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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
R | |
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended | |
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 |
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(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. YesþR Noo£
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). YesþR Noo£
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | Accelerated filer | Non-accelerated filer | Smaller reporting company |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso£ Noþ
As of October 31, 2012, 93,655,027April 24, 2013, 93,751,149 shares of the registrant’s common shares were outstanding.
Table of Contents
2 |
GARTNER, INC.
Condensed Consolidated Balance Sheets
(Unaudited; in thousands)
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| September 30, |
| December 31, |
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Assets |
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Current assets: |
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Cash and cash equivalents |
| $ | 255,391 |
| $ | 142,739 |
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Fees receivable, net |
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| 370,951 |
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| 421,033 |
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Deferred commissions |
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| 65,870 |
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| 78,492 |
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Prepaid expenses and other current assets |
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| 89,766 |
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| 63,521 |
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| ||||
Total current assets |
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| 781,978 |
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| 705,785 |
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Property, equipment and leasehold improvements, net |
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| 80,344 |
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| 68,132 |
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Goodwill |
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| 519,200 |
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| 508,550 |
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Intangible assets, net |
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| 13,142 |
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| 7,060 |
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Other assets |
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| 84,484 |
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| 90,345 |
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Total Assets |
| $ | 1,479,148 |
| $ | 1,379,872 |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable and accrued liabilities |
| $ | 206,290 |
| $ | 259,490 |
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Deferred revenues |
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| 682,603 |
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| 611,647 |
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Current portion of long-term debt |
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| 80,000 |
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| 50,000 |
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| ||||
Total current liabilities |
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| 968,893 |
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| 921,137 |
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Long-term debt |
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| 120,000 |
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| 150,000 |
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Other liabilities |
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| 128,790 |
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| 126,951 |
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Total Liabilities |
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| 1,217,683 |
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| 1,198,088 |
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Stockholders’ Equity |
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Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued or outstanding |
|
| — |
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| — |
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Common stock, $.0005 par value, 250,000,000 shares authorized; 156,234,415 shares issued for both periods |
|
| 78 |
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| 78 |
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Additional paid-in capital |
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| 671,255 |
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| 646,815 |
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Accumulated other comprehensive income, net |
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| 8,673 |
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| 5,793 |
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Accumulated earnings |
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| 849,659 |
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| 742,579 |
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Treasury stock, at cost, 62,579,388 and 62,891,251 common shares, respectively |
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| (1,268,200 | ) |
| (1,213,481 | ) |
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Total Stockholders’ Equity |
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| 261,465 |
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| 181,784 |
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Total Liabilities and Stockholders’ Equity |
| $ | 1,479,148 |
| $ | 1,379,872 |
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March 31, 2013 | December 31, 2012 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 269,063 | $ | 299,852 | ||||
Fees receivable, net of allowances of $6,120 and $6,400, respectively | 441,405 | 463,968 | ||||||
Deferred commissions | 82,929 | 87,933 | ||||||
Prepaid expenses and other current assets | 81,643 | 75,713 | ||||||
Total current assets | 875,040 | 927,466 | ||||||
Property, equipment and leasehold improvements, net | 88,508 | 89,089 | ||||||
Goodwill | 516,525 | 519,506 | ||||||
Intangible assets, net | 10,477 | 11,821 | ||||||
Other assets | 76,845 | 73,395 | ||||||
Total Assets | $ | 1,567,395 | $ | 1,621,277 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 180,896 | $ | 287,763 | ||||
Deferred revenues | 736,696 | 692,237 | ||||||
Current portion of long-term debt | 57,500 | 90,000 | ||||||
Total current liabilities | 975,092 | 1,070,000 | ||||||
Long-term debt | 147,500 | 115,000 | ||||||
Other liabilities | 125,646 | 129,604 | ||||||
Total Liabilities | 1,248,238 | 1,314,604 | ||||||
Stockholders’ Equity | ||||||||
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued or outstanding | — | — | ||||||
Common stock, $.0005 par value, 250,000,000 shares authorized; 156,234,415 shares issued for both periods | 78 | 78 | ||||||
Additional paid-in capital | 689,182 | 679,871 | ||||||
Accumulated other comprehensive income, net | 2,763 | 5,968 | ||||||
Accumulated earnings | 945,157 | 908,482 | ||||||
Treasury stock, at cost, 62,494,184 and 62,873,100 common shares, respectively | (1,318,023 | ) | (1,287,726 | ) | ||||
Total Stockholders’ Equity | 319,157 | 306,673 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 1,567,395 | $ | 1,621,277 |
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)
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| Three Months Ended |
| Nine Months Ended |
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| 2012 |
| 2011 |
| 2012 |
| 2011 |
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| �� |
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Revenues: |
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Research |
| $ | 284,048 |
| $ | 255,979 |
| $ | 836,970 |
| $ | 749,429 |
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Consulting |
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| 71,731 |
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| 70,815 |
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| 222,970 |
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| 219,407 |
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Events |
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| 18,627 |
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| 18,990 |
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| 81,119 |
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| 72,058 |
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Total revenues |
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| 374,406 |
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| 345,784 |
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| 1,141,059 |
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| 1,040,894 |
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Costs and expenses: |
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Cost of services and product development |
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| 151,143 |
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| 142,696 |
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| 458,853 |
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| 428,473 |
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Selling, general and administrative |
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| 164,888 |
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| 148,461 |
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| 492,627 |
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| 442,891 |
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Depreciation |
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| 6,301 |
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| 6,638 |
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| 18,378 |
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| 19,143 |
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Amortization of intangibles |
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| 1,362 |
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| 739 |
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| 3,029 |
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| 5,788 |
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Acquisition and integration charges |
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| 944 |
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| — |
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| 2,126 |
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| — |
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Total costs and expenses |
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| 324,638 |
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| 298,534 |
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| 975,013 |
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| 896,295 |
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Operating income |
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| 49,768 |
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| 47,250 |
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| 166,046 |
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| 144,599 |
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Interest expense, net |
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| (2,209 | ) |
| (2,282 | ) |
| (6,557 | ) |
| (7,863 | ) |
Other expense, net |
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| (748 | ) |
| (541 | ) |
| (1,802 | ) |
| (1,494 | ) |
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Income before income taxes |
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| 46,811 |
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| 44,427 |
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| 157,687 |
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| 135,242 |
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Provision for income taxes |
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| 15,436 |
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| 13,963 |
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| 50,607 |
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| 43,364 |
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Net income |
| $ | 31,375 |
| $ | 30,464 |
| $ | 107,080 |
| $ | 91,878 |
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Income per common share: |
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Basic |
| $ | 0.34 |
| $ | 0.32 |
| $ | 1.15 |
| $ | 0.95 |
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Diluted |
| $ | 0.33 |
| $ | 0.31 |
| $ | 1.12 |
| $ | 0.92 |
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Weighted average shares outstanding: |
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Basic |
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| 93,522 |
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| 96,057 |
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| 93,429 |
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| 96,462 |
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Diluted |
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| 95,611 |
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| 98,259 |
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| 95,791 |
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| 99,467 |
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Three Months Ended March 31, | ||||||||
2013 | 2012 | |||||||
Revenues: | ||||||||
Research | $ | 310,331 | $ | 274,620 | ||||
Consulting | 72,633 | 74,563 | ||||||
Events | 23,790 | 19,988 | ||||||
Total revenues | 406,754 | 369,171 | ||||||
Costs and expenses: | ||||||||
Cost of services and product development | 163,737 | 146,463 | ||||||
Selling, general and administrative | 180,478 | 162,518 | ||||||
Depreciation | 7,100 | 5,895 | ||||||
Amortization of intangibles | 1,334 | 739 | ||||||
Acquisition and integration charges | 100 | — | ||||||
Total costs and expenses | 352,749 | 315,615 | ||||||
Operating income | 54,005 | 53,556 | ||||||
Interest expense, net | (2,436 | ) | (2,195 | ) | ||||
Other income (expense), net | 211 | (978 | ) | |||||
Income before income taxes | 51,780 | 50,383 | ||||||
Provision for income taxes | 15,105 | 16,162 | ||||||
Net income | $ | 36,675 | $ | 34,221 | ||||
Income per common share: | ||||||||
Basic | $ | 0.39 | $ | 0.37 | ||||
Diluted | $ | 0.38 | $ | 0.36 | ||||
Weighted average shares outstanding: | ||||||||
Basic | 93,595 | 93,416 | ||||||
Diluted | 95,537 | 96,199 |
See the accompanying notes to the condensed consolidated financial statements.
4 |
GARTNER, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited; in thousands)
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| Three Months Ended |
| Nine Months Ended |
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| 2012 |
| 2011 |
| 2012 |
| 2011 |
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Net income |
| $ | 31,375 |
| $ | 30,464 |
| $ | 107,080 |
| $ | 91,878 |
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Other comprehensive income (loss): |
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Foreign currency translation adjustments |
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| 5,383 |
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| (5,352 | ) |
| 3,720 |
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| (3,828 | ) |
Unrealized loss on interest rate swap hedge |
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| (470 | ) |
| (5,283 | ) |
| (1,139 | ) |
| (8,170 | ) |
Amortization of pension unrealized actuarial gain |
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| (51 | ) |
| (33 | ) |
| (157 | ) |
| (100 | ) |
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| 4,862 |
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| (10,668 | ) |
| 2,424 |
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| (12,098 | ) |
Tax effect of comprehensive income items |
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| 188 |
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| 2,113 |
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| 456 |
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| 3,268 |
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Other comprehensive income (loss), net of tax effect |
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| 5,050 |
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| (8,555 | ) |
| 2,880 |
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| (8,830 | ) |
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Comprehensive income |
| $ | 36,425 |
| $ | 21,909 |
| $ | 109,960 |
| $ | 83,048 |
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Three Months Ended March 31, | ||||||||
2013 | 2012 | |||||||
Net income | $ | 36,675 | $ | 34,221 | ||||
Other comprehensive (loss) income, net of tax: | ||||||||
Interest rate swap (cash flow hedge) – gain | 561 | 32 | ||||||
Defined benefit pension plans – actuarial gain (loss) | 23 | (54 | ) | |||||
Foreign currency translation adjustments | (3,789 | ) | 2,676 | |||||
Other comprehensive (loss) income | (3,205 | ) | 2,654 | |||||
Comprehensive income | $ | 33,470 | $ | 36,875 |
See the accompanying notes to the condensed consolidated financial statements.
