Document



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
 
 
For the quarterly period ended June 30, 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 July 24, 2018, 90,818,051 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)  
 
June 30,
 
December 31,
 
2018
 
2017
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
141,805

 
$
538,908

Fees receivable, net of allowances of $7,200 and $12,700, respectively
1,083,990

 
1,176,843

Deferred commissions
183,481

 
205,260

Prepaid expenses and other current assets
199,208

 
124,632

Assets held-for-sale

 
542,965

Total current assets
1,608,484

 
2,588,608

Property, equipment and leasehold improvements, net
225,901

 
221,507

Goodwill
2,974,513

 
2,987,294

Intangible assets, net
1,177,297

 
1,292,022

Other assets
166,742

 
193,742

Total Assets
$
6,152,937

 
$
7,283,173

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
542,071

 
$
666,821

Deferred revenues
1,687,724

 
1,630,198

Current portion of long-term debt
284,009

 
379,721

Liabilities held-for-sale

 
145,845

Total current liabilities
2,513,804

 
2,822,585

Long-term debt, net of deferred financing fees
2,146,829

 
2,899,124

Other liabilities
570,872

 
577,999

Total Liabilities
5,231,505

 
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
1,798,075

 
1,761,383

Accumulated other comprehensive (loss) income, net
(24,051
)
 
1,508

Accumulated earnings
1,659,658

 
1,647,284

Treasury stock, at cost, 72,784,641 and 72,779,205 common shares, respectively
(2,512,332
)
 
(2,426,792
)
Total Stockholders’ Equity
921,432

 
983,465

Total Liabilities and Stockholders’ Equity
$
6,152,937

 
$
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
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 

 
 

Research
$
770,314

 
$
613,732

 
$
1,534,238

 
$
1,125,038

Events
111,253

 
91,205

 
157,340

 
126,474

Consulting
96,458

 
91,693

 
179,354

 
170,287

Other
23,311

 
47,101

 
93,969

 
47,101

Total revenues
1,001,336

 
843,731

 
1,964,901

 
1,468,900

Costs and expenses:
 
 
 
 
 

 
 

Cost of services and product development
367,637

 
352,004

 
724,846

 
589,613

Selling, general and administrative
460,803

 
408,226

 
948,548

 
712,470

Depreciation
16,711

 
18,057

 
33,121

 
28,297

Amortization of intangibles
50,127

 
65,500

 
101,773

 
71,790

Acquisition and integration charges
19,962

 
98,332

 
79,228

 
111,604

Total costs and expenses
915,240

 
942,119

 
1,887,516

 
1,513,774

Operating income (loss)
86,096

 
(98,388
)
 
77,385

 
(44,874
)
Interest expense, net
(37,604
)
 
(43,956
)
 
(72,663
)
 
(49,862
)
Gain from divested operations
25,460

 

 
25,460

 

Other income (expense), net
1,120

 
(407
)
 
2,019

 
482

Income (loss) before income taxes
75,072

 
(142,751
)
 
32,201

 
(94,254
)
Provision (benefit) for income taxes
28,802

 
(50,470
)
 
5,518

 
(38,406
)
Net income (loss)
$
46,270

 
$
(92,281
)
 
$
26,683

 
$
(55,848
)
 
 
 
 
 
 
 
 
Net income (loss) per share:
 
 
 
 
 

 
 

Basic
$
0.51

 
$
(1.03
)
 
$
0.29

 
$
(0.65
)
Diluted
$
0.50

 
$
(1.03
)
 
$
0.29

 
$
(0.65
)
Weighted average shares outstanding:
 
 
 
 
 

 
 

Basic
91,048

 
89,297

 
91,026

 
86,066

Diluted
92,156

 
89,297

 
92,252

 
86,066


See the accompanying notes to the condensed consolidated financial statements.

4



GARTNER, INC.

Condensed Consolidated Statements of Comprehensive (Loss) Income

(Unaudited; in thousands)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
46,270

 
$
(92,281
)
 
$
26,683

 
$
(55,848
)
Other comprehensive (loss) income, net of tax:
 
 
 
 
 

 
 

Foreign currency translation adjustments
(60,015
)
 
1,024

 
(39,468
)
 
5,395

Interest rate swaps – net change in deferred gain or loss
3,684

 
(2,130
)
 
13,798

 
(4,698
)
Pension plans – net change in deferred actuarial loss
55

 
49

 
111

 
97

Other comprehensive (loss) income, net of tax
(56,276
)
 
(1,057
)
 
(25,559
)
 
794

Comprehensive (loss) income
$
(10,006
)
 
$
(93,338
)
 
$
1,124

 
$
(55,054
)

See the accompanying notes to the condensed consolidated financial statements.

