemed to be uncollectible for reasons other than bad debt. The amount of the revenue reserve is based on past experience and current estimates. As of March 31, 2018, the revenue reserve balance was $6.9 million and adjustments to the account during the three months ended March 31, 2018 were not significant.

The determination of the allowance for losses is based on historical loss experience, an assessment of current economic conditions, the aging of outstanding receivables, the financial health of specific clients and probable losses. This evaluation is inherently judgmental and requires the use of estimates. The allowance for losses is periodically re-evaluated and adjusted as more information about the ultimate collectability of fees receivable becomes available. Circumstances that could cause the allowance for losses 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.

Costs of obtaining and fulfilling a customer contract

Upon the signing of a customer contract, the Company capitalizes the related commission as a recoverable direct incremental cost of obtaining the underlying contract and records a corresponding commission payable. No other amounts are capitalized as a cost

14



of obtaining or fulfilling a customer contract because no expenditures have been identified that meet the requisite capitalization criteria. For Research, Consulting and Talent Assessment & Other, we generally use the straight-line method of amortization for deferred commissions over a period that is based on the projected recoverability for such costs, using factors such as the underlying contract period, the timing of when the corresponding revenues will be earned, and the anticipated term of the engagement. For Events, deferred commissions are expensed during the period when the related event occurs.

Under all circumstances, deferred commissions are amortized over a period that does not exceed one year. During the three months ended March 31, 2018 and 2017, such amortization expense was $75.9 million and $50.2 million, respectively, and was included in Selling, general and administrative expense in the accompanying Condensed Consolidated Statements of Operations. The Company recorded no material impairments of its deferred commissions during either the three months ended March 31, 2018 or 2017.

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

Accounting standards effective in 2019

Certain Tax Effects Stranded In Accumulated Other Comprehensive Income — In February 2018, the FASB issued ASU No. 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU No. 2018-02"). ASU No. 2018-02 provides an entity with the option to reclassify to retained earnings the tax effects from items that have been stranded in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act of 2017 (the “Act”). Upon adoption, ASU No. 2018-02 requires an entity to make new disclosures, including whether or not the entity elected to reclassify the tax effects related to the Act and the entity’s accounting policy for releasing the income tax effects from accumulated other comprehensive income for all other items (i.e., those not pertaining to the Act). Entities may adopt ASU No. 2018-02 using one of two transition methods: (i) retrospective to each period wherein the income tax effects of the Act related to items remaining in accumulated other comprehensive income are recognized or (ii) at the beginning of the period of adoption. ASU No. 2018-02 is effective for Gartner on January 1, 2019; however, early adoption is permitted. We are currently evaluating the potential impact of ASU No. 2018-02 on the Company's consolidated financial statements but no material impact is expected at adoption.

Targeted Improvements to Accounting for Hedging Activities - In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging ("ASU No. 2017-12"). ASU No. 2017-12 is intended to improve the financial reporting of hedging relationships to better portray economic results of an entity’s risk management activities in its financial statements. In addition to that main objective, the standard makes certain targeted improvements to simplify the application of the hedge accounting guidance in current U.S. GAAP. ASU No. 2017-12 is effective for Gartner on January 1, 2019. We are currently evaluating the impact of ASU No. 2017-12 on the Company's consolidated financial statements.

Distinguishing Liabilities from Equity — In July 2017, the FASB issued ASU No. 2017-11, "Earnings Per Share, Distinguishing Liabilities from Equity, and Derivatives and Hedging" ("ASU No. 2017-11"). ASU No. 2017-11 is intended to simplify the accounting for financial instruments with characteristics of liabilities and equity. Among the issues addressed are: (i) determining whether an instrument (or embedded feature) is indexed to an entity’s own stock; (ii) distinguishing liabilities from equity for mandatorily redeemable financial instruments of certain nonpublic entities; and (iii) identifying mandatorily redeemable non-controlling interests. ASU No. 2017-11 is effective for Gartner on January 1, 2019. We are currently evaluating the potential impact of ASU No. 2017-11 on the Company's 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. Under current U.S. GAAP, lease arrangements that meet certain criteria are considered operating leases and are not recorded on an entity's balance sheet. Because all of our existing lease arrangements are accounted for as operating leases, they are not recorded on the Company's balance sheet. ASU No. 2016-02 will significantly change the accounting for leases because a right-of-use ("ROU") model will be used wherein a lessee must record an ROU asset and a lease liability on its balance sheet for leases with initial terms longer than 12 months. Under ASU No. 2016-02, leases will be classified as either finance or operating arrangements, with such classification affecting the pattern of expense recognition in an entity's 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 potential impact of ASU No. 2016-02 on our consolidated financial statements.





15



Accounting standards effective in 2020

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 under current U.S. GAAP. ASU No. 2017-04 is effective for Gartner on January 1, 2020. The adoption of ASU No. 2017-04 is currently not expected to have a material impact on the Company's 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.

The FASB 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. As these standards have not yet been issued, the effective dates and potential impact are unknown.

Note 2 — Acquisitions and Divestitures

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. The Company did not have any business acquisitions in the first quarter of 2018. In the first quarter of 2017, the Company acquired L2, Inc. ("L2"), a subscription-based research business that benchmarks the digital performance of brands. During the three months ended March 31, 2018, the Company finalized its acquisition accounting for L2 and CEB Inc. ("CEB"), which was acquired on April 5, 2017. There were no material measurement period adjustments recorded during the 2018 quarterly period.

The Company recognized $59.3 million of acquisition and integration charges in 2018 compared to $13.3 million in 2017. The additional charges during 2018 consisted of higher professional fees, severance, stock-based compensation charges, and accruals for exit costs for certain office space that the Company does not intend to occupy in Arlington, Virginia that were related to our acquisition of CEB. The following table presents a summary of the activity related to our accrual for exit costs at all of our facilities for the quarter ended March 31, 2018 (in thousands):
Liability balance at December 31, 2017
$
12,961

Charges and adjustments, net
44,230

Payments
(4,734
)
Liability balance at March 31, 2018 (1)
$
52,457

 
(1)
In total, we estimate that we will make net cash payments of approximately $61.2 million for exit costs in connection with the activities described herein. Through March 31, 2018, in the aggregate, we have expensed $57.3 million and paid $4.9 million related to such activities.

Divestitures

CEB Talent Assessment business

On April 3, 2018, the Company sold its CEB Talent Assessment business in all cash transaction for a purchase price of $400.0 million. The purchase price is subject to customary adjustments and other deal-related expenses. The CEB Talent Assessment business was acquired by Gartner as part of the CEB acquisition in April 2017 and was a significant portion of the Company's Talent Assessment & Other segment. During the first quarter of 2018, the CEB Talent Assessment business contributed approximately $47.0 million of revenue and recognized pre-tax income of approximately $2.1 million.


16



CEB Workforce Survey & Analytics business

On April 30, 2018, the Company sold its CEB Workforce Survey and Analytics ("WS&A") business in an all cash transaction for a purchase price of $29.0 million. The purchase price is subject to customary adjustments and other deal-related expenses. The WS&A business was also acquired by Gartner as part of the CEB acquisition in April 2017 and was reported with the Talent Assessment & Other segment.