5 |
GARTNER, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited; in thousands)
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| Nine Months Ended |
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| 2012 |
| 2011 |
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Operating activities: |
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Net income |
| $ | 107,080 |
| $ | 91,878 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization of intangibles |
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| 21,407 |
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| 24,931 |
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Stock-based compensation expense |
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| 28,021 |
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| 24,750 |
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Excess tax benefits from stock-based compensation |
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| (20,366 | ) |
| (22,458 | ) |
Deferred taxes |
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| (3,268 | ) |
| 3,812 |
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Amortization of debt issue costs |
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| 1,512 |
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| 1,733 |
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Changes in assets and liabilities, net of acquisition: |
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Fees receivable, net |
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| 54,157 |
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| 16,023 |
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Deferred commissions |
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| 13,202 |
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| 11,354 |
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Prepaid expenses and other current assets |
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| (18,803 | ) |
| (6,241 | ) |
Other assets |
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| 2,429 |
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| 2,051 |
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Deferred revenues |
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| 60,681 |
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| 74,021 |
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Accounts payable, accrued, and other liabilities |
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| (37,301 | ) |
| (45,389 | ) |
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Cash provided by operating activities |
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| 208,751 |
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| 176,465 |
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Investing activities: |
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Additions to property, equipment and leasehold improvements |
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| (30,800 | ) |
| (23,720 | ) |
Acquisition (net of cash acquired) |
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| (10,336 | ) |
| — |
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Cash used in investing activities |
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| (41,136 | ) |
| (23,720 | ) |
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Financing activities: |
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Proceeds from stock issued under stock plans |
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| 10,560 |
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| 17,771 |
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Proceeds from debt issuance |
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| 22,500 |
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| 5,000 |
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Payments on debt |
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| (22,500 | ) |
| (15,156 | ) |
Purchases of treasury stock |
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| (89,300 | ) |
| (141,214 | ) |
Excess tax benefits from stock-based compensation |
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| 20,366 |
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| 22,458 |
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Cash used by financing activities |
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| (58,374 | ) |
| (111,141 | ) |
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Net increase in cash and cash equivalents |
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| 109,241 |
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| 41,604 |
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Effects of exchange rates on cash and cash equivalents |
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| 3,411 |
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| (4,882 | ) |
Cash and cash equivalents, beginning of period |
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| 142,739 |
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| 120,181 |
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Cash and cash equivalents, end of period |
| $ | 255,391 |
| $ | 156,903 |
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Three Months Ended March 31, | ||||||||
2013 | 2012 | |||||||
Operating activities: | ||||||||
Net income | $ | 36,675 | $ | 34,221 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization of intangibles | 8,434 | 6,634 | ||||||
Stock-based compensation expense | 12,342 | 10,939 | ||||||
Excess tax benefits from stock-based compensation | (13,219 | ) | (13,784 | ) | ||||
Deferred taxes | (1,872 | ) | (1,664 | ) | ||||
Amortization and write-off of debt issue costs | 858 | 509 | ||||||
Changes in assets and liabilities, net of acquisition: | ||||||||
Fees receivable, net | 17,851 | 39,695 | ||||||
Deferred commissions | 4,113 | 3,665 | ||||||
Prepaid expenses and other current assets | (4,467 | ) | (6,105 | ) | ||||
Other assets | (6,467 | ) | (2,141 | ) | ||||
Deferred revenues | 51,019 | 34,822 | ||||||
Accounts payable, accrued, and other liabilities | (85,574 | ) | (88,112 | ) | ||||
Cash provided by operating activities | 19,693 | 18,679 | ||||||
Investing activities: | ||||||||
Additions to property, equipment and leasehold improvements | (9,648 | ) | (7,118 | ) | ||||
Cash used in investing activities | (9,648 | ) | (7,118 | ) | ||||
Financing activities: | ||||||||
Proceeds from stock issued under stock plans | 1,955 | 5,524 | ||||||
Proceeds from debt issuance | 200,000 | 47,793 | ||||||
Payments for debt issuance costs | (3,553 | ) | — | |||||
Payments on debt | (200,000 | ) | (7,500 | ) | ||||
Purchases of treasury stock | (48,527 | ) | (77,157 | ) | ||||
Excess tax benefits from stock-based compensation | 13,219 | 13,784 | ||||||
Cash used by financing activities | (36,906 | ) | (17,556 | ) | ||||
Net increase in cash and cash equivalents | (26,861 | ) | (5,995 | ) | ||||
Effects of exchange rates on cash and cash equivalents | (3,928 | ) | 2,241 | |||||
Cash and cash equivalents, beginning of period | 299,852 | 142,739 | ||||||
Cash and cash equivalents, end of period | $ | 269,063 | $ | 138,985 |
See the accompanying notes to the condensed consolidated financial statements.
6 |
GARTNER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 — Business and Basis of Presentation
Business.Gartner, Inc. is a global information technology research and advisory company founded in 1979 with its headquarters in Stamford, Connecticut. Gartner delivers its products and services through three business segments: Research, Consulting, and Events. When used in these notes, the terms “Gartner,” “Company,” “we,” “us,” or “our” refer to Gartner, Inc. and its consolidated subsidiaries.
Basis of presentation. TheseThe 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, 2011. 2012.
The fiscal year of Gartner represents the twelve-month calendar period from January 1 through December 31. In the opinion of management, all normal recurring accruals and adjustments considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented herein have been included. The results of operations for the three and nine months ended September 30, 2012March 31, 2013 may not be indicative of the results of operations for the remainder of 2012.2013.
On January 1, 2012, the Company adopted Accounting Standards Update (“ASU”) No. 2011-05,Comprehensive Income (Topic 220-10): Presentation of Comprehensive Income,and a related amendment. Comprehensive income includes income and expense items from nonowner sources and consists of two separate components: net income as reported and other comprehensive income. ASU No. 2011-05 eliminates the option to report comprehensive income and its components in the statement of stockholders’ equity. Instead, the new rule optionally requires the presentation of net income and comprehensive income in one continuous statement, or in two separate, but consecutive statements. The Company has presented net income, other comprehensive income and its components, and comprehensive income in a new, separate statement called theCondensed Consolidated Statements of Comprehensive Income.While the Company’s presentation of comprehensive income has changed, there are no changes to the components or amounts that are recognized in net income or other comprehensive income under current accounting guidance. As a result, the adoption of this new rule did not impact the Company’s results of operations, cash flows, or financial position.
Principles of consolidation. The accompanying interim condensed consolidated financial statements include the accounts of the Company and its wholly- and majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated.
Use of estimates. The preparation of the accompanying interim condensed consolidated financial statements requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the valuation of accounts receivable, goodwill, intangible assets, and other long-lived assets, as well as tax accruals and other liabilities. In addition, estimates are used in revenue recognition, income tax expense, performance-based compensation charges, depreciation and amortization, and the allowance for losses. Management believes its use of estimates in these interim condensed consolidated financial statements is reasonable.
Management continuously evaluates and revises its estimates using historical experience and other factors, including the general economic environment and actions it may take in the future. SuchManagement adjusts these estimates are adjusted 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 suchour estimates and actual results could be material and would be reflected in the Company’s consolidated financial statements in future periods.
Adoption of new accounting rules. The Company adopted new accounting rules in the three months ended March 31, 2013 related to accumulated other comprehensive income (see Note 2 — AcquisitionComprehensive Income) and balance sheet offsetting of receivables and payables arising from derivative contracts (see Note 10 — Derivatives and Hedging). The adoption of these new rules resulted in additional disclosures only.
Note 2 — Comprehensive Income
On May 31, 2012,January 1, 2013, the Company acquired Ideas International Limitedadopted FASB Accounting Standards Update (“Ideas International”ASU”) 2013-02,Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, a publicly-owned Australian corporation (ASX: IDE) headquartered outsidean amendment to FASB ASC Topic 220, Comprehensive Income. ASU 2013-02 requires entities to prospectively disclose additional information about changes in accumulated other comprehensive income (“AOCI’) balances by component and items reclassified out of Sydney with 40 employees that provides intelligence on IT infrastructure configurations and pricing dataAOCI to IT professionals. The Company paid aggregate cash considerationincome during the period. ASU 2013-02 does not change the existing requirement to present the components of $18.8 million for 100% ofcomprehensive income in the outstanding shares of Ideas International. The Company’s strategic objectives in acquiring Ideas International are to leverage Gartner’s scale and worldwide distribution capability and introduce Ideas International’s products and services to Gartner’s much larger end user client base and to further penetrate the technology vendor market. Ideas International’s business operations have been integrated into the Company’s Research segment.
Gartner’s financial statements includeand is intended to improve the operating resultstransparency of Ideas International beginning withreclassification amounts and their impact on the datefinancial statements. The information required by ASU 2013-02 is presented below.
7 |
The changes in AOCI by component (net of acquisition. These operating results were not material to the Company’s consolidated or segment operating resultstax) for the three and nine months ended
September 30, 2012. The Company recorded $0.9 million and $2.1 million of pre-tax acquisition and integration charges related to the acquisition March 31, 2013 are presented in the three and nine months ended September 30, 2012, respectively, which are classified in Acquisition and integration charges in the Condensed Consolidated Statements of Operations. Included in these charges are legal, consulting, and severance costs, all of which were direct and incremental charges from the acquisition. Had the Company acquired Ideas International on January 1, 2010, the impact to the Company’s operating results for 2011 and 2010 would not have been material, and as a result pro forma financial information for those periods has not been presented.
The acquisition was accounted for under the acquisition method of accounting as prescribed by FASB ASC Topic 805,Business Combinations.The acquisition method of accounting requires the consideration paid to be allocated to the net assets and liabilities acquired based on their estimated fair values as of the acquisition date, and any excess of the purchase price over the estimated fair value of the net assets acquired, including identifiable intangible assets, must be allocated to goodwill. The Company considers its allocation of the respective purchase price to be preliminary, particularly with respect to the valuation of certain tax related items. In accordance with FASB ASC Topic 805, a final determination of the purchase price allocation and resulting goodwill must be made within one year of the acquisition date. The Company anticipates that none of the recorded goodwill arising from the acquisition will be deductible for tax purposes. All of the recorded goodwill was included in the Company’s Research segment. The Company believes the recorded goodwill is supported by the anticipated revenues related to the acquisition.
The following table summarizes the preliminary allocation of the purchase price to the fair value of the assets acquired and liabilities assumed in the acquisition (dollars in(in thousands) (1):
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|
|
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Assets: |
|
|
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|
Cash |
| $ | 8,502 |
|
Fees receivable |
|
| 1,310 |
|
Prepaid expenses and other current assets |
|
| 560 |
|
Goodwill and amortizable intangible assets (1) |
|
| 15,990 |
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| ||
Total assets |
| $ | 26,362 |
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| ||
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Liabilities: |
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Accounts payable and accrued liabilities |
| $ | 2,203 |
|
Deferred revenues (2) |
|
| 5,321 |
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| ||
Total liabilities |
| $ | 7,524 |
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Interest Rate Swap (Cash Flow Hedge) | Defined Benefit Pension Plans | Foreign Currency Translation Adjustments | Total | |||||||||||||
Balance – December 31, 2012 | $ | (6,010 | ) | $ | (1,578 | ) | $ | 13,556 | $ | 5,968 | ||||||
Changes during the period: | ||||||||||||||||
Other comprehensive (loss) income before reclassifications | (4 | ) | 17 | (3,789 | ) | (3,776 | ) | |||||||||
Reclassifications from AOCI to income (2), (3) | 565 | 6 | — | 571 | ||||||||||||
Other comprehensive income (loss) for the period | 561 | 23 | (3,789 | ) | (3,205 | ) | ||||||||||
Balance – March 31, 2013 | $ | (5,449 | ) | $ | (1,555 | ) | $ | 9,767 | $ | 2,763 |
(1) | Amounts in parentheses represent debits. | |
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| The |
Note 3 — Earnings per Share
The following table sets forth the calculations of basic and diluted earnings per share (in thousands, except per share data):
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| Three Months Ended |
| Nine Months Ended |
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| 2012 |
| 2011 |
| 2012 |
| 2011 |
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Numerator: |
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Net income used for calculating basic and diluted earnings per share |
| $ | 31,375 |
| $ | 30,464 |
| $ | 107,080 |
| $ | 91,878 |
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Denominator: |
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Weighted average number of common shares used in the calculation of basic earnings per share |
|
| 93,522 |
|
| 96,057 |
|
| 93,429 |
|
| 96,462 |
|
Common stock equivalents associated with stock-based compensation plans (1) |
|
| 2,089 |
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| 2,202 |
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| 2,362 |
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| 3,005 |
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| ||||||||
Shares used in the calculation of diluted earnings per share |
|
| 95,611 |
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| 98,259 |
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| 95,791 |
|
| 99,467 |
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Basic earnings per share |
| $ | 0.34 |
| $ | 0.32 |
| $ | 1.15 |
| $ | 0.95 |
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Diluted earnings per share |
| $ | 0.33 |
| $ | 0.31 |
| $ | 1.12 |
| $ | 0.92 |
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Three Months Ended March 31, | ||||||||
2013 | 2012 | |||||||
Numerator: | ||||||||
Net income used for calculating basic and diluted earnings per share | $ | 36,675 | $ | 34,221 | ||||
Denominator: | ||||||||
Weighted average number of common shares used in the calculation of basic earnings per share | 93,595 | 93,416 | ||||||
Common stock equivalents associated with stock-based compensation plans (1) | 1,942 | 2,783 | ||||||
Shares used in the calculation of diluted earnings per share | 95,537 | 96,199 | ||||||
Basic earnings per share | $ | 0.39 | $ | 0.37 | ||||
Diluted earnings per share | $ | 0.38 | $ | 0.36 |
(1) | ||
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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-service-based and performance-based restricted stock units, and common stock equivalents. At September 30, 2012,March 31, 2013, the Company had 6.36.0 million shares of its common stock, par value $.0005 per share (the “Common Stock”) available for awards of stock-based compensation under its 2003 Long-Term Incentive Plan.