5



GARTNER, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited; in thousands)

 
Six Months Ended
 
June 30,
 
2018
 
2017
Operating activities:
 

 
 

Net income (loss)
$
26,683

 
$
(55,848
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Depreciation and amortization
134,894

 
100,087

Stock-based compensation expense
45,300

 
53,573

Deferred taxes
(18,019
)
 
(78,004
)
Gain from divested operations
(25,460
)
 

Amortization and write-off of deferred financing fees
10,601

 
9,475

Changes in assets and liabilities, net of acquisitions and divestitures:
 

 
 

     Fees receivable, net
81,222

 
(44,939
)
Deferred commissions
21,818

 
477

Prepaid expenses and other current assets
(82,908
)
 
(22,453
)
Other assets
23,862

 
(17,328
)
Deferred revenues
87,316

 
167,412

Accounts payable, accrued, and other liabilities
(128,562
)
 
(29,734
)
Cash provided by operating activities
176,747

 
82,718

Investing activities:
 

 
 

     Additions to property, equipment and leasehold improvements
(40,126
)
 
(41,627
)
     Acquisitions - cash paid (net of cash acquired)

 
(2,604,178
)
Divestitures - cash received (net of cash transferred)
405,542

 

Other
1,000

 

Cash provided by (used in) investing activities
366,416

 
(2,645,805
)
Financing activities:
 

 
 

     Proceeds from employee stock purchase plan
7,627

 
5,662

     Proceeds from borrowings

 
2,885,000

     Payments for deferred financing fees

 
(51,170
)
     Payments on borrowings
(858,609
)
 
(119,812
)
     Purchases of treasury stock
(96,271
)
 
(33,786
)
Cash (used in) provided by financing activities
(947,253
)
 
2,685,894

Net (decrease) increase in cash and cash equivalents and restricted cash
(404,090
)
 
122,807

Effects of exchange rates on cash and cash equivalents and restricted cash
(3,012
)
 
10,406

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

 
499,354

Cash and cash equivalents and restricted cash, end of period
$
159,956

 
$
632,567


See the accompanying notes to the condensed consolidated financial statements.

6



GARTNER, INC.

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

Business. Gartner, Inc. (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.

Segments. Gartner delivers its products and services globally through four business segments: Research, Events, Consulting and Other (previously called the "Talent Assessment & Other" segment). 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.

In the second quarter of 2018, the Company divested its CEB Talent Assessment business and its CEB Workforce Survey and Analytics business. These two businesses were acquired on April 5, 2017 as part of the acquisition of CEB Inc. ("CEB") and were reported with the Talent Assessment & Other segment. As a result of these divestitures, the Company changed the name of the Talent Assessment & Other segment to Other. Additional information regarding these divestitures is included in Note 2 — Acquisitions and Divestitures while additional information regarding our segments is included in Note 5 — Segment Information.

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 and six months ended June 30, 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.


7



Adoption of new accounting standards. The Company adopted the accounting standards described below during the six months ended June 30, 2018:

Certain Tax Effects Stranded In Accumulated Other Comprehensive Income — On April 1, 2018, the Company early adopted 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”). Entities can 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. Gartner elected to early adopt ASU No. 2018-02 as of the beginning of the second quarter of 2018, which resulted in an immaterial reclassification of stranded tax amounts related to the Act from Accumulated other comprehensive income, net to Accumulated earnings. ASU No. 2018-02 had no impact on the Company's operating results during the three months ended June 30, 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 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 six months ended June 30, 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.


8



Below is a table presenting the beginning-of-period and end-of-period cash amounts from the Company's Consolidated Balance Sheets and the total cash amounts presented in the accompanying Condensed Consolidated Cash Flow Statements (in thousands).
 
 
June 30,
 
December 31,
 
 
2018
 
2017
 
2017
 
2016
Cash and cash equivalents
 
$
141,805

 
$
589,282

 
$
538,908

 
$
474,233

Restricted cash classified in (1), (2):
 
 
 
 
 
 
 
 
Prepaid expenses and other current assets
 
18,151

 
25,130

 
15,148

 
25,121

Other assets
 

 
18,155

 
3,002

 

Cash classified as held-for-sale (3)
 

 

 
10,000

 

Cash and cash equivalents and restricted cash per the Condensed Consolidated Statements of Cash Flows
 
$
159,956

 
$
632,567

 
$
567,058

 
$
499,354

 
(1)
Restricted cash consists of 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 the CEB Talent Assessment business that was 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 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 No. 2016-16 had no impact on the Company's operating results during either the three or six months ended June 30, 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 consolidated financial statements. However, as required by ASU No. 2014-09, the Company's disclosures around revenue recognition have been significantly expanded. Additionally, the Company's accounting policies have been updated to reflect the adoption of ASU No. 2014-09.


9



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

Our business and our revenues

Gartner delivers its products and services globally through four business segments: Research, Events, Consulting and 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, 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 75% to 80% 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 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, that are incremental and 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.


10



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 as we work to satisfy our performance obligations, while revenues from time and materials 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 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.

Other

As discussed above, in the second quarter of 2018 the Company divested two of the three primary businesses in this segment. The remaining primary business, the Challenger sales training unit, provides sales training and related assessment tools. Revenue is recorded when the training is provided and over the service period for other offerings.

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.

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 certain 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

11



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.