The Company has classified the related assets and liabilities of these businesses as held-for-sale in its Consolidated Balance Sheets.
The principal components of the held-for-sale assets and liabilities for these businesses are summarized in the table below (in thousands):
 
March 31, 2018 (1)
December 31, 2017 (1)
Cash and cash equivalents
$
19,508

$
10,000

Fees receivable, net
49,191

50,928

Goodwill
246,661

212,994

Intangible assets, net
264,145

250,472

Other assets (2)
23,849

18,571

Total assets held-for-sale
$
603,354

$
542,965

 
 
 
Accounts payable and accrued liabilities
$
26,467

$
32,388

Deferred revenues
65,846

61,450

Other liabilities
51,644

52,007

Total liabilities held-for-sale
$
143,957

$
145,845

 
(1) March 31, 2018 includes both the CEB Talent Assessment business and the WS&A business. December 31, 2017 includes the CEB Talent Assessment business only.
(2) Other assets includes property, equipment and leasehold improvements, net.

Note 3 — Computation of Net (Loss) Income per Share

Basic earnings per share (“EPS”) is computed by dividing net (loss) income by the weighted average number of shares of Common Stock outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in earnings. When the impact of common share equivalents is anti-dilutive, they are excluded from the calculation.

The following table sets forth the calculation of basic and diluted (loss) income per share (in thousands, except per share data):
 
Three Months Ended
 
March 31,
 
2018
 
2017
Numerator:
 

 
 

Net (loss) income used for calculating basic and diluted (loss) income per common share
$
(19,587
)
 
$
36,433

 
 
 
 
Denominator:
 

 
 

Weighted average common shares used in the calculation of basic (loss) income per share
91,005

 
82,835

Common stock equivalents associated with stock-based compensation plans (1), (2)

 
1,260

Shares used in the calculation of diluted (loss) income per share
91,005

 
84,095

 
 
 
 
Basic (loss) income per share
$
(0.22
)
 
$
0.44

Diluted (loss) income per share
$
(0.22
)
 
$
0.43

 
(1)
For the three months ended March 31, 2017, certain common stock equivalents were not included in the computation of diluted income per share because the effect would have been anti-dilutive. These common share equivalents totaled less than 0.4 million for the 2017 period presented.

17



(2)
For the three months ended March 31, 2018, approximately 1.3 million common stock equivalents were completely excluded from the calculation of diluted (loss) per share because they were anti-dilutive.


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. As of March 31, 2018, the Company had 4.9 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 and SEC Staff Accounting Bulletins No. 107 and No. 110. Stock-based compensation expense is based on the fair value of the award on the date of grant. The Company recognizes stock-based compensation expense over the period that the related service is performed, which is generally the same as the vesting period of the underlying award. 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 use of certain subjective assumptions, including the expected life of a stock-based compensation award and Common Stock price volatility. In addition, determining the appropriate periodic stock-based compensation expense requires management to estimate the likelihood of the achievement of certain performance targets. The assumptions used in calculating the fair values of stock-based compensation awards and the related periodic expense represent management’s best estimates, which involve inherent uncertainties and the application of judgment. As a result, if circumstances change and the Company deems it necessary in the future to modify the assumptions it made or to use different assumptions, or if the quantity and nature of the Company’s stock-based compensation awards changes, then the amount of expense may need to be adjusted and future stock-based compensation expense could be materially different from what has been recorded in the current period.

Stock-Based Compensation Expense

The Company recognized the following stock-based compensation expense by award type and expense category line item during the periods indicated (in millions):
 
 
Three Months Ended
 
 
March 31,
Award type
 
2018
 
2017
Stock appreciation rights
 
$
3.5

 
$
2.8

Restricted stock units
 
27.2

 
19.6

Common stock equivalents
 
0.2

 
0.2

Total (1)
 
$
30.9

 
$
22.6

 
 
Three Months Ended
 
 
March 31,
Expense category line item
 
2018
 
2017
Cost of services and product development
 
$
11.4

 
$
9.3

Selling, general and administrative
 
18.2

 
13.3

Acquisition and integration charges (2)
 
1.3

 

Total (1)
 
$
30.9

 
$
22.6

 
(1) Includes charges of $17.8 million and $14.5 million during the three months ended March 31, 2018 and 2017, respectively, for awards to retirement-eligible employees. Those awards vest on an accelerated basis.
(2) These charges are primarily the result of the acceleration of the vesting of certain restricted stock units related to the CEB acquisition.


18



As of March 31, 2018, the Company had $125.8 million of total unrecognized stock-based compensation cost, which is expected to be expensed over the remaining weighted average service period of approximately 2.9 years.

Stock-Based Compensation Awards

The disclosures presented below provide information regarding the Company’s stock-based compensation awards, all of which have been 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 value of the Common Stock. After the applicable vesting criteria have been satisfied, SARs are settled in shares of Common Stock upon exercise by the employee. SARs vest ratably over a four-year service period and expire seven years from the date of grant. The fair value of a SARs award 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 exercise of the SARs award (calculated as the closing price of the Common Stock as reported on the New York Stock Exchange on the date of exercise less the exercise price of the SARs award, multiplied by the number of SARs exercised) is divided by (2) the closing price of the Common Stock on the date of exercise. The Company withholds a portion of the shares of the Common Stock issued upon exercise to satisfy statutory tax withholding requirements. SARs recipients do not have any stockholder rights until the shares of Common Stock are issued in respect of the award, which is subject to the prior satisfaction of the vesting and other criteria relating to such grants.

The following table summarizes changes in SARs outstanding during the three months ended March 31, 2018:
 
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, 2017
1.2

 
$
76.73

 
$
17.35

 
4.28
Granted
0.3

 
114.26

 
25.63

 
6.86
Outstanding at March 31, 2018 (1) (2)
1.5

 
85.06

 
19.15

 
4.70
Vested and exercisable at March 31, 2018 (2)
0.8

 
$
70.96

 
$
16.39

 
3.56
 
(1) As of March 31, 2018, 0.7 million of the total SARs outstanding were unvested. The Company expects that substantially all of those unvested awards will vest in future periods.
(2) As of March 31, 2018, the total SARs outstanding had an intrinsic value of $47.6 million. On such date, SARs vested and exercisable had an intrinsic value of $35.1 million.

The fair value of a SARs award 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,
 
2018
 
2017
Expected dividend yield (1)
%
 
%
Expected stock price volatility (2)
21
%
 
22
%
Risk-free interest rate (3)
2.5
%
 
1.8
%
Expected life in years (4)
4.5

 
4.5

 
(1)
The expected dividend yield assumption was based on both the Company's historical and anticipated 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.

19



(3)
The risk-free interest rate was 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 estimate of the weighted average period of time the SARs are expected to be outstanding (that is, the 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 certain restrictions lapse. Each RSU that vests entitles the awardee to one share of Common Stock. 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 an RSU award is determined on the date of grant based on the closing price of the Common Stock as reported on 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 the vesting period. 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 over the vesting period.

The following table summarizes the changes in RSUs outstanding during the three months ended March 31, 2018:
 
Restricted
Stock Units
("RSUs")
(in millions)
 
Per Share
Weighted
Average
Grant Date
Fair Value
Outstanding at December 31, 2017
1.5

 
$
91.47

Granted (1)
0.7

 
114.33

Vested and released
(0.6
)
 
86.21

Outstanding at March 31, 2018 (2) (3)
1.6

 
$
101.52

 
(1)
The 0.7 million of RSUs granted during the three months ended March 31, 2018 consisted of 0.3 million of performance-based RSUs awarded to executives and 0.4 million of service-based RSUs awarded to non-executive employees. The performance-based awards include RSUs in final settlement of 2017 grants and approximately 0.2 million of RSUs representing the target amount of the grant for the year ending December 31, 2018 that is tied to an increase in Gartner's total contract value for 2018. Total contract value for this determination represents the value attributable to all of Gartner's subscription-related revenue contracts. The number of performance-based RSUs that will ultimately be awarded for 2018 ranges from 0% to 200% of the target amount and will be finalized based on the actual increase in Gartner's total contract value for 2018 as measured on December 31, 2018. If the specified minimum level of achievement is not met, the performance-based RSUs pertaining to 2018 will be forfeited in their entirety and any previously recorded compensation expense will be reversed.
(2)
The Company expects that substantially all of the RSUs outstanding will vest in future periods.
(3)
As of March 31, 2018, the weighted average remaining contractual term of the RSUs outstanding was approximately 1.8 years.