The Company accounts for stock-based compensation awards in accordance with FASB ASC Topics 505 and 718, as interpreted by SEC Staff Accounting Bulletins No. 107 (“SAB No. 107”) and No. 110 (“SAB No. 110”). Stock-based compensation expense is based on the fair value of the award on the date of grant, which is then recognized as expense over the related service period, net of estimated forfeitures. The service period is the period over which the related service is performed, which is generally the same as the vesting period. Currently the Company issues treasury shares upon the exercise, release or settlement of stock-based compensation awards.
Determining the appropriate fair value model and calculating the fair value of stock-based compensation awards requires the input of certain complex and subjective assumptions, including the expected life of the stock compensation awards and the Common Stock price volatility. In addition, determining the appropriate amount of associated periodic expense requires management to estimate the amount of employee forfeitures and the likelihood of the achievement of certain performance targets. The assumptions used in calculating the fair value of stock-based compensation awards and the associated periodic expense represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change and the
8 |
Company deems it necessary in the future to modify the assumptions it made or to use different assumptions, or if the quantity and nature of the Company’s stock-based compensation awards changes, then the amount of expense may need to be adjusted and future stock-based compensation expense could be materially different from what has been recorded in the current period.
Stock-Based Compensation Expense
The Company recognized the following amounts of stock-based compensation expense by award type and expense category in the periods indicated (in millions):
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| Three Months Ended |
| Nine Months Ended |
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Award type: |
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
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Stock appreciation rights (SARs) |
| $ | 2.4 |
| $ | 1.0 |
| $ | 5.0 |
| $ | 3.4 |
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Common stock equivalents (CSEs) |
|
| 0.1 |
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| 0.1 |
|
| 0.4 |
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| 0.4 |
|
Restricted stock units (RSUs) |
|
| 6.7 |
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| 6.7 |
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| 22.6 |
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| 21.0 |
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Total expense (1) |
| $ | 9.2 |
| $ | 7.8 |
| $ | 28.0 |
| $ | 24.8 |
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Stock-based compensation expense was recognized in the Condensed Consolidated Statements of Operations as follows (in millions):
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| Three Months Ended |
| Nine Months Ended |
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Amount recorded in: |
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
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| |||||||||
Cost of services and product development |
| $ | 3.5 |
| $ | 3.3 |
| $ | 12.0 |
| $ | 11.3 |
|
Selling, general and administrative |
|
| 5.7 |
|
| 4.5 |
|
| 16.0 |
|
| 13.5 |
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| ||||||||
Total expense (1) |
| $ | 9.2 |
| $ | 7.8 |
| $ | 28.0 |
| $ | 24.8 |
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Three Months Ended March 31, | ||||||||
Award type: | 2013 | 2012 | ||||||
Stock appreciation rights | $ | 1.8 | $ | 1.6 | ||||
Common stock equivalents | 0.1 | 0.1 | ||||||
Restricted stock units | 10.4 | 9.2 | ||||||
Total | $ | 12.3 | $ | 10.9 |
Three Months Ended March 31, | ||||||||
Amount recorded in: | 2013 | 2012 | ||||||
Cost of services and product development | $ | 5.6 | $ | 5.3 | ||||
Selling, general and administrative | 6.7 | 5.6 | ||||||
Total stock-based compensation expense (1) | $ | 12.3 | $ | 10.9 |
(1) | ||
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|
As of September 30, 2012,March 31, 2013, the Company had $46.6$61.5 million of total unrecognized stock-based compensation cost, which is expected to be expensed over the remaining weighted-average service period of approximately 2.32.7 years.
Stock-Based Compensation Awards
The following disclosures provide information regarding the Company’s stock-based compensation awards, all of which are classified as equity awards in accordance with FASB ASC Topic 505:
Stock Appreciation Rights
Stock-settled stock appreciation rights (SARs) permit the holder to participate in the appreciation of the Common Stock. SARs are settled in shares of Common Stock by the employee once the applicable vesting criteria have been met. SARs vest ratably over a four-
yearfour-year service period and expire seven years from the grant date. The fair value of SARs awards is recognized as compensation expense on a straight-line basis over four years. At the present time, SARs arehave only been awarded only to the Company’s executive officers.
When SARs are exercised, the number of shares of Common Stock issued is calculated as follows: (1) the total proceeds from the SARs exercise (calculated as the closing price of the Common Stock on the date of exercise less the exercise price of the SARs, multiplied by the number of SARs exercised) is divided by (2) the closing price of the Common Stock as reported on the New York Stock Exchange on the exercise date. The Company withholds a portion of the shares of Common Stock issued upon exercise to satisfy minimum statutory tax withholding requirements. SARs recipients do not have any stockholder rights until after actual shares of Common Stock are issued in respect of the award, which is subject to the prior satisfaction of the vesting and other criteria relating to such grants.
The following table summarizes changes in SARs outstanding during the ninethree months ended September 30, 2012:March 31, 2013:
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| SARs |
| Per Share |
| Per Share |
| Weighted |
| ||||
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| ||||||||
Outstanding at December 31, 2011 |
|
| 2.5 |
| $ | 20.39 |
| $ | 7.66 |
|
| 4.00 years |
|
Granted |
|
| 0.4 |
|
| 37.81 |
|
| 12.99 |
|
| 6.36 years |
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Forfeited |
|
| — |
|
| — |
|
| — |
|
| n/a |
|
Exercised |
|
| (0.8 | ) |
| 18.60 |
|
| 6.86 |
|
| n/a |
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| ||
Outstanding at September 30, 2012 (1), (2) |
|
| 2.1 |
| $ | 24.27 |
| $ | 8.94 |
|
| 4.23 years |
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Vested and exercisable at September 30, 2012 (2) |
|
| 0.9 |
| $ | 18.50 |
| $ | 7.08 |
|
| 3.17 years |
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SARs (in millions) | Per Share Weighted- Average Exercise Price | Per Share Weighted- Average Grant Date Fair Value | Weighted Average Remaining Contractual Term | |||||||||||||
Outstanding at December 31, 2012 | 2.0 | $ | 24.59 | $ | 9.04 | 4.10 years | ||||||||||
Granted | 0.4 | 49.37 | 14.88 | 6.87 years | ||||||||||||
Forfeited | — | — | — | n/a | ||||||||||||
Exercised | (0.1 | ) | 20.25 | 7.58 | n/a | |||||||||||
Outstanding at March 31, 2013 (1), (2) | 2.3 | $ | 28.62 | $ | 10.00 | 4.41 years | ||||||||||
Vested and exercisable at March 31, 2013(2) | 1.3 | $ | 20.42 | $ | 7.73 | 3.42 years |
n/a=not applicableapplicable.
9 |
(1) | ||
| As of | |
(2) |
|
The fair value of the SARs was estimated on the date of grant using the Black-Scholes-Merton valuation model with the following weighted-average assumptions:
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| Nine Months Ended |
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| 2012 |
| 2011 |
| ||
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Expected dividend yield (2) |
|
| 0 | % |
| 0 | % |
Expected stock price volatility (3) |
|
| 40 | % |
| 38 | % |
Risk-free interest rate (4) |
|
| 0.8 | % |
| 2.2 | % |
Expected life in years (5) |
|
| 4.6 |
|
| 4.8 |
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|
Three Months Ended March 31, | ||||||||
2013 | 2012 | |||||||
Expected dividend yield(1) | 0 | % | 0 | % | ||||
Expected stock price volatility(2) | 35 | % | 40 | % | ||||
Risk-free interest rate(3) | 0.8 | % | 0.8 | % | ||||
Expected life in years(4) | 4.5 | 4.6 |
(1) | ||
|
| |
| The dividend yield assumption is based on the history and expectation of the Company’s dividend payouts. Historically, Gartner has not paid cash dividends on its Common Stock. | |
| 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. | |
| The risk-free interest rate is based on the yield of a U.S. Treasury security with a maturity similar to the expected life of the award. | |
| The expected life represents the Company’s weighted-average estimate of the period of time the SARs are expected to be outstanding |
Restricted Stock Units
Restricted stock units (RSUs) give the awardee the right to receive shares of Common Stock when the vesting conditions are met and the restrictions lapse, and each RSU that vests entitles the awardee to one common share. RSU awardees do not have any of the rights of a Gartner stockholder, including voting rights and the right to receive dividends and distributions, until after the common shares are released. The fair value of RSUs is determined on the date of grant based on the closing price of the Common Stock as reported by the New York Stock Exchange on that date. Service-based RSUs vest ratably over four years and are expensed on a straight-line basis over four years. Performance-based RSUs are subject to both performance and service conditions, vest ratably over four years, and are expensed on an accelerated basis.
The following table summarizes the changes in RSUs outstanding during the ninethree months ended September 30, 2012:March 31, 2013:
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| Restricted |
| Per Share |
| ||
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| ||||
Outstanding at December 31, 2011 |
|
| 3.1 |
| $ | 21.53 |
|
Granted (1) |
|
| 0.7 |
|
| 37.97 |
|
Vested and released |
|
| (1.3 | ) |
| 19.51 |
|
Forfeited |
|
| — |
|
| — |
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| ||
Outstanding at September 30, 2012 (2), (3) |
|
| 2.5 |
| $ | 27.93 |
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|
Restricted Stock Units (RSUs) (in millions) | Per Share Weighted Average Grant Date Fair Value | |||||||
Outstanding at December 31, 2012 | 2.5 | $ | 27.95 | |||||
Granted(1) | 0.6 | 49.37 | ||||||
Vested and released | (1.2 | ) | 22.08 | |||||
Forfeited | — | — | ||||||
Outstanding at March 31, 2013(2), (3) | 1.9 | $ | 37.37 |
(1) | ||
| The | |
(2) | The Company expects that substantially all of the outstanding awards will vest in future periods. | |
(3) | The weighted-average remaining contractual term of the outstanding RSUs is approximately |
10 |
Common Stock Equivalents
Common stock equivalents (CSEs) are convertible into Common Stock and each CSE entitles the holder to one common share. Members of our Board of Directors receive directors’ fees payable in CSEs unless they opt to receive up to 50% of the fees in cash. Generally, the CSEs have no defined term and are converted into common shares when service as a director terminates unless the director has elected an accelerated release. The fair value of the CSEs is determined on the date of grant based on the closing price of the Common Stock as reported by the New York Stock Exchange on that date. CSEs vest immediately and as a result are recorded as expense on the date of grant.
The following table summarizes the changes in CSEs outstanding during the ninethree months ended September 30, 2012:
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| Common |
| Per Share |
| ||
|
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| ||||
Outstanding at December 31, 2011 |
|
| 97,268 |
| $ | 15.93 |
|
Granted |
|
| 8,631 |
|
| 44.63 |
|
Converted to common shares |
|
| (6,173 | ) |
| 44.60 |
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| ||
Outstanding at September 30, 2012 |
|
| 99,726 |
| $ | 16.64 |
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|
|
Stock OptionsMarch 31, 2013:
Historically, the Company granted stock options to employees that allowed them to purchase shares of Common Stock at a certain price. The Company has
Common Stock Equivalents (CSEs) | Per Share Weighted Average Grant Date Fair Value | |||||||
Outstanding at December 31, 2012 | 100,545 | $ | 16.89 | |||||
Granted | 2,387 | 54.48 | ||||||
Converted to common shares | (1,925 | ) | 54.48 | |||||
Outstanding at March 31, 2013 | 101,007 | $ | 17.06 |
na=not made any stock option grants since 2006. All outstanding options are fully vested and there is no remaining unamortized cost. The Company received $7.7 million and $15.2 million in cash from option exercises in the nine months ended September 30, 2012 and 2011, respectively.available
The following table summarizes the changes in stock options outstanding during the nine months ended September 30, 2012:
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| Options in |
| Per Share |
| Weighted |
| Aggregate |
| ||||
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Vested and outstanding at December 31, 2011 |
|
| 1.2 |
| $ | 10.93 |
|
| 1.47 years |
| $ | 27.7 |
|
Exercised (1) |
|
| (0.8 | ) |
| 10.80 |
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| n/a |
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| n/a |
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| ||
Vested and outstanding at September 30, 2012 |
|
| 0.4 |
| $ | 11.13 |
|
| 1.30 years |
| $ | 15.6 |
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n/a=not applicable |
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Employee Stock Purchase Plan
The Company has an employee stock purchase plan (the “ESP Plan”) under which eligible employees are permitted to purchase Common Stock through payroll deductions, which may not exceed 10% of an employee’s compensation (or a maximum of $23,750 in any calendar year), at a price equal to 95% of the closing price of the Common Stock as reported by the New York Stock Exchange at the end of each offering period.