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 June 30, 2018
 
Research
Events
Consulting
Other
Total
Primary Geographic Markets: (1)
 
 
 
 
 
United States and Canada
$
493,343

$
85,144

$
55,784

$
15,877

$
650,148

Europe, Middle East and Africa
186,399

14,850

33,590

7,434

242,273

Other International
90,572

11,259

7,084


108,915

Total revenues
$
770,314

$
111,253

$
96,458

$
23,311

$
1,001,336

 
Three Months Ended June 30, 2017
 
Research
Events
Consulting
Other
Total
Primary Geographic Markets: (1)
 
 
 
 
 
United States and Canada
$
392,815

$
68,900

$
54,951

$
23,398

$
540,064

Europe, Middle East and Africa
152,778

12,859

29,667

16,960

212,264

Other International
68,139

9,446

7,075

6,743

91,403

Total revenues
$
613,732

$
91,205

$
91,693

$
47,101

$
843,731



12



Six Months Ended June 30, 2018
 
Research
Events
Consulting
Other
Total
Primary Geographic Markets: (1)
 
 
 
 
 
United States and Canada
$
983,056

$
109,213

$
100,913

$
50,471

$
1,243,653

Europe, Middle East and Africa
370,946

31,741

63,528

35,724

501,939

Other International
180,236

16,386

14,913

7,774

219,309

Total revenues
$
1,534,238

$
157,340

$
179,354

$
93,969

$
1,964,901


Six Months Ended June 30, 2017
 
Research
Events
Consulting
Other
Total
Primary Geographic Markets: (1)
 
 
 
 
 
United States and Canada
$
720,307

$
86,563

$
102,783

$
23,398

$
933,051

Europe, Middle East and Africa
268,580

26,954

53,490

16,960

365,984

Other International
136,151

12,957

14,014

6,743

169,865

Total revenues
$
1,125,038

$
126,474

$
170,287

$
47,101

$
1,468,900

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

Three Months Ended June 30, 2018
 
Research
Events
Consulting
Other
Total
Timing of Revenue Recognition:
 
 
 
 
 
Transferred over time (1)
$
708,801

$

$
77,073

$
18,921

$
804,795

Transferred at a point in time (2)
61,513

111,253

19,385

4,390

196,541

Total revenues
$
770,314

$
111,253

$
96,458

$
23,311

$
1,001,336


Three Months Ended June 30, 2017
 
Research
Events
Consulting
Other
Total
Timing of Revenue Recognition:
 
 
 
 
 
Transferred over time (1)
$
570,024

$

$
68,383

$
35,476

$
673,883

Transferred at a point in time (2)
43,708

91,205

23,310

11,625

169,848

Total revenues
$
613,732

$
91,205

$
91,693

$
47,101

$
843,731


Six Months Ended June 30, 2018
 
Research
Events
Consulting
Other
Total
Timing of Revenue Recognition:
 
 
 
 
 
Transferred over time (1)
$
1,409,897

$

$
151,083

$
77,867

$
1,638,847

Transferred at a point in time (2)
124,341

157,340

28,271

16,102

326,054

Total revenues
$
1,534,238

$
157,340

$
179,354

$
93,969

$
1,964,901



13



Six Months Ended June 30, 2017
 
Research
Events
Consulting
Other
Total
Timing of Revenue Recognition:
 
 
 
 
 
Transferred over time (1)
$
1,036,730

$

$
133,377

$
35,476

$
1,205,583

Transferred at a point in time (2)
88,308

126,474

36,910

11,625

263,317

Total revenues
$
1,125,038

$
126,474

$
170,287

$
47,101

$
1,468,900

 

(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. 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 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 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 June 30, 2018 was approximately $2.2 billion. The Company expects to recognize $777.0 million, $1,082.7 million and $384.0 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. Our performance obligations for contracts meeting this ASU No. 2014-09 disclosure exclusion primarily include: (i) stand-ready services under Research subscription contracts; (ii) holding events where attendees and exhibitors can participate; and (iii) providing customized Consulting solutions for clients under fixed fee and time and materials engagements. The remaining duration of these performance obligations is generally less than one year, which aligns with the period that the parties have enforceable rights and obligations under the affected contracts.

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.





14



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

 
June 30,
 
December 31,
 
2018
 
2017
Assets:
 
 
 
Fees receivable, gross (1)
$
1,091,190

 
$
1,162,871

 
 
 
 
Contract assets (2)
$
31,911

 
$
26,672

 
 
 
 
Contract liabilities:
 
 
 
Deferred revenues (current liability) (3)
$
1,687,724

 
$
1,630,198

Non-current deferred revenues (3)
17,859

 
16,205

Total contract liabilities
$
1,705,583

 
$
1,646,403

 
 
 
 
 

(1)
Fees receivable represent the unconditional right of payment from our customers and include 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 June 30, 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 and six months ended June 30, 2018, the Company recognized $651.9 million and $969.3 million, respectively, of revenue that was attributable to deferred revenues that were recorded at the beginning of each such period. Such amounts primarily consisted of (i) Research and 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 reporting period. During the six months ended June 30, 2018, the Company recorded no material impairments related to its contract assets. In the normal course of business, the Company does not 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. When determining the amount of the revenue reserve, the Company uses an expected-value method that is based on current estimates and a portfolio of data from its historical experience. Due to the common characteristics and similar attributes of our customers and contracts, which provide relevant and predictive evidence about our projected future liability, an expected-value method is reasonable and appropriate. However, the determination of the revenue reserve is inherently judgmental and requires the use of certain estimates. Changes in estimates are recorded in the period that they are identified. As of June 30, 2018, the revenue reserve balance was $6.9 million and adjustments to the account during the six months ended June 30, 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.