Common Stock Equivalents

Common stock equivalents ("CSEs") are convertible into Common Stock. Each CSE entitles the holder to one share of Common Stock. Members of our Board of Directors receive their directors’ fees in CSEs unless they opt to receive up to 50% of those fees in cash. Generally, CSEs have no defined term and are converted into shares of Common Stock when service as a director terminates unless the director has elected an accelerated release. The fair value of a CSE award is determined on the date of grant based on the closing price of the Common Stock as reported on the New York Stock Exchange on that date. CSEs vest immediately and, as a result, they are recorded as expense on the date of grant.











20




The following table summarizes the changes in CSEs outstanding during the three months ended March 31, 2018:
 
Common
Stock
Equivalents
("CSEs")
 
Per Share
Weighted
Average
Grant Date
Fair Value
Outstanding at December 31, 2017
110,013

 
$
23.19

Granted
1,624

 
116.06

Converted to shares of Common Stock upon grant
(998
)
 
124.94

Outstanding at March 31, 2018
110,639

 
$
23.59

 

Employee Stock Purchase Plan

The Company has an employee stock purchase plan (the “ESP Plan”) under which eligible employees are permitted to purchase shares of 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 on the New York Stock Exchange at the end of each offering period. As of March 31, 2018, the Company had 0.8 million shares available for purchase under the ESP Plan. The ESP Plan is considered non-compensatory under FASB ASC Topic 718 and, as a result, the Company does not record stock-based compensation expense for employee share purchases. The Company received $4.1 million and $3.0 million in cash from employee share purchases under the ESP Plan during the three months ended March 31, 2018 and 2017, respectively.

Note 5 — Segment Information

Our products and services are delivered through four segments – Research, Events, Consulting and Talent Assessment & Other, as follows:

Research provides trusted, objective insights and advice on the mission-critical priorities of leaders across all functional areas of the enterprise through research and other reports, briefings, proprietary tools, access to our analysts, peer networking services and membership programs that enable our clients to make better decisions. Gartner's traditional strengths in IT, marketing and supply chain research were enhanced in 2017 with Gartner's acquisition of CEB, Inc., which added CEB's best practice and talent management research insights across a range of business functions, to include human resources, finance, sales and legal.

Events provides business professionals across the organization the opportunity to learn, share and network. From our flagship CIO event Gartner Symposium/ITxpo, to industry-leading conferences focused on specific business roles and topics, to member-driven sessions, our events enable attendees to experience the best of Gartner insight and advice live.

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.

Talent Assessment & Other helps organizations assess, engage, manage and improve talent. This is accomplished through knowledge and skills assessments, training programs, workshops, and survey and questionnaire services.
    
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 or loss 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.




21



The following tables present operating information about the Company’s reportable segments for the periods indicated (in thousands):
Three Months Ended March 31, 2018
Research
 
Events
 
Consulting
 
Talent Assessment & Other (1)
 
Consolidated
Revenues
$
763,924

 
$
46,087

 
$
82,896

 
$
70,658

 
$
963,565

Gross contribution
531,456

 
16,190

 
24,124

 
43,044

 
614,814

Corporate and other expenses
 

 
 

 
 

 
 
 
(623,525
)
Operating loss
 

 
 

 
 

 
 
 
$
(8,711
)
Three Months Ended March 31, 2017
Research
 
Events
 
Consulting
 
Talent Assessment & Other
 
Consolidated
Revenues (2)
$
511,306

 
$
35,269

 
$
78,594

 
$

 
$
625,169

Gross contribution (2)
351,113

 
13,567

 
23,937

 

 
388,617

Corporate and other expenses
 

 
 

 
 

 
 
 
(335,103
)
Operating income
 

 
 

 
 

 
 
 
$
53,514

 
(1) In April 2018, the Company sold its CEB Talent Assessment and CEB Workforce Survey and Analytics businesses. These two businesses were acquired in April 2017 with the CEB acquisition. The results of these businesses are included in the Talent Assessment & Other segment results for the three months ended March 31, 2018. Additional information regarding these divestitures is included in Note 2 — Acquisitions and Divestitures.
(2)
In 2017, the Company began reporting the results of its Strategic Advisory Services ("SAS") business in Research whereas previously the SAS business was reported with Consulting. As a result, revenues of $6.7 million pertaining to the three months ended March 31, 2017 were reclassified from Consulting to Research to be comparable with the current year presentation. Gross contribution of $4.4 million for the three months ended March 31, 2017 was also reclassified from Consulting to Research.

The following table provides a reconciliation of total segment gross contribution to net (loss) income for the periods indicated (in thousands):
 
Three Months Ended
 
March 31,
 
2018
 
2017
Total segment gross contribution
$
614,814

 
$
388,617

Costs and expenses:
 
 
 
Cost of services and product development - unallocated (1)
8,458

 
1,057

Selling, general and administrative
487,745

 
304,244

Depreciation and amortization
68,056

 
16,530

Acquisition and integration charges
59,266

 
13,272

Operating (loss) income
(8,711
)
 
53,514

Interest expense and other, net
34,160

 
5,017

(Benefit) provision for income taxes
(23,284
)
 
12,064

Net (loss) income
$
(19,587
)
 
$
36,433

 
(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.





22



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. Evaluations of the recoverability of goodwill are 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 approaches. 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. 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. In connection with our most recent annual impairment test of goodwill during the quarter ended September 30, 2017, which indicated no impairment of recorded goodwill, the Company utilized the qualitative approach in assessing the fair values of its reporting units relative to their respective carrying values.
 
The following table presents changes to the carrying amount of goodwill by segment during the three months ended March 31, 2018 (in thousands):
 
Research
 
Events
 
Consulting
 
Talent Assessment & Other

 
Total
Balance at December 31, 2017 (1), (2)
$
2,619,677

 
$
187,920

 
$
97,798

 
$
81,899

 
$
2,987,294

Reclassified as held-for-sale (3)

 

 

 
(20,547
)
 
(20,547
)
Foreign currency translation impact and other (4)
(17,958
)
 
(170
)
 
528

 
7,495

 
(10,105
)
Balance at March 31, 2018
$
2,601,719

 
$
187,750

 
$
98,326

 
$
68,847

 
$
2,956,642

 
(1)
The Company does not have any accumulated goodwill impairment losses.
(2)
Excludes certain amounts related to held-for-sale operations.
(3)
Represents amounts reclassified as held-for-sale assets related to the CEB Talent Assessment and WS&A businesses. See Note 2 — Acquisitions and Divestitures for additional information.
(4)
Includes the foreign currency translation impact and certain measurement period adjustments related to the acquisition of CEB in April 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, 2018
 
Customer
Relationships
 
Software
 
Content
 
Other
 
Total
Gross cost at December 31, 2017 (1)
 
$
1,200,316

 
$
123,424

 
$
104,313

 
$
54,929

 
$
1,482,982

Write-off of fully amortized intangible assets
 

 

 
(228
)
 

 
(228
)
Reclassified as held-for-sale (2)
 
(7,170
)
 
(321
)
 
(241
)
 
(39
)
 