At September 30, 2012,March 31, 2013, the Company had 1.31.2 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 $2.9$1.3 million and $2.6$1.1 million in cash from share purchases under the ESP Plan induring the ninethree months ended September 30,March 31, 2013 and 2012, and 2011, respectively.
Note 5 — Segment Information
The Company manages its business through three reportable segments: Research, Consulting and Events. Research consists primarily of subscription-based research products, access to research inquiry, peer networking services, and membership programs. Consulting consists primarily of consulting, measurement engagements, and strategic advisory services. Events consists of various symposia, conferences, and exhibitions.
The Company evaluates reportable segment performance and allocates resources based on gross contribution margin. Gross contribution, as presented in the table below, is defined as operating income excluding certain Cost of services and product development andexpenses, Selling, general and administrative expenses,expense, depreciation, amortization of intangibles, and acquisition and integration charges. Certain bonus and fringe benefit costs included in consolidated Cost of services and product development are not allocated to segment expense. The accounting policies used by the reportable segments are the same as those used by the Company. There are no intersegment revenues.
The Company does not identify or allocate assets, including capital expenditures, by reportable segment. Accordingly, assets are not reported by segment because the information is not available by segment and is not reviewed in the evaluation of segment performance or in making decisions in the allocation of resources.
The following tables present information about the Company’s reportable segments (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2012: |
| Research |
| Consulting |
| Events |
| Consolidated |
| ||||
|
|
|
|
|
| ||||||||
Revenues |
| $ | 284,048 |
| $ | 71,731 |
| $ | 18,627 |
| $ | 374,406 |
|
Gross contribution |
|
| 193,540 |
|
| 24,380 |
|
| 4,511 |
|
| 222,431 |
|
Corporate and other expenses |
|
|
|
|
|
|
|
|
|
|
| (172,663 | ) |
|
|
|
|
|
|
|
|
|
|
|
| ||
Operating income |
|
|
|
|
|
|
|
|
|
| $ | 49,768 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2011: |
| Research |
| Consulting |
| Events |
| Consolidated |
| ||||
|
|
|
|
|
| ||||||||
Revenues |
| $ | 255,979 |
| $ | 70,815 |
| $ | 18,990 |
| $ | 345,784 |
|
Gross contribution |
|
| 173,615 |
|
| 24,458 |
|
| 5,553 |
|
| 203,626 |
|
Corporate and other expenses |
|
|
|
|
|
|
|
|
|
|
| (156,376 | ) |
|
|
|
|
|
|
|
|
|
|
|
| ||
Operating income |
|
|
|
|
|
|
|
|
|
| $ | 47,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2013: | Research | Consulting | Events | Consolidated | ||||||||||||
Revenues | $ | 310,331 | $ | 72,633 | $ | 23,790 | $ | 406,754 | ||||||||
Gross contribution | 215,214 | 22,538 | 7,108 | 244,860 | ||||||||||||
Corporate and other expenses | (190,855 | ) | ||||||||||||||
Operating income | $ | 54,005 |
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2012: |
| Research |
| Consulting |
| Events |
| Consolidated |
| ||||
|
|
|
|
|
| ||||||||
Revenues |
| $ | 836,970 |
| $ | 222,970 |
| $ | 81,119 |
| $ | 1,141,059 |
|
Gross contribution |
|
| 571,547 |
|
| 79,886 |
|
| 32,867 |
|
| 684,300 |
|
Corporate and other expenses |
|
|
|
|
|
|
|
|
|
|
| (518,254 | ) |
|
|
|
|
|
|
|
|
|
|
|
| ||
Operating income |
|
|
|
|
|
|
|
|
|
| $ | 166,046 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2011: |
| Research |
| Consulting |
| Events |
| Consolidated |
| ||||
|
|
|
|
|
| ||||||||
Revenues |
| $ | 749,429 |
| $ | 219,407 |
| $ | 72,058 |
| $ | 1,040,894 |
|
Gross contribution |
|
| 506,420 |
|
| 78,820 |
|
| 28,533 |
|
| 613,773 |
|
Corporate and other expenses |
|
|
|
|
|
|
|
|
|
|
| (469,174 | ) |
|
|
|
|
|
|
|
|
|
|
|
| ||
Operating income |
|
|
|
|
|
|
|
|
|
| $ | 144,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2012: | Research | Consulting | Events | Consolidated | ||||||||||||
Revenues | $ | 274,620 | $ | 74,563 | $ | 19,988 | $ | 369,171 | ||||||||
Gross contribution | 188,602 | 27,600 | 7,895 | 224,097 | ||||||||||||
Corporate and other expenses | (170,541 | ) | ||||||||||||||
Operating income | $ | 53,556 |
Note 6 — Goodwill and Intangible Assets
Goodwill
Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value of the tangible and identifiable intangible net assets acquired. The evaluation of goodwill is performed in accordance with FASB ASC Topic 350, which requires an annual assessment of potential goodwill impairment at the reporting unit level. A reporting unit can be an operating segment or a business if discrete financial information is prepared and reviewed by management. The Company has three reporting units: Research, Consulting, and Events.
The following table presents changes to the carrying amount of goodwill by reporting unit during the ninethree months ended September 30, 2012March 31, 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Research |
| Consulting |
| Events |
| Total |
| ||||
|
|
|
|
|
| ||||||||
Balance, December 31, 2011 |
| $ | 366,980 |
| $ | 99,677 |
| $ | 41,893 |
| $ | 508,550 |
|
Addition due to acquisition (1) |
|
| 7,455 |
|
| — |
|
| — |
|
| 7,455 |
|
Foreign currency translation adjustments |
|
| 2,488 |
|
| 683 |
|
| 24 |
|
| 3,195 |
|
|
|
|
|
|
| ||||||||
Balance, September 30, 2012 (2) |
| $ | 376,923 |
| $ | 100,360 |
| $ | 41,917 |
| $ | 519,200 |
|
|
|
|
|
|
|
Research | Consulting | Events | Total | |||||||||||||
Balance, December 31, 2012 (1) | $ | 377,225 | $ | 100,349 | $ | 41,932 | $ | 519,506 | ||||||||
Foreign currency translation adjustments and other (2) | (2,106 | ) | (837 | ) | (38 | ) | (2,981 | ) | ||||||||
Balance, March 31, 2013 | $ | 375,119 | $ | 99,512 | $ | 41,894 | $ | 516,525 |
(1) | ||
|
| |
| The Company does not have any accumulated goodwill impairment losses. | |
(2) | Includes the impact of foreign currency translation and certain immaterial goodwill adjustments. |
Amortizable Intangible Assets
The following tables present reconciliations of the carrying amounts of amortizable intangible assets as of the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012 |
| Trade |
| Customer |
| Content |
| Software |
| Total |
| |||||
|
|
|
|
|
| |||||||||||
Gross cost, December 31, 2011 |
| $ | 5,758 |
| $ | 7,210 |
| $ | — |
| $ | — |
| $ | 12,968 |
|
Additions due to acquisition (1) |
|
| 240 |
|
| 3,170 |
|
| 3,170 |
|
| 1,955 |
|
| 8,535 |
|
Foreign currency translation adjustments |
|
| 18 |
|
| 207 |
|
| 234 |
|
| 134 |
|
| 593 |
|
|
|
|
|
|
|
| ||||||||||
Gross cost |
|
| 6,016 |
|
| 10,587 |
|
| 3,404 |
|
| 2,089 |
|
| 22,096 |
|
Accumulated amortization (2) |
|
| (3,210 | ) |
| (5,238 | ) |
| (284 | ) |
| (222 | ) |
| (8,954 | ) |
|
|
|
|
|
|
| ||||||||||
Balance, September 30, 2012 |
| $ | 2,806 |
| $ | 5,349 |
| $ | 3,120 |
| $ | 1,867 |
| $ | 13,142 |
|
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011 |
| Trade |
| Customer |
| Total |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||||||
Gross cost, December 31, 2010 |
| $ | 5,758 |
| $ | 7,210 |
| $ | 12,968 |
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
| — |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Gross cost |
|
| 5,758 |
|
| 7,210 |
|
| 12,968 |
|
|
|
|
|
|
|
Accumulated amortization (2) |
|
| (2,303 | ) |
| (3,605 | ) |
| (5,908 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance, December 31, 2011 |
| $ | 3,455 |
| $ | 3,605 |
| $ | 7,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013 | Trade Name | Customer Relationships | Content | Software | Total | |||||||||||||||
Gross cost, December 31, 2012 | $ | 6,019 | $ | 10,562 | $ | 3,447 | $ | 2,124 | $ | 22,152 | ||||||||||
Foreign currency translation adjustments | — | 13 | (14 | ) | (18 | ) | (19 | ) | ||||||||||||
Gross cost | 6,019 | 10,575 | 3,433 | 2,106 | 22,133 | |||||||||||||||
Accumulated amortization (1) | (3,852 | ) | (6,559 | ) | (713 | ) | (532 | ) | (11,656 | ) | ||||||||||
Balance, March 31, 2013 | $ | 2,167 | $ | 4,016 | $ | 2,720 | $ | 1,574 | $ | 10,477 |
December 31, 2012 | Trade Name | Customer Relationships | Content | Software | Total | |||||||||||||||
Gross cost | $ | 6,019 | $ | 10,562 | $ | 3,447 | $ | 2,124 | $ | 22,152 | ||||||||||
Accumulated amortization (1) | (3,531 | ) | (5,896 | ) | (497 | ) | (407 | ) | (10,331 | ) | ||||||||||
Balance, December 31, 2012 | $ | 2,488 | $ | 4,666 | $ | 2,950 | $ | 1,717 | $ | 11,821 |
(1) | ||
|
| |
| Intangible assets are being amortized against earnings over the following periods: Trade name—2 to 5 years; Customer relationships—4 years; Content—4 years; Software—3 years. |
Aggregate amortization expense related to intangible assets was $1.4$1.3 million and $0.7 million for the three months ended September 30,March 31, 2013 and 2012, and 2011, respectively, and $3.0 million and $5.8 million for the nine months ended September 30, 2012 and 2011, respectively.
The estimated future amortization expense by year from amortizable intangibles is as follows (in thousands):
|
|
|
|
|
2012 (remaining three months) |
| $ | 1,370 |
|
2013 |
|
| 5,475 |
|
2014 |
|
| 3,600 |
|
2015 |
|
| 1,995 |
|
2016 |
|
| 702 |
|
|
|
| ||
|
| $ | 13,142 |
|
|
|
|
2013 (remaining nine months) | $ | 4,155 | ||
2014 | 3,610 | |||
2015 | 2,000 | |||
2016 | 712 | |||
$ | 10,477 |
12 |
Note 7 — Debt
2013 Credit Agreement
The
On March 7, 2013, the Company hasentered into a new credit arrangement that(the “2013 Credit Agreement”) with a syndication of banks led by JPMorgan Chase to take advantage of favorable financing conditions and obtain additional liquidity through a larger revolving credit facility. The 2013 Credit Agreement provides for a five-year, $200.0$150.0 million term loan and a $400.0$600.0 million revolving credit facility that it entered into in December 2010 (the “2010 Credit Agreement”). The 2010facility. In addition, the 2013 Credit Agreement contains an expansion feature by which the term loan and revolving credit facility may be increased, at the Company’s option and under certain conditions, by up to an additional $150.0$250.0 million in the aggregate.