15



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 of obtaining or fulfilling a customer contract because no expenditures have been identified that meet the requisite capitalization criteria. For Research, Consulting and 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 June 30, 2018 and 2017, such amortization expense was $76.8 million and $54.7 million, respectively, and was included in Selling, general and administrative expense in the accompanying Condensed Consolidated Statements of Operations. The corresponding amortization expense during the six months ended June 30, 2018 and 2017 was $152.7 million and $104.9 million, respectively. The Company recorded no material impairments of its deferred commissions during either the six months ended June 30, 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

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 the 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 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.

Leases — In February 2016, the FASB issued ASU No. 2016-02, "Leases," as amended ("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 not recorded on an entity's balance sheet. ASU No. 2016-02 significantly changes the accounting for leases because a right-of-use ("ROU") model will be used whereby a lessee must record an ROU asset and a lease liability on its balance sheet for most of its leases. Under ASU No. 2016-02, leases will be classified as either operating or financing arrangements, with such classification affecting the pattern of expense recognition in an entity's income statement. ASU No. 2016-02 also requires expanded disclosures to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows related to leases. We intend to adopt ASU No. 2016-02 on January 1, 2019 using a modified retrospective approach, with certain available transitional practical expedients.

We continue to assess the impact of the new leasing standard and collect the necessary data. We also continue to monitor changes, modifications, clarifications and interpretations undertaken by the FASB, which may impact our preliminary conclusions. However, based on the work completed to date, we believe that the adoption of the new leasing standard on January 1, 2019 will have a material impact on our consolidated balance sheet because the ROU model will result in a significant increase in both assets and liabilities from our operating leases, which currently are not recorded on the balance sheet. The actual amount of the overall increase in our assets and liabilities will not be known until closer to the adoption date. We also believe that ASU No. 2016-02 will not have a material impact on our consolidated statements of operations, comprehensive income and cash flows.

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,

16



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 2018. In the second quarter of 2017, the Company acquired CEB Inc. ("CEB"), a leading provider of subscription-based, best practice research and analysis focusing on human resources, sales, finance, IT and legal. 

The Company recognized $20.0 million and $79.2 million of acquisition and integration charges during the three and six months ended June 30, 2018, respectively, compared to $98.3 million and $111.6 million during the three and six months ended June 30, 2017, respectively. Acquisition and integration charges reflect additional costs and expenses resulting from our acquisitions and include professional fees, severance, stock-based compensation charges and accruals for exit costs for certain office space in Arlington, Virginia related to our acquisition of CEB that the Company does not intend to occupy. During 2018, exit costs represent the single largest component of our acquisition and integration charges. The following table presents a summary of the activity related to our accrual for exit costs at all of our facilities during the six months ended June 30, 2018 (in thousands):
Liability balance at December 31, 2017
$
12,961

Charges and adjustments, net (1) (2)
54,069

Payments, net of $316 in sublease rent
(9,890
)
Liability balance at June 30, 2018 (3)
$
57,140

 
(1)
The Company recognized $9.8 million and $54.1 million of charges and adjustments, net during the three and six months ended June 30, 2018, respectively, compared to $20.8 million during both the three and six months ended June 30, 2017.
(2)
For the six months ended June 30, 2018, the Company recognized $4.9 million of expense for changes in its exit cost estimates.
(3)
In total, we estimate that we will make net cash payments of approximately $70.0 million for exit costs in connection with the activities described herein. Through June 30, 2018, in the aggregate, we have expensed $67.2 million and had net cash outlays of $10.0 million related to such activities.

Divestitures

During the second quarter of 2018, the Company completed the previously announced sales of two non-core businesses that were reported as part of the Talent Assessment & Other segment. As a result of these divestitures, the Company changed the name of the Talent Assessment & Other segment to Other. Additional information regarding these items is provided below:

CEB Talent Assessment business

On April 3, 2018, the Company sold its CEB Talent Assessment business for $403.0 million and realized approximately $377.8 million in cash from the sale, which is net of cash transferred with the business and certain closing expenses. The cash received is subject to certain post-closing adjustments. The Company recorded a pretax gain of approximately $16.0 million on the sale. The CEB Talent Assessment business was acquired in the CEB acquisition in April 2017 and was a significant portion of the Other segment. During the six months ended June 30, 2018, the CEB Talent Assessment business contributed approximately $47.0 million of revenue and pre-tax income of approximately $2.1 million, substantially all of which was recorded by the Company during the first quarter of 2018.




17



CEB Workforce Survey and Analytics business

On May 1, 2018, the Company sold its CEB Workforce Survey and Analytics ("WS&A") business for $28.0 million and realized approximately $26.4 million in cash, which is net of certain closing expenses. The cash received is subject to certain post-closing adjustments. The Company recorded a pre-tax gain on the sale of approximately $8.8 million. The WS&A business was also acquired in the CEB transaction and was also reported with the Other segment.

Also during the second quarter of 2018, the Company sold other miscellaneous assets acquired in the CEB transaction. The Company received $1.3 million in net cash proceeds from these sales and recorded a net pre-tax gain of approximately $0.7 million.