(7,771
)
Foreign currency translation impact
 
15,218

 
491

 
251

 
(171
)
 
15,789

Gross cost
 
1,208,364

 
123,594

 
104,095

 
54,719

 
1,490,772

Accumulated amortization (3)
 
(119,075
)
 
(32,410
)
 
(63,778
)
 
(27,738
)
 
(243,001
)
Balance at March 31, 2018 (1)
 
$
1,089,289

 
$
91,184

 
$
40,317

 
$
26,981

 
$
1,247,771


December 31, 2017
 
Customer
Relationships
 
Software
 
Content
 
Other
 
Total
Gross cost (1)
 
$
1,200,316

 
$
123,424

 
$
104,313

 
$
54,929

 
$
1,482,982

Accumulated amortization (3)
 
(92,983
)
 
(26,344
)
 
(47,475
)
 
(24,158
)
 
(190,960
)
Balance at December 31, 2017 (1)
 
$
1,107,333

 
$
97,080

 
$
56,838

 
$
30,771

 
$
1,292,022


23



 
(1) Excludes amounts related to held-for-sale operations.
(2)
Represents amounts reclassified (net) as held-for-sale assets related to the WS&A business. See Note 2 — Acquisitions and Divestitures for additional information.
(3) Finite-lived intangible assets are amortized using the straight-line method over the following periods: Customer relationships—4 to 13 years; Software—3 to 7 years; Content—1.5 to 5 years; and Other—2 to 5 years.

Amortization expense related to finite-lived intangible assets was $51.6 million and $6.3 million during the three months ended March 31, 2018 and 2017, respectively. The estimated future amortization expense by year for finite-lived intangible assets is as follows (in thousands):
2018 (remaining nine months)
$
138,953

2019
135,868

2020
129,461

2021
108,979

2022
99,363

Thereafter
635,147

 
$
1,247,771



Note 7 — Debt

2016 Credit Agreement

The Company has a credit facility that provides for a $1.5 billion Term loan A facility, a $500.0 million Term loan B facility, and a $1.2 billion revolving credit facility (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 covenants as of March 31, 2018.

The Term loan A facility is being repaid in 16 consecutive quarterly installments that commenced 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. Amounts borrowed under the Term loan A facility and the revolving credit facility 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.

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%. The Term loan B facility is being repaid in 28 consecutive quarterly installments that commenced on June 30, 2017, plus a final payment to be made on April 5, 2024.
 
Senior Notes

The Company has $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. 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, the redemption date. Prior to April 1, 2020,

24



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.

Outstanding Borrowings

The following table summarizes the Company’s total outstanding borrowings as of the dates indicated (in thousands):
 
 
March 31,
 
December 31,
Description:
 
2018
 
2017
2016 Credit Agreement - Term loan A facility (1)
 
$
1,410,750

 
$
1,429,312

2016 Credit Agreement - Term loan B facility (1)
 
495,000

 
496,250

2016 Credit Agreement - Revolving credit facility (1), (2)
 
310,000

 
595,000

Senior Notes (3)
 
800,000

 
800,000

Other (4)
 
2,385

 
2,500

Principal amount outstanding (5)
 
$
3,018,135

 
$
3,323,062

  Less: deferred financing fees (6)
 
(42,350
)
 
(44,217
)
Net balance sheet carrying amount (7)
 
$
2,975,785

 
$
3,278,845

 
(1)
The contractual annualized interest rate as of March 31, 2018 on the Term loan A and B facilities was 3.88%, which consisted of a floating eurodollar base rate of 1.88% plus a margin of 2.00%. The contractual annualized interest rate on the revolving credit facility was 4.38%, which consisted of a floating eurodollar base rate of 1.88% plus a margin of 2.50%. However, the Company has interest rate swap contracts which effectively convert the floating eurodollar base rates on a portion of the amounts outstanding to a fixed base rate.
(2)
The Company had $866.0 million of available borrowing capacity on the revolver (not including the expansion feature) as of March 31, 2018.
(3)
Consists of $800.0 million principal amount of Senior Notes outstanding. The Senior Notes pay a fixed rate of 5.125% and mature on April 1, 2025.
(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 time 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, 2018, including the effect of its interest rate swaps discussed below, was 4.14%.
(6)
The deferred financing fees are being amortized to Interest expense, net over the term of the related debt obligation.
(7)
On April 30, 2018, the Company repaid $400.0 million of the Term loan B facility and $50.0 million of the revolving credit facility.

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 Company's swaps were highly effective hedges of the forecasted interest payments as of March 31, 2018. The interest rate swaps had a total positive fair value (asset) to the Company of $17.3 million at March 31, 2018, which is deferred and recorded in Accumulated other comprehensive income, net of tax effect.



25



Note 8 — Equity

Share Repurchase Authorization

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, 2018. 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,
 
2018
 
2017
Number of shares repurchased (1), (2)
239,268

 
218,752

Cash paid for repurchased shares (in thousands)
$
28,394

 
$
21,978

 
(1) The average purchase price for repurchased shares was $118.73 and $100.47 for the three months ended March 31, 2018 and 2017, respectively.
(2) All of the shares repurchased in both quarterly periods related to the settlement of the Company's share-based compensation awards.

Accumulated Other Comprehensive Income (Loss), net ("AOCI/L")

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

For the three months ended March 31, 2018:
 
Interest Rate
Swaps
 
Defined
Benefit
Pension Plans
 
Foreign
Currency
Translation
Adjustments
 
Total
Balance – December 31, 2017
$
2,483

 
$
(5,861
)
 
$
4,886

 
$
1,508

Changes during the period:
 

 
 

 
 

 
 

Change in AOCI/L before reclassifications to income
9,365

 

 
20,547

 
29,912

Reclassifications from AOCI/L to income during the period (2), (3)
749

 
56

 

 
805

Other comprehensive income for the period
10,114

 
56

 
20,547

 
30,717

Balance – March 31, 2018
$
12,597

 
$
(5,805
)
 
$
25,433

 
$
32,225


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 AOCI/L before reclassifications to income
(3,393
)
 

 
4,371

 
978

Reclassifications from AOCI/L to income during the period (2), (3)
825

 
48

 

 
873

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

 
4,371

 
1,851

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

26



(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 for the three months ended March 31, 2018 was a benefit of $(23.3) million on a pretax loss of $(42.9) million compared to an expense of $12.1 million on pretax income of $48.5 million in the three months ended March 31, 2017. The effective income tax rate was 54.3% for the three months ended March 31, 2018 and 24.9% for the same period in 2017.
The quarter-over-quarter change in the effective income tax rate was primarily attributable to the relative impact of stock-based compensation benefits quarter-over-quarter. The tax benefits from stock-based compensation during the first quarter of 2018 increased the tax rate on pretax losses while such benefits in the first quarter of 2017 decreased the tax rate on pretax income. In addition to the impact of stock-based compensation, the change in the effective income tax rate quarter-over-quarter was driven by a reduction in the U.S. tax rate effective for 2018 as well as tax benefits recognized in 2018 for unrealized capital losses on the divestiture of the CEB Talent Assessment business.
The Tax Cuts and Jobs Act (the "Act”) was enacted on December 22, 2017. Among other things, the Act reduces the U.S. federal corporation tax rate from 35% to 21%, requires companies to pay a one-time transition tax on accumulated deferred foreign income (“ADFI”) of foreign subsidiaries that were previously tax deferred and creates a new tax on global intangible low-taxed income (“GILTI”) attributable to foreign subsidiaries. As of March 31, 2018, we have not completed our accounting for the tax effects of enactment of the Act because all of the necessary information is not currently available, prepared or analyzed. As such, the amounts we have recorded are provisional estimates and as permitted by the SEC per Staff Accounting Bulletin No. 118. We expect to complete the accounting for the impact of tax reform by the fourth quarter of 2018 as we complete our analysis and receive additional guidance from the Internal Revenue Service pertaining to the Act.