The term loan will be repaid in 1916 consecutive quarterly installments which commenced on March 31, 2011,commencing June 30, 2013, plus a final payment due on December 22, 2015,March 7, 2018, and may be prepaid at any time without penalty or premium (other than applicable breakage costs) at the Company’s option. The revolving credit facility may be used for loans, and up to $40.0 million may be used for letters of credit. The revolving loans may be borrowed, repaid and re-borrowed until December 22, 2015,March 7, 2018, at which time all amounts borrowed must be repaid.
On March 7, 2013, the Company drew down $150.0 million from the term loan and $50.0 million from the revolving credit facility which was used to repay amounts outstanding under the Company’s prior credit arrangement, which was terminated in connection with the refinancing. Future amounts to be drawn down under the revolving credit facility will be used for general working capital purposes. The Company recorded a charge of $0.3 million for capitalized debt issuance costs related to the termination of the previous credit arrangement, which was recorded in Interest expense, net in the Condensed Consolidated Statements of Operations. The Company incurred $3.6 million in debt issuance costs related to the new credit facility, which was capitalized and will be amortized to interest expense over the term of the 2013 Credit Agreement.
Amounts borrowed under the 20102013 Credit Agreement bear interest at a rate equal to, at the Company’sGartner’s option, either (i) the greatest of: the administrative agent’sAdministrative Agent’s prime rate; the average rate on overnight federal funds plus 1/2 of 1%; and the Eurodollar rate (adjusted for statutory reserves) plus 1%, in each case plus a margin equal to between 0.50%0.25% and 1.25%0.75% depending on the Company’sGartner’s leverage ratio as of the end of the four consecutive fiscal quarters most recently ended, or (ii) the Eurodollar rate (adjusted for statutory reserves) plus a margin equal to between 1.50%1.25% and 2.25%1.75%, depending on the Company’sGartner’s leverage ratio as of the end of the four consecutive fiscal quarters most recently ended.
The 20102013 Credit Agreement contains certain customary restrictive loan covenants, including, among others, financial covenants requiring a maximum leverage ratio, a minimum interest expense coverage ratio, and covenants limiting the Company’sGartner’s ability to incur indebtedness, grant liens, make acquisitions, be acquired, dispose of assets, pay dividends, repurchase stock, make capital expenditures, make investments and enter into certain transactions with affiliates. The 2013 Credit Agreement contains customary events of default that include, among others, non-payment of principal, interest or fees, inaccuracy of representations and warranties, violation of covenants, cross defaults to certain other indebtedness, bankruptcy and insolvency events, ERISA defaults, material judgments, and events constituting a change of control. The occurrence of an event of default will increase the applicable rate of interest by 2.0%, allows the lenders to terminate their obligations to lend under the 2013 Credit Agreement and could result in the acceleration of Gartner’s obligations under the credit facility and an obligation of any or all of the guarantors to pay the full amount of Gartner’s obligations under the credit facility. As of March 31, 2013, the Company was in full compliance with these covenants as of September 30, 2012 and December 31, 2011.the loan covenants.
The following table provides information regarding the Company’s borrowings under the 2010 Credit Agreement:total outstanding borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
Description: |
|
| Amount |
| Contractual |
| Amount |
| |||
|
|
|
|
| |||||||
Term loan (1) |
| $ | 157,500 |
| 1.86 | % |
| $ | 180,000 |
| |
Revolver (1), (2) |
|
| 42,500 |
| 1.86 | % |
|
| 20,000 |
| |
|
|
|
|
|
|
| |||||
Total |
| $ | 200,000 |
|
|
|
| $ | 200,000 |
| |
|
|
|
|
|
|
|
Description: | Amount Outstanding March 31, 2013 (In thousands) | Contractual Annualized Interest Rate March 31, 2013 | Amount Outstanding December 31, 2012 (In thousands) | |||||||||
Term loans (1) | $ | 150,000 | 1.66 | % | $ | 150,000 | ||||||
Revolver loans (1), (2) | 50,000 | 1.66 | % | 50,000 | ||||||||
Other (3) | 5,000 | 3.00 | % | 5,000 | ||||||||
Total | $ | 205,000 | $ | 205,000 |
(1) | ||
|
|
3.64%. | |
| |
(2) | The Company had |
13 |
(3) | The Company borrowed $5.0 million in December 2012 as part of an economic development program through the State of Connecticut in connection with the Company’s renovation of its Stamford headquarters facility. The loan has a 10 year maturity and bears a 3.0% fixed rate of interest. Principal payments are deferred for the first five years and the loan may be repaid at any point by the Company without penalty. The loan has a principal forgiveness provision in which up to $2.5 million of the loan may be forgiven if the Company meets certain employment targets in the State of Connecticut during the first five years of the loan. |
Interest Rate Swap Hedge
The Company has a $200.0 million notional fixed-for-floating interest rate swap contract which it designates as a hedge of the forecasted interest payments on the Company’s variable rate borrowings. Under the swap terms, the Company pays a base fixed rate of 2.26% and in return receives a floating Eurodollar base rate on $200.0 million of notional borrowings. The Company entered into this swap contract in December 2010 and it matures in September 2015.
The Company accounts for the interest rate swap as a cash flow hedge in accordance with FASB ASC Topic 815. Since the swap is hedging forecasted interest payments, changes in the fair value of the swap are recorded in OCI as long as the swap continues to be a highly effective hedge of the designated interest rate risk. Any ineffective portion of change in the fair value of the hedge is recorded in earnings. There was no ineffective portionThe swap continued to be a highly effective hedge of the hedge at September 30, 2012 or Decemberforecasted interest payments as of March 31, 2011.2013. The interest rate swap had a negative fair value to the Company of $11.0$9.1 million and $9.9$10.0 million at September 30, 2012March 31, 2013 and December 31, 2011,2012, respectively, which is deferred and classified in OCI, net of tax effect.
Letters of Credit
The Company had $10.1$10.2 million of letters of credit and related guarantees outstanding at September 30, 2012.March 31, 2013. The Company enters into these instruments in the ordinary course of business to facilitate transactions with customers and others.
Note 8 — Equity
Share Repurchase Program
The Company has a $500.0 million share repurchase program, of which $231.0$186.6 million remained available for share repurchases as of September 30, 2012.March 31, 2013. Repurchases may be made from time-to-time through open market purchases, private transactions, tender offers or other transactions. The amount and timing of repurchases will be subject to the availability of stock, prevailing market conditions, the market price of the stock, the Company’s financial performance and other conditions. Repurchases may also be made from time-to-time in connection with the settlement of the Company’s shared-based compensation awards. Repurchases may be funded from operating cash flow or borrowings.
The Company’s share repurchase activity is summarizedincluded in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
|
|
| ||||||||||
|
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
|
|
|
|
|
| ||||||||
Number of shares repurchased (1) |
|
| 95,833 |
|
| 1,543,069 |
|
| 2,260,093 |
|
| 3,886,521 |
|
Cost of repurchased shares (in thousands) |
| $ | 4,626 |
| $ | 53,354 |
| $ | 89,300 |
| $ | 141,214 |
|
|
|
|
|
|
|
Three Months Ended March 31, | ||||||||
2013 | 2012 | |||||||
Number of shares repurchased (1) | 976,943 | 1,979,429 | ||||||
Cost of repurchased shares (in thousands) | $ | 48,527 | $ | 77,158 |
(1) | ||
| The average purchase price for the shares was |
Note 9 — Income Taxes
The provision for income taxes was $15.4$15.1 million for the three months ended September 30, 2012March 31, 2013 compared to $14.0$16.2 million in the prior year quarter.three months ended March 31, 2012. The effective tax rate was 33.0%29.2% for the three months ended September 30, 2012March 31, 2013 and 31.4%32.1% for the same period in 2011.2012. The increasedecrease in the effective tax rate was primarily due to a changethe impact of tax law changes.The American Taxpayer Relief Act of 2012 (the “Tax Act”) was enacted in January of 2013 and contains beneficial tax provisions for the Company. Since the Tax Act was enacted in 2013, approximately $1.5 million of tax benefits relating to its application was recorded by the Company in the estimated annual mixfirst quarter of pre-tax income by jurisdiction. The provision for income taxes was $50.6 million for the nine months ended September 30, 2012 compared to $43.4 million for the same period in 2011. The effective tax rate was 32.1% for both the nine months ended September 30, 2012 and 2011.2013.
As of September 30, 2012March 31, 2013 and December 31, 2011,2012, the Company had gross unrecognized tax benefits of $20.0$18.1 million and $18.3$17.6 million, respectively. The unrecognized tax benefits relate primarily to the utilization of certain tax attributes. It is reasonably possible that the gross unrecognized tax benefits will decrease by $4.8$3.5 million within the next 12 months, primarily due to settlementsanticipated closure of outstanding audits and the expiration of the relevantcertain statutes of limitation. The Company classifies uncertain tax positions not expected to be settled within one year as long term liabilities.As of September 30, 2012March 31, 2013 and December 31, 2011,2012, the Company had Other liabilities of $15.2$14.6 million and $15.4$13.1 million, respectively, related to long-termlong term uncertain tax positions.
14 |
TheIn 2011 the Internal Revenue Service (“IRS”) has completed its examination of the federal income tax return of the Company for the tax year ended December 31, 2007. The Company disagrees with certain of the proposed adjustments and is disputing this matter through applicable IRS and judicial procedures, as appropriate. Separately, in the second quarter of 2011 the IRS commenced an audit of the Company’s 2008 and 2009federal income tax years. The Company continues to comply with all information requests and no material adjustments of
the Company’s tax positions have been proposed at this timereturns for the 2008 and 2009 tax years. The IRS has proposed adjustments for both 2008 and 2009 and the Company expects to settle the audit in 2013. Although the final resolution of these audits is uncertain and there are no assurances that the ultimate resolution willaudit has not exceed the amounts recorded,been fully resolved, the Company believes that the ultimate disposition of these matters will not have a material adverse effect on its consolidated financial position, cash flows, or results of operations.
Note 10 — Derivatives and Hedging
The Company enters into a limited number of derivative contracts to offset the potentially negative economic effects of interest rate and foreign exchange movements. The Company accounts for its outstanding derivative contracts in accordance with FASB ASC Topic 815, which requires all derivatives, including derivatives designated as accounting hedges, to be recorded on the balance sheet at fair value. The following tables provide information regarding the Company’s outstanding derivatives contracts (in thousands, except for number of outstanding contracts) as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Derivative Contract Type |
| Number of |
| Notional |
| Fair Value |
|
| Balance |
| Unrealized |
| ||||
|
|
|
|
|
|
| ||||||||||
Interest rate swap (1) |
|
| 1 |
| $ | 200,000 |
| $ | (11,000 | ) |
| Other liabilities |
| $ | (6,617 | ) |
Foreign currency forwards (2) |
|
| 30 |
|
| 40,530 |
|
| (240 | ) |
| Accrued liabilities |
|
| — |
|
|
|
|
|
|
|
| ||||||||||
Total |
|
| 31 |
| $ | 240,530 |
| $ | (11,240 | ) |
|
|
| $ | (6,617 | ) |
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Contract Type |
| Number of |
| Notional |
| Fair Value |
|
| Balance |
| Unrealized |
| ||||
|
|
|
|
|
|
| ||||||||||
Interest rate swap (1) |
|
| 1 |
| $ | 200,000 |
| $ | (9,891 | ) |
| Other liabilities |
| $ | (5,934 | ) |
Interest rate swaps (3) |
|
| 2 |
|
| 30,750 |
|
| (98 | ) |
| Other liabilities |
|
| — |
|
Foreign currency forwards (2) |
|
| 60 |
|
| 99,585 |
|
| 272 |
|
| Other current assets |
|
| — |
|
|
|
|
|
|
|
| ||||||||||
Total |
|
| 63 |
| $ | 330,335 |
| $ | (9,717 | ) |
|
|
| $ | (5,934 | ) |
|
|
|
|
|
|
|
March 31, 2013
Derivative Contract Type | Number of Outstanding Contracts | Notional Amounts | Fair Value Asset (Liability), Net (3) | Balance Sheet Line Item | Unrealized Loss Recorded in OCI | |||||||||||||
Interest rate swap (1) | 1 | $ | 200,000 | $ | (9,080 | ) | Other liabilities | $ | (5,449 | ) | ||||||||
Foreign currency forwards (2) | 43 | 48,300 | (20 | ) | Accrued Liabilities | — | ||||||||||||
Total | 44 | $ | 248,300 | $ | (9,100 | ) | $ | (5,449 | ) |
December 31, 2012
Derivative Contract Type | Number of Outstanding Contracts | Notional Amounts | Fair Value Asset (Liability), Net (3) | Balance Sheet Line Item | Unrealized Loss Recorded in OCI | |||||||||||||
Interest rate swap (1) | 1 | $ | 200,000 | $ | (10,000 | ) | Other liabilities | $ | (6,010 | ) | ||||||||
Foreign currency forwards (2) | 68 | 76,100 | 4 | Current assets | — | |||||||||||||
Total | 69 | $ | 276,100 | $ | (9,996 | ) | $ | (6,010 | ) |
(1) | ||
|
| |
(2) | The Company has foreign exchange transaction risk since it typically enters into transactions in the normal course of business that are denominated in foreign currencies that differ from the local functional currency. The Company enters into short-term foreign currency forward exchange contracts to offset the economic effects of these foreign currency transaction risks. These contracts are accounted for at fair value with realized and unrealized gains and losses recognized in Other expense, net since the Company does not designate these contracts as hedges for accounting purposes. | |
(3) |
| |
| See Note 11 — Fair Value Disclosures for the determination of the fair value of these instruments. |
The Company’s derivative counterparties are all large investment grade financial institutions. The Company did not have any collateral arrangements with its derivative counterparties, and none of the derivative contracts contained credit-risk guarantees.