The principal components of the assets and liabilities divested in the above transactions are summarized in the table below (in thousands):
Cash and cash equivalents
 
$
19,625

Fees receivable, net
 
48,305

Goodwill
 
246,210

Intangible assets, net
 
264,120

Other assets (including prepaid expenses and fixed assets)
 
27,820

Total assets
 
$
606,080

 
 
 
Accounts payable and accrued liabilities
 
$
26,022

Deferred revenues
 
68,910

Other liabilities
 
51,131

Foreign currency translation adjustment
 
60,310

Total liabilities and foreign currency translation adjustment
 
$
206,373


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

Basic earnings per share (“EPS”) is computed by dividing net income (loss) 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 income (loss) per share (in thousands, except per share data):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 

 
 

 
 

 
 

Net income (loss) used for calculating basic and diluted income (loss) per common share
$
46,270

 
$
(92,281
)
 
$
26,683

 
$
(55,848
)
 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Weighted average common shares used in the calculation of basic income (loss) per share
91,048

 
89,297

 
91,026

 
86,066

Common stock equivalents associated with stock-based compensation plans (1), (2)
1,108

 

 
1,226

 

Shares used in the calculation of diluted income (loss) per share
92,156

 
89,297

 
92,252

 
86,066

 
 
 
 
 
 
 
 
Basic income (loss) per share
$
0.51

 
$
(1.03
)
 
$
0.29

 
$
(0.65
)
Diluted income (loss) per share
$
0.50

 
$
(1.03
)
 
$
0.29

 
$
(0.65
)
 
(1)
For the three and six months ended June 30, 2018, certain common stock equivalents were not included in the computation of diluted income (loss) per share because the effect would have been anti-dilutive. These common share equivalents totaled less than 0.4 million for both periods.
(2)
For the three and six months ended June 30, 2017, approximately 1.3 million common stock equivalents were excluded from the calculation of diluted income (loss) per share because the effect would have been anti-dilutive.

18




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 June 30, 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
 
 Six Months Ended
 
 
June 30,
 
June 30,
Award type
 
2018
 
2017
 
2018
 
2017
Stock appreciation rights
 
$
1.3

 
$
1.4

 
$
4.8

 
$
4.2

Restricted stock units
 
12.9

 
29.5

 
40.1

 
49.1

Common stock equivalents
 
0.2

 
0.1

 
0.4

 
0.3

Total (1)
 
$
14.4

 
$
31.0

 
$
45.3

 
$
53.6

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
Expense category line item
 
2018
 
2017
 
2018
 
2017
Cost of services and product development
 
$
6.7

 
$
6.3

 
$
18.1

 
$
15.6

Selling, general and administrative
 
7.5

 
10.3

 
25.7

 
23.6

Acquisition and integration charges (2)
 
0.2

 
14.4

 
1.5

 
14.4

Total (1)
 
$
14.4

 
$
31.0

 
$
45.3

 
$
53.6

 
(1) Includes charges of $2.1 million and $6.0 million during the three months ended June 30, 2018 and 2017, respectively, and $19.9 million and $20.5 million during the six months ended June 30, 2018 and 2017, respectively, for awards to retirement-eligible employees. Those awards vest on an accelerated basis.
(2) These charges are the result of (i) the acceleration of the vesting of certain restricted stock units related to the CEB acquisition and (ii) restricted stock units granted in connection with the CEB integration process.

As of June 30, 2018, the Company had $107.4 million of total unrecognized stock-based compensation cost, which is expected to be expensed over the remaining weighted average service period of approximately 2.7 years.


19



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 six months ended June 30, 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

 
6.61
Exercised
(0.1
)
 
56.92

 
14.98

 
n/a
Outstanding at June 30, 2018 (1) (2)
1.4

 
86.01

 
19.29

 
4.53
Vested and exercisable at June 30, 2018 (2)
0.7

 
$
72.03

 
$
16.51

 
3.40
 
n/a = not applicable

(1) As of June 30, 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 June 30, 2018, the total SARs outstanding had an intrinsic value of $66.6 million. On such date, SARs vested and exercisable had an intrinsic value of $43.2 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:
 
Six Months Ended
 
June 30,
 
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.

20



(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 six months ended June 30, 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

 
114.93

Vested and released
(0.6
)
 
88.18

Forfeited
(0.1
)
 
104.03

Outstanding at June 30, 2018 (2) (3)
1.5

 
$
101.67

 
(1)
The 0.7 million of RSUs granted during the six months ended June 30, 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 and non-management board members. 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. 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 June 30, 2018, the weighted average remaining contractual term of the RSUs outstanding was approximately 1.6 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.


21



The following table summarizes the changes in CSEs outstanding during the six months ended June 30, 2018:
 
Common
Stock
Equivalents
("CSEs")
 
Per Share
Weighted
Average
Grant Date
Fair Value
Outstanding at December 31, 2017
110,013

 
$
23.19

Granted
3,045

 
124.12

Converted to shares of Common Stock upon grant
(2,073
)
 
120.34

Outstanding at June 30, 2018
110,985

 
$
24.10

 

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 June 30, 2018, the Company had 0.7 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 $7.6 million and $5.7 million in cash from employee share purchases under the ESP Plan during the six months ended June 30, 2018 and 2017, respectively.