Companies have the option to account for the GILTI tax as a period cost in the period incurred, or to recognize deferred taxes for temporary differences including outside basis differences expected to reverse as a result of the GILTI provisions. The Company has not yet determined its policy election with respect to GILTI. We have, however, included an estimate of the current year GILTI impact in the 2018 tax provision calculation.
Upon enactment of the Act, we remeasured U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21% and recorded a provisional amount which reduced our 2017 income tax expense by $123.2 million. We are still analyzing certain aspects of the Act and refining our deferred tax calculations, which could affect the measurement of these balances or give rise to new deferred tax amounts. We did not adjust the initial provisional amount in the three months ended March 31, 2018.

The tax on ADFI is based on post-1986 earnings and profits ("E&P") of our foreign subsidiaries that were previously deferred from U.S. income taxes. We recorded a provisional amount for this one-time transition tax liability, resulting in an increase in income tax expense of $63.6 million in 2017. We have not yet completed our calculation of the tax on ADFI given the need to obtain, prepare and analyze various information relevant to such calculation including, but not limited to, our post-1986 E&P, foreign taxes and amounts held in cash or other specified assets on various measurement dates. We did not adjust the initial provisional amount in the three months ended March 31, 2018.

As of March 31, 2018 and December 31, 2017, the Company had gross unrecognized tax benefits of $63.2 million and $60.3 million, respectively. It is reasonably possible that gross unrecognized tax benefits will decrease by approximately $8.0 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.



27




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 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, 2018
 
 
 
 
 
 
 
 
 
 
Derivative Contract Type
 
Number of
Outstanding
Contracts
 
Notional
Amounts
 
Fair Value
Asset
(Liability), Net (3)
 
Balance
Sheet
Line Item
 
Unrealized
Gain Recorded
in AOCI/L
Interest rate swaps (1)
 
5

 
$
1,400,000

 
$
17,314

 
Other assets
 
$
12,597

Foreign currency forwards (2)
 
46

 
313,425

 
(495
)
 
Accrued liabilities
 

Total
 
51

 
$
1,713,425

 
$
16,819

 
 
 
$
12,597


December 31, 2017
 
 
 
 
 
 
 
 
 
 
Derivative Contract Type
 
Number of
Outstanding
Contracts
 
Notional
Amounts
 
Fair Value
Asset
(Liability), Net (3)
 
Balance
Sheet
Line Item
 
Unrealized
Gain Recorded
in AOCI/L
Interest rate swaps (1)
 
5

 
$
1,400,000

 
$
3,412

 
Other assets
 
$
2,483

Foreign currency forwards (2)
 
137

 
686,764

 
448

 
Other current assets
 

Total
 
142

 
$
2,086,764

 
$
3,860

 
 
 
$
2,483

 
 
(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 the fair value of the swaps are deferred and recorded in AOCI/L, 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 income, net since the Company does not designate these contracts as hedges for accounting purposes. All of the outstanding contracts at March 31, 2018 matured by the end of April 2018.
(3)
See Note 11 — Fair Value Disclosures for the determination of the fair value of these instruments.

At March 31, 2018, 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:
 
2018
 
2017
Interest expense (1)
 
$
945

 
$
1,375

Other (gain) loss, net (2)
 
(7,232
)
 
219

Total (income) expense, net
 
$
(6,287
)
 
$
1,594

 
 
(1)
Consists of interest expense from interest rate swap contracts.
(2)
Consists of net realized and unrealized gains and losses on foreign currency forward contracts.




28



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 variable-rate borrowings under the 2016 Credit Agreement. The Company believes the carrying amount of its variable-rate borrowings reasonably approximates their fair value because the rate of interest on those borrowings reflects current market rates of interest for similar instruments with comparable maturities.

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

FASB ASC Topic 820 provides a framework for the measurement of fair value and a valuation hierarchy based upon the transparency of inputs used in the valuation of assets and liabilities. Classification within the hierarchy is based upon the lowest level of input that is significant to the resulting fair value measurement. The valuation hierarchy contains three levels. Level 1 measurements consist of quoted prices in active markets for identical assets or liabilities. Level 2 measurements include significant other observable inputs such as quoted prices for similar assets or liabilities in active markets; identical assets or liabilities in inactive markets; observable inputs such as interest rates and yield curves; and other market-corroborated inputs. Level 3 measurements include significant unobservable inputs, such as internally-created valuation models. The Company does not currently utilize Level 3 valuation inputs to remeasure any of its assets or liabilities. However, Level 3 inputs may be used by the Company in its required annual impairment review of recorded goodwill. Information regarding the periodic assessment of the Company’s goodwill is included in Note 6 — Goodwill and Intangible Assets. The Company does not typically transfer assets or liabilities between different levels of the fair value hierarchy.

The following table presents the fair value of certain financial assets and liabilities (in thousands):
Description:
March 31,
2018
 
December 31,
2017
Assets:
 

 
 

Values based on Level 1 inputs:
 
 
 
Deferred compensation plan assets (1)
$
16,746

 
$
29,108

Total Level 1 inputs
16,746

 
29,108

Values based on Level 2 inputs:
 
 
 
Deferred compensation plan assets (1)
59,477

 
59,017

Foreign currency forward contracts (2)
156

 
2,053

Interest rate swap contracts (3)
17,314

 
3,412

Total Level 2 inputs
76,947

 
64,482

Total Assets
$
93,693

 
$
93,590

Liabilities:
 

 
 

Values based on Level 2 inputs:
 
 
 
Deferred compensation plan liabilities (1)
$
73,172

 
$
89,900

Foreign currency forward contracts (2)
651

 
1,605

Senior Notes due 2025 (4)
801,640

 
837,560

Total Level 2 inputs
875,463

 
929,065

Total Liabilities
$
875,463

 
$
929,065

 
(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.

29



(2)
The Company enters into foreign currency forward exchange contracts to hedge the effects of adverse fluctuations in foreign currency exchange rates (see Note 10 - Derivatives and Hedging). 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.
(4)
As discussed in Note 7 — Debt, the Company has $800.0 million of principal amount fixed-rate Senior Notes due in 2025. The estimated fair value of the notes was derived from quoted market prices provided by an independent dealer which the Company considers to be a Level 2 input.

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, 2018 and 2017.

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, 2018, the Company did not have any material payment obligations under any such indemnification agreements.

Note 14 — Subsequent Events

In April 2018, the Company sold its CEB Talent Assessment and CEB Workforce Survey and Analytics businesses. These two businesses were acquired in April 2017 with the CEB acquisition and were reported by the Company in the Talent Assessment & Other segment. Additional information regarding these divestitures is included in Note 2 — Acquisitions and Divestitures.

In addition, on April 30, 2018, the Company repaid $450.0 million of its outstanding debt. Note 7 — Debt provides additional information regarding the Company's debt obligations.


30



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 facilitate an understanding of significant factors influencing the quarterly operating results, financial condition and cash flows of Gartner, Inc. Additionally, the MD&A 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 our Annual Report on Form 10-K for the year ended December 31, 2017 (the "2017 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.