The following table provides information regarding derivative gains and losses that have been recognized in the Condensed Consolidated Statements of Operations for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
|
|
| ||||||||||
Amount recorded in: |
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
|
|
|
|
| |||||||||
Interest expense, net (1) |
| $ | 907 |
| $ | 1,022 |
| $ | 2,657 |
| $ | 3,100 |
|
Other expense (income), net (2) |
|
| 36 |
|
| (1,976 | ) |
| (563 | ) |
| 1,794 |
|
|
|
|
|
|
| ||||||||
Total expense (income), net |
| $ | 943 |
| $ | (954 | ) | $ | 2,094 |
| $ | 4,894 |
|
|
|
|
|
|
|
Three Months Ended March 31, | ||||||||
Amount recorded in: | 2013 | 2012 | ||||||
Interest expense, net (1) | $ | 940 | $ | 847 | ||||
Other expense (income), net (2) | 73 | (246 | ) | |||||
Total expense, net | $ | 1,013 | $ | 601 |
(1) | ||
| Consists of interest expense from an interest rate swap | |
(2) | Consists of realized and unrealized gains and losses on foreign currency forward contracts. |
15 |
Note 11 — Fair Value Disclosures
The Company’s financial instruments include cash equivalents, fees receivable from customers, accounts payable, and accruals which are normally short-term in nature. The Company believes the carrying amounts of these financial instruments reasonably approximate their fair value due to their short-term nature. The Company’s financial instruments also include borrowingsits outstanding under its 2010 Credit Agreement, and at September 30, 2012, the Company had $200.0 million of floating rate debt outstanding under this arrangement, which is carried at amortized cost.borrowings. The Company believes the carrying amount of the outstanding borrowings reasonably approximates their fair value since the rate of interest on the borrowings reflect current market rates of interest for similar instruments with comparable maturities.
FASB ASC Topic 820 provides a framework for the measurement of fair value and a valuation hierarchy based upon the transparency of inputs used in the valuation of assets and liabilities. Classification within the hierarchy is based upon the lowest level of input that is significant to the resulting fair value measurement. The valuation hierarchy contains three levels. Level 1 measurements consist of quoted prices in active markets for identical assets or liabilities. Level 2 measurements include significant other observable inputs such as quoted prices for similar assets or liabilities in active markets; identical assets or liabilities in inactive markets; observable inputs such as interest rates and yield curves; and other market-corroborated inputs. Level 3 measurements include significant unobservable inputs, such as internally-created valuation models.
On January 1, 2012, the Company adopted ASU No. 2011-04,Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,which updates FASB ASC Topic 820 with new requirements. These include: (1) a prohibition on grouping financial instruments for purposes of determining fair value, except when an entity manages market and credit risks on the basis of the entity’s net exposure to the group; (2) an extension of the prohibition against the use of a blockage factor to all fair value measurements (that prohibition currently applies only to financial instruments with quoted prices in active markets); and (3) a requirement that for recurring Level 3 fair value measurements, entities disclose additional quantitative information about unobservable inputs, a description of the valuation process used and qualitative details about the sensitivity of the measurements and their potential impact on operating results.
The Company has a limited number of assets and liabilities recorded in its Consolidated Balance Sheets that are remeasured to fair value on a recurring basis, and the Company does not currently utilize Level 3 valuation inputs to remeasure any of its assets or liabilities. In addition, the Company typically does not transfer assets or liabilities between different levels of the fair value hierarchy. As a result, the adoption of ASU No. 2011-04 did not result in any changes to the Company’s processes for determining fair values or require additional fair value disclosures.
The Company’s assets and liabilities remeasured to fair value are presented in the following table for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
Description: |
| Fair Value |
| Fair Value |
| ||
|
|
| |||||
Assets: |
|
|
|
|
| ||
Deferred compensation plan assets (1) |
| $ | 27,000 |
| $ | 25,050 |
|
Pension reinsurance asset (2) |
|
| 14,350 |
|
| 12,980 |
|
Foreign currency forward contracts (3) |
|
| — |
|
| 272 |
|
|
|
|
| ||||
|
| $ | 41,350 |
| $ | 38,302 |
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
Deferred compensation plan liabilities (1) |
| $ | 30,290 |
| $ | 28,100 |
|
Foreign currency forward contracts (3) |
|
| 240 |
|
| — |
|
Interest rate swap contract (4) |
|
| 11,000 |
|
| 9,989 |
|
|
|
|
| ||||
|
| $ | 41,530 |
| $ | 38,089 |
|
|
|
|
|
Description: | Fair Value March 31, 2013 | Fair Value December 31, 2012 | ||||||
Assets: | ||||||||
Deferred compensation plan assets (1) | $ | 29,345 | $ | 27,795 | ||||
Foreign currency forward contracts (2) | 80 | 204 | ||||||
$ | 29,425 | $ | 27,999 | |||||
Liabilities: | ||||||||
Deferred compensation plan liabilities (1) | $ | 32,960 | $ | 31,260 | ||||
Foreign currency forward contracts (2) | 100 | 200 | ||||||
Interest rate swap contract (3) | 9,080 | 10,000 | ||||||
$ | 42,140 | $ | 41,460 |
(1) | ||
| The Company has a deferred compensation plan for the benefit of certain highly compensated employees. The assets consist of investments in money market and mutual funds, and company-owned life insurance contracts, all of which are valued based on Level 1 or Level 2 valuation inputs. The related deferred compensation plan liabilities are recorded at fair value, or the estimated amount needed to settle the liability, which the Company also considers to be based on a Level 2 input. | |
(2) |
| |
| The Company enters into foreign currency forward exchange contracts to hedge the effects of adverse fluctuations in foreign currency exchange rates. Valuation of the foreign currency forward contracts is based on observable foreign currency exchange rates in active markets, which the Company considers a Level 2 input. |
| |
(3) | The Company has an interest rate swap contract which hedges the forecasted interest |
Disclosures about Offsetting of Assets and Liabilities
On January 1, 2013, the Company adopted FASB ASU No. 2013-01,Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which updates FASB ASU No. 2011-11,Disclosures about Offsetting Assets and Liabilities. These rules require certain disclosures of assets and liabilities resulting from derivative transactions, repurchase agreements, and securities lending arrangements. Among the required disclosures are the gross amounts of assets and liabilities resulting from these transactions, amounts potentially subject to offset under master netting arrangements, and resulting amounts recorded in the balance sheets.
The Company enters into a limited number of derivatives transactions but does not enter into repurchase agreements or securities lending transactions. In addition, the Company does not enter into master netting arrangements and receivables or payables that result from derivatives transactions are recorded gross in the Company’s Consolidated Balance Sheets. Information regarding the
16 |
Company’s derivatives contracts and related amounts recorded in the Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012 are included in the fair value table above.
Note 12 — Employee Benefits
Defined Benefit Pension Plans
The Company has defined-benefit pension plans in several of its international locations. Benefits paid under these plans are based on years of service and level of employee compensation. The Company’s defined benefit pension plans are accounted for in accordance with FASB ASC Topics 715 and 960. Net periodic pension expense was $0.8 and $0.6 million for both the three months ended September 30,March 31, 2013 and 2012, and 2011, and $1.8 million and $2.0 million for the nine months ended September 30, 2012 and 2011, respectively.
Note 13 — Commitments and Contingencies
Contingencies
The Company is involved in legal proceedings and litigation arising in the ordinary course of business. We believe that the potential liability, if any, in excess of amounts already accrued from all proceedings, claims and litigation will not have a material effect on our financial position, cash flows, or results of operations when resolved in a future period.
The Company has various agreements that may obligate us to indemnify the other party with respect to certain matters. Generally, these indemnification clauses are included in contracts arising in the normal course of business under which we customarily agree to hold the other party harmless against losses arising from a breach of representations related to such matters as title to assets sold and licensed or certain intellectual property rights. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of the Company’s obligations and the unique facts of each particular agreement. Historically, payments made by us under these agreements have not been material. As of September 30, 2012,March 31, 2013, the Company did not have any indemnification agreements that could require material payments.
17 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of the following Management’s Discussion and Analysis (“MD&A”) is to help facilitate the understanding of significant factors influencing the quarterly operating results, financial condition and cash flows of Gartner, Inc. Additionally, the MD&A also conveys our expectations of the potential impact of known trends, events or uncertainties that may impact future results. You should read this discussion in conjunction with our condensed consolidated financial statements and related notes included in this report and in our Annual Report on Form 10-K for the year ended December 31, 2011.2012. Historical results and percentage relationships are not necessarily indicative of operating results for future periods. References to “Gartner,” “the Company,” “we,” “our,” and “us” in this MD&A are to Gartner, Inc. and its subsidiaries.
On May 31, 2012, we acquired Ideas International Limited (“Ideas International”), a publicly-owned Australian corporation (see Note 2—Acquisition in the Notes to the Condensed Consolidated Financial Statements for additional information). Ideas International’s business operations have been integrated into the Company’s Research segment, and its operating results and business measurements are included in the Company’s consolidated and segment results and disclosures beginning on the date of acquisition. The impact of the acquisition was not material for the three and nine months ended September 30, 2012.
Forward-Looking Statements
In addition to historical information, this Quarterly Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are any statements other than statements of historical fact, including statements regarding our expectations, beliefs, hopes, intentions or strategies regarding the future. In some cases, forward-looking statements can be identified by the use of words such as “may,” “will,” “expect,” “should,” “could,” “believe,” “plan,” “anticipate,” “estimate,” “predict,” “potential,” “continue,” or other words of similar meaning.
Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in, or implied by, the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in “Factors That May Affect Future Performance” and elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2011.2012. Readers should not place undue reliance on these forward-looking statements, which reflect management’s opinion only as of the date on which they were made. Except as required by law, we disclaim any obligation to review or update these forward-looking statements to reflect events or circumstances as they occur. Readers should review carefully any risk factors described in other reports we filed with the SEC.
BUSINESS OVERVIEW
Gartner, Inc. (NYSE: IT) is the world’s leading information technology research and advisory company. We deliver the technology-related insight necessary for our clients to make the right decisions, every day. From CIOs and senior IT leaders in corporations and government agencies, to business leaders in high-tech and telecom enterprises and professional services firms, to supply chain professionals and technology investors, we are the valuable partner to clients in over 12,60013,200 distinct organizations. We work with every clientclients to research, analyze and interpret the business of IT within the context of their individual role.roles. Founded in 1979, Gartner is headquartered in Stamford, Connecticut, U.S.A., and has approximately 5,400as of March 31, 2013, we had 5,634 associates, including almost 1,4001,452 research analysts and consultants, and clients in 85 countries.