Note 5 — Segment Information

In the second quarter of 2018, the Company divested its CEB Talent Assessment business and its CEB Workforce Survey and Analytics business. These two businesses were acquired on April 5, 2017 as part of the CEB acquisition and were reported with the Talent Assessment & Other segment. As a result of these divestitures, the Company changed the name of the Talent Assessment & Other segment to Other. Additional information regarding these divestitures is included in Note 2 — Acquisitions and Divestitures.

Our products and services are delivered through four segments – Research, Events, Consulting and 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.

Other currently includes the Challenger sales training unit, which provides sales training and related assessment tools, and certain other miscellaneous activities. As discussed above, the Company divested the majority of the operations in this segment in the second quarter of 2018.
    
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

22



segment. Accordingly, assets are not reported by segment because the information is not available by segment and is not reviewed in the evaluation of segment performance or in making decisions in the allocation of resources.

The following tables present information about the Company’s reportable segments for the periods indicated (in thousands):
Three Months Ended June 30, 2018
Research
 
Events
 
Consulting
 
Other
 
Consolidated
Revenues
$
770,314

 
$
111,253

 
$
96,458

 
$
23,311

 
$
1,001,336

Gross contribution
532,910

 
63,461

 
33,693

 
15,104

 
645,168

Corporate and other expenses
 

 
 

 
 

 
 
 
(559,072
)
Operating income
 

 
 

 
 

 
 
 
$
86,096

Three Months Ended June 30, 2017
Research
 
Events
 
Consulting
 
Other
 
Consolidated
Revenues
$
613,732

 
$
91,205

 
$
91,693

 
$
47,101

 
$
843,731

Gross contribution
400,571

 
49,735

 
31,433

 
17,297

 
499,036

Corporate and other expenses
 

 
 

 
 

 
 
 
(597,424
)
Operating loss
 

 
 

 
 

 
 
 
$
(98,388
)
Six Months Ended June 30, 2018
Research
 
Events
 
Consulting
 
Other
 
Consolidated
Revenues
$
1,534,238

 
$
157,340

 
$
179,354

 
$
93,969

 
$
1,964,901

Gross contribution
1,064,367

 
79,651

 
57,817

 
58,148

 
1,259,983

Corporate and other expenses
 

 
 

 
 

 
 
 
(1,182,598
)
Operating income
 

 
 

 
 

 
 
 
$
77,385

Six Months Ended June 30, 2017
Research
 
Events
 
Consulting
 
Other
 
Consolidated
Revenues
$
1,125,038

 
$
126,474

 
$
170,287

 
$
47,101

 
$
1,468,900

Gross contribution
751,684

 
63,302

 
55,370

 
17,297

 
887,653

Corporate and other expenses
 

 
 

 
 

 
 
 
(932,527
)
Operating loss
 

 
 

 
 

 
 
 
$
(44,874
)

The following table provides a reconciliation of total segment gross contribution to net income (loss) (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Total segment gross contribution
$
645,168

 
$
499,036

 
$
1,259,983

 
$
887,653

Costs and expenses:
 
 
 
 
 
 
 
Cost of services and product development - unallocated (1)
11,469

 
7,309

 
19,928

 
8,366

Selling, general and administrative
460,803

 
408,226

 
948,548

 
712,470

Depreciation and amortization
66,838

 
83,557

 
134,894

 
100,087

Acquisition and integration charges
19,962

 
98,332

 
79,228

 
111,604

Operating income (loss)
86,096

 
(98,388
)
 
77,385

 
(44,874
)
Interest expense and other, net
36,484

 
44,363

 
70,644

 
49,380

Gain from divested operations
25,460

 

 
25,460

 

Provision (benefit) for income taxes
28,802

 
(50,470
)
 
5,518

 
(38,406
)
Net income (loss)
$
46,270

 
$
(92,281
)
 
$
26,683

 
$
(55,848
)
 
(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.



23



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 six months ended June 30, 2018 (in thousands):
 
Research
 
Events
 
Consulting
 
Other
 
Total
Balance at December 31, 2017 (1), (2)
$
2,619,677

 
$
187,920

 
$
97,798

 
$
81,899

 
$
2,987,294

Divestiture (3)

 

 

 
(20,642
)
 
(20,642
)
Foreign currency translation impact and other (4)
568

 
(245
)
 
(335
)
 
7,873

 
7,861

Balance at June 30, 2018
$
2,620,245

 
$
187,675

 
$
97,463

 
$
69,130

 
$
2,974,513

 
(1)
The Company does not have any accumulated goodwill impairment losses.
(2)
Excludes certain amounts related to held-for-sale operations.
(3)
Represents amounts related to a divested business. 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):
June 30, 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

Divestiture (2)
 
(7,167
)
 
(321
)
 
(241
)
 
(39
)
 
(7,768
)
Foreign currency translation impact and other (3)
 
(6,953
)
 
(315
)
 
(564
)
 
(500
)
 
(8,332
)
Gross cost
 
1,186,196

 
122,788

 
103,508

 
54,390

 
1,466,882

Accumulated amortization (4)
 
(141,775
)
 
(38,759
)
 
(79,220
)
 
(29,831
)
 
(289,585
)
Balance at June 30, 2018
 
$
1,044,421

 
$
84,029

 
$
24,288

 
$
24,559

 
$
1,177,297


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 (4)
 
(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

 
(1) Excludes certain amounts related to held-for-sale operations.
(2) Represents amounts related to a divested business. See Note 2 — Acquisitions and Divestitures for additional information.
(3) Includes the foreign currency translation impact and certain other adjustments.