In April 2018 the Company sold its CEB Talent Assessment and CEB Workforce Survey and Analytics businesses. These two businesses were acquired in April 2017 with the CEB Inc. acquisition and were reported by the Company in the Talent Assessment & Other segment. The results of these businesses are included in the consolidated results of operations and segment results presented below for the three months ended March 31, 2018. Additional information regarding these divestitures is included in Note 2 — Acquisitions and Divestitures in the Notes to the Condensed Consolidated Financial Statements.

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q 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.

We operate in a very competitive and rapidly changing environment that involves numerous risks and uncertainties, some of which are beyond our control. Additionally, our quarterly and annual revenues, operating income, and cash flows fluctuate as a result of many factors, including: the timing of our Symposium/ITxpo series that normally occurs during the fourth quarter, as well as our other events; the amount of new business generated, including from acquisitions; the mix of domestic and international business; domestic and international economic conditions; changes in market demand for our products and services; changes in foreign currency rates; the timing of the development, introduction and marketing of new products and services; competition in the industry; the payment of performance compensation; and other factors. The potential fluctuations in our operating income could cause period-to-period comparisons of operating results not to be meaningful and could provide an unreliable indication of future operating results. A description of the risk factors associated with our business is included under “Risk Factors” contained in Item 1A. of our 2017 Annual Report on Form 10-K which is incorporated herein by reference.

Forward-looking statements are subject to risks, estimates 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 on Form 10-Q and in the 2017 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 carefully review our risk factors described in the 2017 Form 10-K.
  
BUSINESS OVERVIEW

Gartner, Inc. (NYSE: IT) is the world’s leading research and advisory company and a member of the S&P 500. We equip business leaders with indispensable insights, advice and tools to achieve their mission-critical priorities and build the successful organizations of tomorrow. We believe our unmatched combination of expert-led, practitioner-sourced and data-driven research steers clients toward the right decisions on the issues that matter most. We’re trusted as an objective resource and critical partner by more than 15,000 organizations in more than 100 countries across all major functions, in every industry and enterprise size. Gartner is headquartered in Stamford, Connecticut, U.S.A. and, as of March 31, 2018, we had more than 14,000 associates (excluding the operations that were held-for-sale as of that date).  

Gartner delivers its products and services globally through four business segments: Research, Events, Consulting and Talent Assessment & Other:


31



Research provides trusted, objective insights and advice on the mission-critical priorities of leaders across all functional areas of the enterprise through research and other reports, briefings, proprietary tools, access to our analysts, peer networking services and membership programs that enable our clients to make better decisions. Gartner's traditional strengths in IT, marketing and supply chain research were enhanced in 2017 with Gartner's acquisition of CEB, Inc., which added CEB's best practice and talent management research insights across a range of business functions, to include human resources, finance, sales and legal.

Events provides business professionals across the organization the opportunity to learn, share and network. From our flagship CIO event Gartner Symposium/ITxpo, to industry-leading conferences focused on specific business roles and topics, to member-driven sessions, our events enable attendees to experience the best of Gartner insight and advice live.

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.

Talent Assessment & Other helps organizations assess, engage, manage and improve talent. This is accomplished through knowledge and skills assessments, training programs, workshops, and survey and questionnaire services.




























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BUSINESS MEASUREMENTS

We believe that 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. Our total contract value consists of Global Technology Sales contract value, which includes sales to users and providers of technology, and Global Business Sales contract value, which includes sales to all other functional leaders.
 
 
 
 
 
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.
 
 
 
Events
 
Number of events represents the total number of hosted destination events completed during the period. Single day, local events are excluded.
 
 
 
 
 
Number of attendees represents the total number of people who attend destination events. Single day, local events are excluded.
 
 
 
Consulting
 
Consulting backlog represents future revenue to be derived from in-process consulting and measurement 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.
 
 
 


33



EXECUTIVE SUMMARY OF OPERATIONS AND FINANCIAL POSITION

We have executed a consistent growth strategy since 2005 to drive 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 continue to focus on maximizing shareholder value.

We had total revenues of $963.6 million in the first quarter of 2018, an increase of 54% compared to the first quarter of 2017. Quarter-over-quarter revenues for Research, Events and Consulting increased 49%, 31% and 5%, respectively, during the first quarter of 2018, which included CEB's operating results. Our Talent Assessment & Other segment contributed $70.7 million of revenues during the first quarter of 2018. For a more complete discussion of our results by segment, see Segment Results below.

For the first quarter of 2018, we had a net loss of $19.6 million and a diluted loss per share of $0.22. Cash provided by operating activities was $2.7 million during the three months ended March 31, 2018 compared to $29.6 million of cash used in operating activities during the three months ended March 31, 2017. As of March 31, 2018, we had $190.0 million of cash and cash equivalents and $866.0 million of available borrowing capacity on our revolving credit facility. For a more complete discussion of our cash flows and financial position, see Liquidity and Capital Resources below.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our consolidated financial statements requires the application of appropriate accounting policies and the use of estimates. Our significant accounting policies are described in Note 1 in the Notes to Consolidated Financial Statements of Gartner, Inc. contained in the 2017 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 consolidated financial statements requires us to make estimates and assumptions about future events. We develop our estimates using both current and historical experience, as well as other factors, including the general economic environment and actions we may take in the future. We adjust such estimates when facts and circumstances dictate. However, our estimates may involve significant uncertainties and judgments and cannot be determined with precision. In addition, these estimates are based on our best judgment at a point in time and, as such, they may ultimately differ materially from actual results. Ongoing 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 described below.

Revenue recognition — On January 1, 2018, the Company adopted Financial Accounting Standards Board Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers" ("ASU No. 2014-09"). ASU No. 2014-09 and related amendments required changes in revenue recognition policies as well as enhanced disclosures. Among other things, ASU No. 2014-09 requires a five-step evaluative process that consists of:

(1)
Identifying the contract with the customer;
(2)
Identifying the performance obligations in the contract;
(3)
Determining the transaction price for the contract;
(4)
Allocating the transaction price to the performance obligations in the contract; and
(5)
Recognizing revenue when (or as) performance obligations are satisfied.

The Company adopted ASU No. 2014-09 on January 1, 2018 using the modified retrospective method of adoption. Under this method of adoption, the cumulative effect of applying the new standard is recorded at the date of initial application, with no restatement of the comparative prior periods presented. The adoption of ASU No. 2014-09 did not have a material impact on the Company’s consolidated financial statements. However, the adoption of the new standard required reclassifications of certain amounts presented in the Company’s consolidated balance sheet. Prior to January 1, 2018, the Company recognized revenue in accordance with then-existing generally accepted accounting principles in the United States of America and SEC Staff Accounting Bulletin No. 104, "Revenue Recognition" (“prior GAAP”). Under both ASU No. 2014-09 and prior GAAP, revenue can only be recognized when all of the required criteria are met. Note 1 — Business and Basis of Presentation in the Notes to Condensed Consolidated Financial Statements provides additional information regarding our adoption of ASU No. 2014-09 and its impact on the Company's consolidated financial statements and related disclosures.



34



Our 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 are recognized when the leads are provided to vendors.

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

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.

Talent Assessment & Other revenues arising from knowledge and skill assessment services are recognized based on the nature of the underlying contract: (i) ratably over the term of the service period; (ii) upon delivery; or (iii) on a proportional performance basis. Revenues from training programs and survey and questionnaire products are primarily recognized upon delivery of the service.

The majority of research contracts are billable upon signing, absent special terms granted on a limited basis from time to time. Research contracts are generally 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 a subscription contract that is billable as a fee receivable at the time the contract is signed with a corresponding amount as deferred revenue because the contract represents a legally enforceable claim.