The foundation for all Gartner products and services is our independent research on IT and supply chain issues. The findings from this research are delivered through our three business segments — Research, Consulting and Events:
• | |
| Researchprovides objective insight on critical and timely technology and supply chain initiatives for CIOs, other IT professionals, supply chain leaders, technology companies and the investment community through reports, briefings, proprietary tools, access to our analysts, peer networking services and membership programs that enable our clients to make better decisions about their IT and supply chain investments. |
• | Consultingprovides 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. |
• | Eventsprovide IT, supply chain and business professionals the opportunity to attend various symposia, conferences and exhibitions to learn, contribute and network with their peers. From our flagship event Symposium/ITxpo, to |
For more information regarding Gartner and our products and services, visitwww.gartner.com.
18 |
BUSINESS MEASUREMENTS
We believe the following business measurements are important performance indicators for our business segments:
BUSINESS SEGMENT | BUSINESS MEASUREMENTS | |
|
| |
| Contract value represents the value attributable to all of our subscription-related research products that recognize revenue on a ratable basis. Contract value is calculated as the annualized value of all subscription research contracts in effect at a specific point in time, without regard to the duration of the contract. | |
Client retention rate represents a measure of client satisfaction and renewed business relationships at a specific point in time. Client retention is calculated on a percentage basis by dividing our current clients, who were also clients a year ago, by all clients from a year ago. | ||
Wallet retention rate represents a measure of the amount of contract value we have retained with clients over a twelve-month period. Wallet retention is calculated on a percentage basis by dividing the contract value of clients, who were clients one year earlier, by the total contract value from a year earlier, excluding the impact of foreign currency exchange. When wallet retention exceeds client retention, it is an indication of retention of higher-spending clients, or increased spending by retained clients, or both. | ||
Consulting | ||
| Consulting backlog represents future revenue to be derived from in-process consulting, measurement and strategic advisory services engagements. | |
Utilization | ||
Billing Rate represents earned billable revenue divided by total billable hours. | ||
Average annualized revenue per billable headcount represents a measure of the revenue generating ability of an average billable consultant and is calculated periodically by multiplying the average billing rate per hour times the utilization percentage times the billable hours available for one year. | ||
Events | ||
| Number of events represents the total number of hosted events completed during the period. | |
Number of attendees represents the total number of people who attend events. | ||
EXECUTIVE SUMMARY OF OPERATIONS AND FINANCIAL POSITION
We have executed a consistent growth strategy since 2005 to drive double-digit revenue and earnings growth. The fundamentals of our strategy include a focus on creatingare to create extraordinary research insight, deliveringdeliver innovative and highly differentiated product offerings, buildingbuild a strong sales capability, providingprovide world class client service with a focus on client engagement and retention, and continuously improvingimprove our operational effectiveness.
We had total revenues of $374.4$406.8 million in the thirdfirst quarter of 2013, an increase of 10% compared to the first quarter of 2012 an increase of 8% compared to the third quarter of 2011 and 12%11% excluding the unfavorable foreign exchange impact. Revenues increased by 11%13% in our Research segment and 1%19% in Consulting,Events, while EventsConsulting revenues declined by 2%, primarily due to a shift in our events calendar.3%. For a more complete discussion of our results by segment, see Segment Results below. For the nine months ended September 30, 2012, total revenues increased 10%, but excluding the unfavorable impact of foreign exchange, revenues increased 12%.
We had net income of $31.4$36.7 million in the thirdfirst quarter of 2012,2013, an increase of 3%7% compared to thirdfirst quarter 2011. Diluted earnings per share increased $0.02 per share quarter-over-quarter, to $0.33 per share for the third quarter 2012. For the nine months ended September 30, 2012, net income increased 17% compared to the same period in 2011. Diluted earnings per share was $1.12$0.38 per share for the nine months ended September 30, 2012, an increasein first quarter of 22%.2013 compared to $0.36 in first quarter 2012.
We refinanced our credit facility during the first quarter of 2013 to take advantage of favorable market conditions, provide for additional liquidity, and extend the maturity of our debt. Our total borrowing capacity under the new facility is $1.0 billion, including a $250.0 million expansion feature. We had almost $209.0 million of operating cash flow in the nine months ended September 30, 2012, an increase of 18% compared to the same period in 2011 and the highest nine months’ operating cash flow in the Company’s history. At September 30, 2012, we had $255.4$269.1 million of cash and cash equivalents at March 31, 2013 and over $354.0 million of available borrowing capacity under our revolving credit facility. Wewe believe that our liquidity is adequate to fund our current plans. During 2012 we have used $89.3 million of cashWe continue to repurchase
our common shares as part of our continued focus on enhancingenhance shareholder value through our share repurchase plan, and during the first quarter we used $10.3repurchased almost 1.0 million in cash onshares for a net basis to purchase Ideas International.total cost of $48.5 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires the application of appropriate accounting policies and the use of estimates. Our significant accounting policies are described in Note 1 in the Notes to Consolidated Financial Statements of Gartner, Inc. contained in our Annual Report on Form 10-K for the year ended December 31, 2011.2012. Management considers the policies discussed below to be
19 |
critical to an understanding of our financial statements because their application requires complex and subjective management judgments and estimates. Specific risks for these critical accounting policies are also described below.
The preparation of our financial statements requires us to make estimates and assumptions about future events. We develop our estimates using both current and historical experience, as well as other factors, including the general economic environment and actions we may take in the future. We adjust such estimates when facts and circumstances dictate. However, our estimates may involve significant uncertainties and judgments and cannot be determined with precision. In addition, these estimates are based on our best judgment at a point in time and as such these estimates may ultimately differ materially from actual results. Also, on-going changes in our estimates could be material and would be reflected in the Company’s consolidated financial statements in future periods.
Our critical accounting policies are as follows:
Revenue recognition — Revenue is recognized in accordance with the requirements of U.S. GAAP as well as SEC Staff Accounting Bulletins No. 101, Revenue Recognition in Financial Statements (“SAB 101”), and SEC Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”). Revenue is only recognized once all required criteria for revenue recognition have been met. Revenue by significant source is accounted for as follows:
• | |
| Research revenues are derived from subscription contracts for research products and are deferred and recognized ratably over the applicable contract term. Fees from research reprints are recognized when the reprint is delivered. |
• | Consulting revenues are principally generated from fixed fee and time and material engagements. Revenues from fixed fee contracts are recognized on a proportional performance basis. Revenues from time and materials engagements are recognized as work is delivered and/or services are provided. Revenues related to contract optimization contracts are contingent in nature and are only recognized upon satisfaction of all conditions related to their payment. |
• | Events revenues are deferred and recognized upon the completion of the related symposium, conference or exhibition. |
The majority of research contracts are billable upon signing, absent special terms granted on a limited basis from time to time. All research contracts are non-cancelable and non-refundable, except for government contracts that may have cancellation or fiscal funding clauses. It is our policy to record the entire amount of the contract that is billable as a fee receivable at the time the contract is signed with a corresponding amount as deferred revenue, since the contract represents a legally enforceable claim.
Uncollectible fees receivable — We maintain an allowance for losses which is composed of a bad debt allowance and a sales reserve. Provisions are charged against earnings, either as a reduction in revenues or an increase to expense. The measurement of likely and probable losses and the allowance for losses is based on historical loss experience, aging of outstanding receivables, an assessment of current economic conditions and the financial health of specific clients. This evaluation is inherently judgmental and requires estimates. These valuation reserves are periodically re-evaluated and adjusted as more information about the ultimate collectability of fees receivable becomes available. Circumstances that could cause our valuation reserves to increase include changes in our clients’ liquidity and credit quality, other factors negatively impacting our clients’ ability to pay their obligations as they come due, and the effectiveness of our collection efforts.
The following table provides our total fees receivable, along with the related allowance for losses, as of the date indicated (in thousands):
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| ||
|
|
|
| ||||
Total fees receivable |
| $ | 377,751 |
| $ | 428,293 |
|
Allowance for losses |
|
| (6,800 | ) |
| (7,260 | ) |
|
|
|
| ||||
Fees receivable, net |
| $ | 370,951 |
| $ | 421,033 |
|
|
|
|
|
March 31, 2013 | December 31, 2012 | |||||||
Total fees receivable | $ | 447,525 | $ | 470,368 | ||||
Allowance for losses | (6,120 | ) | (6,400 | ) | ||||
Fees receivable, net | $ | 441,405 | $ | 463,968 |
Goodwill and other intangible assets — Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value of the tangible and identifiable intangible net assets acquired. Goodwill is not amortized against earnings, but is periodically evaluated for impairment in accordance with FASB ASC Topic 350, which requires goodwill to be assessed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In addition, an impairment evaluation of our amortizable intangible assets may also be performed on a periodic basis should events or circumstances indicate potential impairment. If we determine that the fair value of a reporting unit or an intangible asset is less than its related carrying amount, we must recognize an impairment charge against earnings. Among the factors we consider important that could trigger an impairment review are the following:
• | |
| Significant under-performance relative to historical or projected future operating results; |
• | Significant changes in the manner of our use of acquired assets or the strategy for our overall business; |
• | Significant negative industry or general economic trends; |
20 |
•
Significant decline in our stock price for a sustained period; and
•
Our market capitalization relative to net book value.
The determination of the estimated fair value of our reporting units, whether based on a quantitative or qualitative assessment, contains judgments and assumptions regarding future trends and events, with both the precision and reliability of the resulting estimates subject to uncertainty. As a result, if the Company deems it necessary in the future to modify its judgments and assumptions, or if actual results are materially different from our expectations, then the estimated reporting unit values could change, potentially resulting in goodwill impairment charges in future periods. We completed our required annual goodwill impairment assessment as of September 30, 2012 utilizing a qualitative approach and concluded that the fair value of our reporting units continued to substantially exceed their respective carrying amounts.
Accounting for income taxes — As we prepare our consolidated financial statements, we estimate our income taxes in each of the jurisdictions where we operate. This process involves estimating our current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We record a valuation allowance to reduce our deferred tax assets when future realization is in question. We consider the availability of loss carryforwards, existing deferred tax liabilities, future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. In the event we determine that we are able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment is made to reduce the valuation allowance and increase income in the period such determination is made. Likewise, if we determine that we will not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the valuation allowance is charged against income in the period such determination is made.
Accounting for stock-based compensation— The Company accounts for stock-based compensation in accordance with FASB ASC Topics 505 and 718, as interpreted by SEC Staff Accounting Bulletins No. 107 (“SAB No. 107”) and No. 110 (“SAB No. 110”). The Company recognizes stock-based compensation expense, which is based on the fair value of the award on the date of grant, over the related service period, net of estimated forfeitures (see Note 4 — Stock-Based Compensation in the Notes to the Condensed Consolidated Financial Statements).
Determining the appropriate fair value model and calculating the fair value of stock-based compensation awards requires the input of certain complex and subjective assumptions, including the expected life of the stock-based compensation awards and the Company’s Common Stock price volatility. In addition, determining the appropriate amount of associated periodic expense requires management to estimate the rate of employee forfeitures and the likelihood of the achievement of certain performance targets. The assumptions used in calculating the fair value of stock-based compensation awards and the associated periodic expense represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change and the Company deems it necessary in the future to modify the assumptions it made or to use different assumptions, or if the quantity and nature of the Company’s stock-based compensation awards changes, then the amount of periodic stock-based compensation expense may need to be adjusted which could be materially different from what has been recorded in the current period.
Restructuring and other accruals — We may record accruals for severance costs, costs associated with excess facilities that we have leased, contract terminations, asset impairments, the integration of acquired businesses, and other costs as a result of on-going actions we undertake to streamline our organization, reposition certain businesses and reduce ongoing costs, or acquire other companies. Estimates of costs to be incurred to complete these actions, such as future lease payments, sublease income, the fair value of assets, and severance and related benefits, are based on assumptions at the
21 |
time the actions are initiated. These accruals may need to be adjusted to the extent actual costs differ from such estimates. In addition, these actions may be revised due to changes in business conditions that we did not foresee at the time such plans were approved. We also record accruals during the year for our various employee cash incentive programs. Amounts accrued at the end of each reporting period are based on our estimates and may require adjustment as the ultimate amount paid for these incentives are sometimes not known with certainty until the end of our fiscal year.