24



(4) 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 $50.1 million and $65.5 million during the three months ended June 30, 2018 and 2017, respectively, and $101.8 million and $71.8 million during the six months ended June 30, 2018 and 2017, respectively. 

The estimated future amortization expense by year for finite-lived intangible assets is as follows (in thousands):
2018 (remaining six months)
$
84,072

2019
133,661

2020
127,022

2021
106,555

2022
96,998

Thereafter
628,989

 
$
1,177,297


Note 7 — Debt

2016 Credit Agreement

The Company has a credit facility that provides for a $1.5 billion Term loan A facility and a $1.2 billion revolving credit facility (the "2016 Credit Agreement"). The Company's $500.0 million Term loan B facility was completely repaid during the six months ended June 30, 2018.

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 June 30, 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.
 
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, 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.

25




Outstanding Borrowings

The following table summarizes the Company’s total outstanding borrowings as of the dates indicated (in thousands):
 
 
June 30,
 
December 31,
Description:
 
2018
 
2017
2016 Credit Agreement - Term loan A facility (1)
 
$
1,392,188

 
$
1,429,312

2016 Credit Agreement - Term loan B facility (2)
 

 
496,250

2016 Credit Agreement - Revolving credit facility (1), (3)
 
270,000

 
595,000

Senior Notes (4)
 
800,000

 
800,000

Other (5)
 
2,267

 
2,500

Principal amount outstanding (6)
 
$
2,464,455

 
$
3,323,062

  Less: deferred financing fees (7)
 
(33,617
)
 
(44,217
)
Net balance sheet carrying amount
 
$
2,430,838

 
$
3,278,845

 
(1)
The contractual annualized interest rate as of June 30, 2018 on the Term loan A facility and the revolving credit facility was 4.09%, which consisted of a floating eurodollar base rate of 2.09% plus a margin of 2.00%. 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 Term loan B facility was completely repaid in 2018.
(3)
The Company had $906.0 million of available borrowing capacity on the revolver (not including the expansion feature) as of June 30, 2018.
(4)
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.
(5)
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.
(6)
The average annual effective rates on the Company's total debt outstanding for the three and six months ended June 30, 2018, including the effect of its interest rate swaps discussed below, were 4.28% and 4.20%, respectively.
(7)
The deferred financing fees are being amortized to Interest expense, net over the term of the related debt obligation. The Company expensed approximately $6.9 million of additional deferred financing fees in the second quarter of 2018 related to the repayment of the Term loan B 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 June 30, 2018. The interest rate swaps had a total positive fair value (asset) to the Company of $22.4 million at June 30, 2018, which is deferred and recorded in Accumulated other comprehensive income, net of tax effect.


26



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 $1.0 billion remained available as of June 30, 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Number of shares repurchased (1), (2)
524,435

 
101,614

 
763,703

 
320,366

Cash paid for repurchased shares (in thousands) (3)
$
67,877

 
$
11,808

 
$
96,271

 
$
33,786

 
(1) The average purchase price for repurchased shares was $131.23 and $127.29 for the three and six months ended June 30, 2018, respectively, and $116.20 and $105.46 for the three and six months ended June 30, 2017, respectively.
(2)
The number of shares repurchased for the three and six months ended June 30, 2018 includes shares repurchased in June 2018 that settled in July 2018.
(3) The cash paid for repurchased shares during the three and six months ended June 30, 2018 includes repurchases for both share-based compensation awards and open market purchases. There were no open market purchases during 2017.

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 June 30, 2018:
 
Interest Rate
Swaps
 
Defined
Benefit
Pension Plans
 
Foreign
Currency
Translation
Adjustments
 
Total
Balance – March 31, 2018
$
12,597

 
$
(5,805
)
 
$
25,433

 
$
32,225

Changes during the period:
 

 
 

 
 

 
 

Change in AOCI/L before reclassifications to income (2)
4,005

 

 
295

 
4,300

Reclassifications from AOCI/L to income (3), (4), (5)
(321
)
 
55

 
(60,310
)
 
(60,576
)
Other comprehensive income (loss) for the period
3,684

 
55

 
(60,015
)
 
(56,276
)
Balance – June 30, 2018
$
16,281

 
$
(5,750
)
 
$
(34,582
)
 
$
(24,051
)

For the three months ended June 30, 2017:
 
Interest Rate
Swaps
 
Defined
Benefit
Pension Plans
 
Foreign
Currency
Translation
Adjustments
 
Total
Balance – March 31, 2017
$
(3,977
)
 
$
(5,749
)
 
$
(38,106
)
 
$
(47,832
)
Changes during the period:
 
 
 
 
 
 
 
Change in AOCI/L before reclassifications to income
(3,528
)
 

 
1,024

 
(2,504
)
Reclassifications from AOCI/L to income (3), (4)
1,398

 
49

 