Uncollectible fees receivable — At December 31, 2017, the Company maintained an allowance for losses that was comprised of a bad debt allowance and a revenue reserve. In connection with the adoption of ASU No. 2014-09 on January 1, 2018, management concluded that the revenue reserve was a refund liability rather than a contra-receivable due to the nature of the account activity. As a result, the Company reclassified the revenue reserve of $6.2 million on January 1, 2018 from the allowance for losses to Accounts payable and accrued liabilities and will consistently present the revenue reserve in this manner in all future consolidated balance sheets. Note 1 — Business and Basis of Presentation in the Notes to Condensed Consolidated Financial Statements provides additional information regarding our adoption of ASU No. 2014-09 and its impact on the Company's allowance for losses. Increases and decreases in the allowance for losses are charged to earnings, either to expense (i.e., the bad debt allowance) or revenues (i.e., the revenue reserve).

The determination of the bad debt allowance is based on historical loss experience, an assessment of current economic conditions, the aging of outstanding receivables, the financial health of specific clients and probable losses. This evaluation is inherently judgmental and requires estimates. The Company's bad debt allowance is periodically re-evaluated and adjusted as more information about the ultimate collectability of fees receivable becomes available. Circumstances that could cause our bad debt allowance 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 presents our total fees receivable and the related allowance for losses (in thousands):
 
March 31,
2018
 
December 31,
2017
Total fees receivable (1)
$
1,142,064

 
$
1,189,543

Allowance for losses (2)
(7,100
)
 
(12,700
)
Fees receivable, net
$
1,134,964

 
$
1,176,843

 
(1)
Total fees receivable at December 31, 2017 included $26.7 million of contract assets. As a result of the Company's adoption of ASU No. 2014-09 on January 1, 2018, contract assets are now included in Prepaid expenses and other current assets on the Company's Condensed Consolidated Balance Sheet at March 31, 2018.
(2) The allowance for losses at December 31, 2017 included $6.2 million that was attributable to the Company's revenue reserve. As a result of the Company's adoption of ASU No. 2014-09 on January 1, 2018, the revenue reserve balance is now included in Accounts payable and accrued liabilities on the Company's Condensed Consolidated Balance Sheet at March 31, 2018.

Goodwill and other intangible assets — When we acquire a business, we determine the fair value of the assets acquired and liabilities assumed on the date of acquisition, which may include a significant amount of intangible assets such as customer

35



relationships, software, content and other intangible assets, as well as resulting goodwill. When determining the fair values of the acquired intangible assets, we consider, among other factors, analyses of historical financial performance and an estimate of the future performance of the acquired business. The fair values of the acquired intangible assets are primarily calculated using an income approach that relies on discounted cash flows. This method starts with a forecast of the expected future net cash flows associated with the asset and then adjusts the forecast to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. We consider this approach to be the most appropriate valuation technique because the inherent value of the acquired intangible assets is their ability to generate future income. In a typical acquisition, we engage a third-party valuation expert to assist us with the fair value analyses for acquired intangible assets.

Determining the fair values of acquired intangible assets requires us to exercise significant judgment. We select reasonable estimates and assumptions based on evaluating a number of factors, including, but not limited to, marketplace participants, consumer awareness and brand history. Additionally, there are significant judgments inherent in discounted cash flows such as estimating the amount and timing of projected future cash flows, the selection of appropriate discount rates, hypothetical royalty rates and contributory asset capital charges. Specifically, the discount rates used in discounted cash flow analyses are intended to reflect the risk inherent in the projected future cash flows generated by the underlying acquired intangible assets.

Determining an acquired intangible asset's useful life requires significant judgment and is based on evaluating a number of factors, including, but not limited to, the expected use of the asset, historical client retention rates, consumer awareness and trade name history, as well as any contractual provisions that could limit or extend an asset's useful life.

The Company evaluates recorded goodwill in accordance with FASB Accounting Standards Codification ("ASC") Topic 350, which requires goodwill to be assessed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value of goodwill 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.

FASB ASC Topic 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 approaches. 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. If our 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. Among the factors that 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 quarter ended September 30, 2017. The results of this test determined that the fair values of the Company's reporting units continue to exceed their respective carrying values and, as a result, no goodwill impairment was indicated. Note 6 — Goodwill and Intangible Assets in the Notes to Condensed Consolidated Financial Statements provides additional information regarding goodwill and amortizable intangible assets.

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

The Company adopted Financial Accounting Standards Board Accounting Standards Update No. 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory," on January 1, 2018. Note 1 — Business and Basis of Presentation in the Notes to Condensed Consolidated Financial Statements provides information regarding our adoption of this accounting standard and its impact.


36



Accounting for stock-based compensation — The Company accounts for stock-based compensation awards in accordance with FASB ASC Topics 505 and 718 and SEC Staff Accounting Bulletins No. 107 and 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. Note 4 — Stock-Based Compensation in the Notes to Condensed Consolidated Financial Statements provides additional information regarding stock-based compensation. Determining the appropriate fair value model and calculating the fair value of stock-based compensation awards requires the use of certain subjective assumptions, including the expected life of a stock-based compensation award and the Company’s common stock price volatility. In addition, determining the appropriate periodic stock-based compensation expense requires management to estimate the likelihood of the achievement of certain performance targets. The assumptions used in calculating the fair values of stock-based compensation awards and the related periodic expense represent management’s best estimates, which involve inherent uncertainties and the application of judgment. As a result, if circumstances 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.

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 ongoing 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.

37



RESULTS OF OPERATIONS
Consolidated Results
The table below 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). The operating results of CEB, which was acquired by Gartner on April 5, 2017, are included in the results for the three months ended March 31, 2018.
 
Three Months Ended March 31, 2018
 
Three Months Ended March 31, 2017
 
Income
Increase
(Decrease)
$
 
Income Increase
(Decrease)
%
Total revenues
$
963,565

 
$
625,169

 
$
338,396

 
54
 %
Costs and expenses:
 

 
 

 
 

 
 

Cost of services and product development
357,209

 
237,609

 
(119,600
)
 
(50
)
Selling, general and administrative
487,745

 
304,244

 
(183,501
)
 
(60
)
Depreciation
16,410

 
10,240

 
(6,170
)
 
(60
)
Amortization of intangibles
51,646

 
6,290

 
(45,356
)
 
>(100)

Acquisition and integration charges
59,266

 
13,272

 
(45,994
)
 
>(100)

Operating (loss) income
(8,711
)
 
53,514

 
(62,225
)
 
>(100)

Interest expense, net
(35,059
)
 
(5,906
)
 
(29,153
)
 
>(100)

Other income, net
899

 
889

 
10

 
1

(Benefit) provision for income taxes
(23,284
)
 
12,064

 
35,348

 
>100

Net (loss) income
$
(19,587
)
 
$
36,433

 
$
(56,020
)
 
>(100)%

 

Total revenues for the three months ended March 31, 2018 increased $338.4 million, to $963.6 million, an increase of 54% compared to the same period in 2017 on a reported basis and 49% excluding the foreign currency impact, primarily due to the CEB acquisition. 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 was $357.2 million during the three months ended March 31, 2018, an increase of $119.6 million compared to the same period in 2017, or 50% on a reported basis and 45% excluding the foreign currency impact. This increase was primarily due to higher payroll and related benefits costs resulting from increased headcount, a substantial portion of which was related to the CEB acquisition. Cost of services and product development as a percentage of revenues was 37% and 38% during the three months ended March 31, 2018 and 2017, respectively.