 
1,447

Other comprehensive income (loss) for the period
(2,130
)
 
49

 
1,024

 
(1,057
)
Balance – June 30, 2017
$
(6,107
)
 
$
(5,700
)
 
$
(37,082
)
 
$
(48,889
)


27



For the six months ended June 30, 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 (2)
13,370

 

 
20,842

 
34,212

Reclassifications from AOCI/L to income (3), (4), (5)
428

 
111

 
(60,310
)
 
(59,771
)
Other comprehensive income (loss) for the period
13,798

 
111

 
(39,468
)
 
(25,559
)
Balance – June 30, 2018
$
16,281

 
$
(5,750
)
 
$
(34,582
)
 
$
(24,051
)

For the six months ended June 30, 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
(6,921
)
 

 
5,395

 
(1,526
)
Reclassifications from AOCI/L to income (3), (4)
2,223

 
97

 

 
2,320

Other comprehensive income (loss) for the period
(4,698
)
 
97

 
5,395

 
794

Balance – June 30, 2017
$
(6,107
)
 
$
(5,700
)
 
$
(37,082
)
 
$
(48,889
)

 
(1)
Amounts in parentheses represent debits (deferred losses).
(2)
The activity for interest rate swaps includes an immaterial impact from the Company's adoption of ASU No. 2018-02. See Note 1 - Business and Basis of Presentation for additional information.
(3)
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.
(4)
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.
(5)
The reclassifications related to foreign currency translation adjustments during the three and six months ended June 30, 2018 were recorded in Gain from divested operations. See Note 2 – Acquisitions and Divestitures for information regarding our divestitures during the second quarter of 2018.
  
Note 9 — Income Taxes

The provision for income taxes for the three months ended June 30, 2018 was an expense of $28.8 million on pretax income of $75.1 million compared to a benefit of $50.5 million on a pretax loss of $142.8 million in the three months ended June 30, 2017. The effective income tax rate was 38.4% for the three months ended June 30, 2018 and 35.4% for the same period in 2017. The quarter-over-quarter change in the effective income tax rate was primarily attributable to tax expense on the gain from divestitures in 2018 partially offset by a reduction in the U.S. tax rate effective for 2018.

The provision for income taxes for the six months ended June 30, 2018 was an expense of $5.5 million on pretax income of $32.2 million compared to a benefit of $38.4 million on a pretax loss of $94.3 million in the six months ended June 30, 2017. The effective income tax rate was 17.1% for the six months ended June 30, 2018 and 40.7% for the same period in 2017. The year-over-year change in the effective income tax rate was largely attributable to tax benefits from stock-based compensation during the first half of 2018 that decreased the tax rate on pretax income while such benefits in the first half of 2017 increased the tax rate on pretax losses. In addition to the impact of stock-based compensation, the change in the effective income tax rate was driven by a reduction in the U.S. tax rate effective for 2018 partially offset by tax expense on the gain from divestitures in 2018.
The Tax Cuts and Jobs Act (the "Act”) was enacted on December 22, 2017. Among other things, the Act reduced the U.S. federal corporation tax rate from 35% to 21% and requires companies to pay a one-time transition tax on accumulated deferred foreign income (“ADFI”) of foreign subsidiaries that were previously tax deferred. Upon enactment, we remeasured U.S. deferred tax

28



assets and liabilities to reflect the reduced federal corporate tax rate, which reduced our 2017 income tax expense by $123.2 million. We also recorded a provisional amount for the one-time transition tax, which increased our 2017 income tax expense by $63.6 million.

During the three months ending June 30, 2018, we recorded an additional $0.7 million provisional expense for the estimated state income tax impact of the one-time transition tax. As of June 30, 2018, we have not completed our accounting for the tax effects of enactment of the Act given the need to obtain, prepare, and analyze various information largely pertinent to the determination of ADFI including, but not limited to, our post-1986 earnings and profits, foreign taxes and amounts held in cash or other specified assets on various measurement dates. As such, the amounts we have recorded are provisional as permitted by the SEC per Staff Accounting Bulletin No. 118 and could change materially. We expect to complete our accounting for the Act by the fourth quarter of 2018 as we complete our analysis and receive additional guidance from the U.S. Government pertaining to the Act.

The Act also created a new tax on global intangible low-taxed income ("GILTI") attributable to foreign subsidiaries. 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 accounting policy election with respect to GILTI. We have, however, included an estimate of the current year GILTI tax impact in the 2018 tax provision calculation.

The Company had gross unrecognized tax benefits of $60.3 million at both June 30, 2018 and December 31, 2017. It is reasonably possible that gross unrecognized tax benefits will decrease by approximately $5.2 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 appealed the decision and, on July 24, 2018, the appellate court ruled in favor of the Internal Revenue Service. The affected taxpayer has 90 days to petition for review by the Supreme Court. 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 matter. The Company will monitor developments related to this case and the potential impact of those developments on the Company’s consolidated financial statements.

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):
June 30, 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

 
$
22,380

 
Other assets
 
$
16,281

Foreign currency forwards (2)
 
44

 
343,666

 
(401
)
 
Accrued liabilities
 

Total
 
49

 
$
1,743,666