Selling, general and administrative (“SG&A”) expense was $487.7 million during the three months ended March 31, 2018, an increase of $183.5 million compared to the same period in 2017, or 60% on a reported basis and 55% excluding the foreign currency impact. This increase was primarily due to $87.7 million in higher payroll and related benefits costs, mostly driven by increased headcount, with a substantial portion of the headcount increase due to the CEB acquisition; $22.7 million in higher commissions due to increased sales bookings; and $73.1 million in higher facilities and corporate costs and foreign currency impact. The overall headcount growth includes increases in quota-bearing sales associates at Global Technology Sales and Global Business Sales to 2,746 and 755, respectively, at March 31, 2018. On a combined basis, the total number of quota-bearing sales associates increased by approximately 38% when compared to March 31, 2017, which includes associates added as a result of the CEB acquisition. SG&A expense as a percentage of revenues was 51% and 49% during the three months ended March 31, 2018 and 2017, respectively.

Depreciation increased $6.2 million, or 60%, during the three months ended March 31, 2018 when compared to the same period in 2017 due to property, equipment and leasehold improvements acquired with CEB and additional Gartner investments.

Amortization of intangibles increased $45.4 million during the three months ended March 31, 2018 when compared to the same period in 2017 due to additional amortization from the intangibles recorded in connection with our recent acquisitions.

Acquisition and integration charges increased $46.0 million during the three months ended March 31, 2018 when compared to the same period in 2017. This increase reflects the additional charges resulting from our recent acquisitions and primarily consists of higher professional fees, severance, stock-based compensation charges and accruals for exit costs for certain office space that the Company does not intend to occupy in Arlington, Virginia.

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Operating (loss) income was an operating loss of $(8.7) million during the three months ended March 31, 2018 compared to operating income of $53.5 million for the same period in 2017. The decline reflects several factors, to include higher SG&A expenses and acquisition-related costs, including depreciation, amortization of intangibles, and acquisition and integration charges.

Interest expense, net increased $29.2 million during the three months ended March 31, 2018 when compared to the same period in 2017. The increase was primarily due to higher outstanding borrowings during 2018.

Other income, net was $0.9 million during each of the three months ended March 31, 2018 and 2017. Both periods reflect the net impact of foreign currency gains and losses from our hedging activities, as well as sales of certain state tax credits and the recognition of other tax incentives.

(Benefit) provision for income taxes for the three months ended March 31, 2018 was a benefit of $(23.3) million on a pretax loss of $(42.9) million compared to an expense of $12.1 million on pretax income of $48.5 million in the three months ended March 31, 2017. The effective income tax rate was 54.3% for the three months ended March 31, 2018 and 24.9% for the same period in 2017. The quarter-over-quarter change in the effective income tax rate was primarily attributable to the relative impact of stock- based compensation benefits quarter-over-quarter. The tax benefits from stock-based compensation during the first quarter of 2018 increased the tax rate on pretax losses while such benefits in the first quarter of 2017 decreased the tax rate on pretax income. In addition to the impact of stock-based compensation, the change in the effective income tax rate quarter-over-quarter was driven by a reduction in the U.S. tax rate effective for 2018 as well as tax benefits recognized in 2018 for unrealized capital losses on the divestiture of the CEB Talent Assessment business.

During the three months ended March 31, 2018, our net loss was $(19.6) million compared to net income of $36.4 million during the same period in 2017. The change primarily reflects a decline in our operating profitability and higher interest expense. As a result of such change, our diluted (loss) income per share was $(0.22) during the three months ended March 31, 2018 compared to $0.43 during the same period in 2017.

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SEGMENT RESULTS

We evaluate reportable segment performance and allocate resources based on gross contribution margin. Gross contribution is defined as operating income (loss), 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 Company’s reportable segments are as follows:

Research provides trusted, objective insights and advice on the mission-critical priorities of leaders across all functional areas of the enterprise through research and other reports, briefings, proprietary tools, access to our analysts, peer networking services and membership programs that enable our clients to make better decisions. Gartner's traditional strengths in IT, marketing and supply chain research were enhanced in 2017 with Gartner's acquisition of CEB Inc., which added CEB's best practice and talent management research insights across a range of business functions, to include human resources, finance, sales and legal.

Events provides business professionals across the organization the opportunity to learn, share and network. From our flagship CIO event Gartner Symposium/ITxpo, to industry-leading conferences focused on specific business roles and topics, to member-driven sessions, our events enable attendees to experience the best of Gartner insight and advice live.

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.

Talent Assessment & Other helps organizations assess, engage, manage and improve talent. This is accomplished through knowledge and skills assessments, training programs, workshops, and survey and questionnaire services.

The sections below present the results of these four reportable business segments.

Research
 
As Of And For The Three Months Ended March 31, 2018
 
As Of And For The Three Months Ended March 31, 2017
 
Increase
(Decrease)
 
Percentage
Increase
(Decrease)
Financial Measurements:
 

 
 

 
 

 
 

Revenues (1), (2)
$
763,924

 
$
511,306

 
$
252,618

 
49
%
Gross contribution (1), (2)
$
531,456

 
$
351,113

 
$
180,343

 
51
%
Gross contribution margin
70
%
 
69
%
 
1 point

 

 
 
 
 
 
 
 
 
Business Measurements (3):
 

 
 

 
 

 
 

Global Technology Sales (4):
 
 
 
 
 
 
 
Contract value (1), (5)
$
2,270,000

 
$
2,004,000

 
$
266,000

 
13
%
Client retention
83
%
 
82
%
 
1 point

 

Wallet retention
104
%
 
103
%
 
1 point

 

Global Business Sales (4):
 
 
 
 
 
 
 
Contract value (1), (5)
$
612,000

 
$
574,000

 
$
39,000

 
7
%
Client retention
82
%
 
78
%
 
4 points

 

Wallet retention
99
%
 
97
%
 
2 points

 

 
(1)
Dollars in thousands.
(2)
In June 2017, the Company began reporting the results of its Strategic Advisory Services ("SAS") business in Research whereas previously the SAS business was reported with Consulting. Although the impact of the reclassification was not significant, the operating results of the SAS business for the three months ended March 31, 2017 were reclassified from Consulting to Research to be comparable with the current period presentation.
(3)
Includes CEB in both the three months ended March 31, 2018 and 2017.

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(4)
Global Technology Sales includes sales to users and providers of technology. Global Business Sales includes sales to all other functional leaders.
(5)
Contract values are on a foreign exchange neutral basis.

Research segment revenues increased $252.6 million on a reported basis during the three months ended March 31, 2018 compared to the same period in 2017, or 49% on a reported basis and 45% excluding the foreign currency impact. The gross contribution margin improved by one point during the three months ended March 31, 2018, primarily due to improvement in margins for our premium services, partially offset by the impact of the deferred revenue fair value accounting adjustment resulting from the CEB acquisition.

On a foreign currency neutral basis, Global Technology Sales ("GTS") and Global Business Sales ("GBS") contract values increased 13% and 7%, respectively, at March 31, 2018 when compared to March 31, 2017. Total contract value increased to $2.9 billion at March 31, 2018, or 12%. Total contract value at March 31, 2018 increased by double-digits across nearly all of the Company’s client sizes and the majority of its industry segments when compared to March 31, 2017.

GTS client retention was 83% and 82% as of March 31, 2018 and 2017, respectively, while wallet retention was 104% and 103%, respectively. GBS client retention was 82% and 78% as of March 31, 2018 and 2017, respectively, while wallet retention was 99% and 97%, respectively. The number of GTS and GBS client enterprises increased by 7% and 1%, respectively, at March 31, 2018 when compared to March 31, 2017.

Events
 
As Of And For The Three Months Ended March 31, 2018
 
As Of And For The Three Months Ended March 31, 2017