RESULTS OF OPERATIONS
Overall Results
The following tables summarize the changes in selected income and expense lines in our interim Condensed Consolidated Statements of Operations for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months |
| Three Months |
| Income |
| Income |
| ||||
|
|
|
|
|
| ||||||||
Total revenues |
| $ | 374,406 |
| $ | 345,784 |
| $ | 28,622 |
|
| 8 | % |
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and product development |
|
| 151,143 |
|
| 142,696 |
|
| (8,447 | ) |
| (6 | ) |
Selling, general and administrative |
|
| 164,888 |
|
| 148,461 |
|
| (16,427 | ) |
| (11 | ) |
Depreciation |
|
| 6,301 |
|
| 6,638 |
|
| 337 |
| 5 | ||
Amortization of intangibles |
|
| 1,362 |
|
| 739 |
|
| (623 | ) |
| (84 | ) |
Acquisition and integration charges |
|
| 944 |
|
| — |
|
| (944 | ) |
| (100 | ) |
|
|
|
|
|
|
|
| ||||||
Operating income |
|
| 49,768 |
|
| 47,250 |
|
| 2,518 |
|
| 5 |
|
Interest expense, net |
|
| (2,209 | ) |
| (2,282 | ) |
| 73 |
|
| 3 |
|
Other expense, net |
|
| (748 | ) |
| (541 | ) |
| (207 | ) |
| (38 | ) |
Provision for income taxes |
|
| (15,436 | ) |
| (13,963 | ) |
| (1,473 | ) |
| (11 | ) |
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Net income |
| $ | 31,375 |
| $ | 30,464 |
| $ | 911 |
|
| 3 | % |
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| Nine Months |
| Nine Months |
| Income |
| Income |
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Total revenues |
| $ | 1,141,059 |
| $ | 1,040,894 |
| $ | 100,165 |
|
| 10 | % |
Costs and expenses: |
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Cost of services and product development |
|
| 458,853 |
|
| 428,473 |
|
| (30,380 | ) |
| (7 | ) |
Selling, general and administrative |
|
| 492,627 |
|
| 442,891 |
|
| (49,736 | ) |
| (11 | ) |
Depreciation |
|
| 18,378 |
|
| 19,143 |
|
| 765 |
|
| 4 |
|
Amortization of intangibles |
|
| 3,029 |
|
| 5,788 |
|
| 2,759 |
|
| 48 |
|
Acquisition and integration charges |
|
| 2,126 |
|
| — |
|
| (2,126 | ) |
| (100 | ) |
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Operating income |
|
| 166,046 |
|
| 144,599 |
|
| 21,447 |
|
| 15 |
|
Interest expense, net |
|
| (6,557 | ) |
| (7,863 | ) |
| 1,306 |
|
| 17 |
|
Other expense, net |
|
| (1,802 | ) |
| (1,494 | ) |
| (308 | ) |
| (21 | ) |
Provision for income taxes |
|
| (50,607 | ) |
| (43,364 | ) |
| (7,243 | ) |
| (17 | ) |
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Net income |
| $ | 107,080 |
| $ | 91,878 |
| $ | 15,202 |
|
| 17 | % |
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Three Months Ended March 31, 2013 | Three Months Ended March 31, 2012 | Income Increase (Decrease) $ | Increase (Decrease) % | |||||||||||||
Total revenues | $ | 406,754 | $ | 369,171 | $ | 37,583 | 10 | % | ||||||||
Costs and expenses: | ||||||||||||||||
Cost of services and product development | 163,737 | 146,463 | (17,274 | ) | (12 | ) | ||||||||||
Selling, general and administrative | 180,478 | 162,518 | (17,960 | ) | (11 | ) | ||||||||||
Depreciation | 7,100 | 5,895 | (1,205 | ) | (20 | ) | ||||||||||
Amortization of intangibles | 1,334 | 739 | (595 | ) | (81 | ) | ||||||||||
Acquisition and integration charges | 100 | — | (100 | ) | (100 | ) | ||||||||||
Operating income | 54,005 | 53,556 | 449 | 1 | ||||||||||||
Interest expense, net | (2,436 | ) | (2,195 | ) | (241 | ) | (11 | ) | ||||||||
Other income (expense), net | 211 | (978 | ) | 1,189 | >100 | |||||||||||
Provision for income taxes | (15,105 | ) | (16,162 | ) | 1,057 | 7 | ||||||||||
Net income | $ | 36,675 | $ | 34,221 | $ | 2,454 | 7 | % |
Total revenues for the three months ended September 30, 2012March 31, 2013 increased $28.6$37.6 million, or 8%10%, compared to the same quarter in 2011,2012, primarily driven by our Research segment, which had a double-digit revenue increase. Excluding the unfavorable impact of foreign currency translation, total quarterly revenues increased 12%11%. For the nine month periods, revenues increased over $100.0 million in 2012, or 10%, with increases in all three of our business units, including double-digit increases in Research and Events. Excluding the unfavorable impact of foreign currency translation, revenues for the nine months ended September 30, 2012 increased 12% over the same period in 2011. Please refer to the section of this MD&A below entitled “Segment Results” for a discussion of revenues and results by segment.
Cost of services and product developmentincreased $8.4$17.3 million, or 6%12%, in the thirdfirst quarter of 20122013 compared to the thirdfirst quarter of 2011.2012. The increase was primarily due to $8.0$13.0 million in higher payroll and related benefits costs due to increased headcount and merit salary increases, and we also had higher travel expenses related to the increased headcount. These increases wereincreases. The increase was partially offset by the favorable impact of foreign currency translation. Cost of services and product development as a percentage of revenues decreased by 1 point, towas 40% in the third quarter of 2012 from 41% in the third quarter of 2011, driven by the higher revenues and operating leverage inherent in our Research segment.for both quarters.
For the nine month periods, Cost of services and product development increased $30.4 million in 2012, or 7%, compared to 2011. Consistent with the quarter, the increase was primarily due to higher payroll and related benefits costs due to increased headcount and merit salary increases, which increased by about $28.0 million. We also had higher conference and travel costs, due to higher attendance at our events and additional associates. These increases were partially offset by the favorable impact of foreign currency translation. Cost of services and product development as a percentage of revenues for the nine months ended September 30, 2012 was 40%, a decline of 1 point compared to the same period in 2011, primarily due to higher revenues and the operating leverage in the Research business.
Selling, general and administrative(“SG&A”) increased $16.4$18.0 million, or 11%, quarter-over-quarter. The increase was primarily due to higher payroll and related benefits costs, which was partially offset by favorable foreign currency impact. The higher payroll costs resulted from additional headcount, higher sales commissions, and merit salary increases. The increased headcount was primarily due to theincludes our investment in additional quota-bearing sales associates, which increased by 15%,13% quarter-over-quarter, to 1,3971,288 at September 30, 2012 from 1,215 at September 30, 2011. SG&AMarch 31, 2013.
Depreciation expense increased 11%, or $49.7 million, in the nine months ended September 30, 2012 compared to the same period in the prior year. Consistent with the20% quarter-over-quarter increase, the additional expense was primarily driven by higher payroll and benefit costs.
Depreciation expense declined in both the three and nine months ended September 30, 2012 compared to the same periods in the prior year. The decline was due to certain fixed assets becoming fully depreciated which was only partially offset byan additional depreciation from asset additions.renovated building on our Stamford headquarters campus placed into service.
Amortization of intangiblesincreased to $1.4$1.3 million in the three months ended September 30, 2012March 31, 2013 compared to $0.7 million in the same period in 20112012 due to the addition of intangibles from the mid-year 2012 acquisition of Ideas International. For the nine month periods, amortization declined in 2012 due to certain intangibles becoming fully amortized, which was only partially offset by the additional amortization from the intangible assets resulting from the Ideas International acquisition.Limited.
Acquisition and Integration Charges was $0.9 million and $2.1$0.1 million in the threefirst quarter of 2013 and nine months ended September 30, 2012 compared to zero in the same periods in 2011.first quarter of 2012. These charges relaterelated to the acquisition of Ideas International Limited and includeincluded legal, consulting, severance, and other costs.
Operating Income increased by $2.5 million, or 5%, quarter-over-quarter, to $49.8 million in the third quarter of 2012 compared to $47.3 million in the third quarter of 2011.1% quarter-over-quarter. Operating income as a percentage of revenues declined slightlyby approximately 2 points quarter-over-quarter, primarily due to our investment in additional headcount, to include the 2012 quarter. For the nine month periods, operating income increased 15%13% growth in 2012 comparedquote-bearing sales associates, and to 2011,a lesser extent, lower segment contributions in Consulting and as a percentage of revenues, operating income increased slightly in the 2012 period.Events.
Interest Expense, Netdecreased 3%increased 11% quarter-over-quarter, primarily due to $0.3 million in write-offs of capitalized debt issuance costs related to our debt refinancing. The additional debt issuance charge was slightly offset by lower interest expense on our debt due to a lower average amount of debt outstanding. For the nine month periods, Interest expense, net, decreased 17%, again primarily due to a lower average amount of debt outstanding.
22 |
Other (Expense) Income, Netconsisted of net foreign currency exchange gains and losses.
Provision For Income Taxes was $15.4$15.1 million for the three months ended September 30, 2012March 31, 2013 compared to $14.0$16.2 million in the same quarter of the prior year.three months ended March 31, 2012. The effective tax rate was 33.0%29.2% for the three months ended September 30, 2012March 31, 2013 and 31.4%32.1% for the same period in 2011.2012. The increasedecrease in the effective tax rate was primarily due to a changethe impact of tax law changes.The American Taxpayer Relief Act of 2012 (the “Tax Act”) was enacted in January of 2013 and contains beneficial tax provisions for the Company. Since the Tax Act was passed in 2013, approximately $1.5 million of tax benefits relating to its application was recorded by the Company in the estimated annual mixfirst quarter of pre-tax income by jurisdiction. The provision for income taxes was $50.6 million for the nine months ended September 30, 2012 compared to $43.4 million for the same period in 2011. The effective tax rate was 32.1% for both the nine months ended September 30, 2012 and 2011.2013.
Net Income increased 3% in the three months ended September 30, 2012 compared to the same period in 2011. Both basic and7% quarter-over-quarter while diluted earnings per share increased by 6%, reflectingdue to the higher net income and a slightly lower number of weighted-average shares outstanding. For the nine month periods, net income increased 17% in 2012, while basic and diluted earnings per share increased by $0.20 per share, due to substantially higher net income and to a lesser extent, lower weighted-average shares outstanding.
SEGMENT RESULTS
We evaluate reportable segment performance and allocate resources based on gross contribution margin. Gross contribution is defined as operating income excluding certain Cost of services and product development charges, SG&A expenses, Depreciation, Acquisition and integration charges, and Amortization of intangibles. Gross contribution margin is defined as gross contribution as a percentage of revenues.
The following sections present the results of our three business segments:
Research
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| As Of And For The Three Months Ended March 31, 2013 | As Of And For The Three Months Ended March 31, 2012 | Increase (Decrease) | Percentage Increase (Decrease) | ||||||||||||||||||||||||||||||||||
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Revenues (1) |
| $ | 284,048 |
| $ | 255,979 |
| $ | 28,069 |
| 11 | % | $ | 836,970 |
| $ | 749,429 |
| $ | 87,541 |
| 12 | % | $ | 310,331 | $ | 274,620 | $ | 35,711 | 13 | % | ||||||||
Gross contribution (1) |
| $ | 193,540 |
| $ | 173,615 |
| $ | 19,925 |
| 11 | % | $ | 571,547 |
| $ | 506,420 |
| $ | 65,127 |
| 13 | % | $ | 215,214 | $ | 188,602 | $ | 26,612 | 14 | % | ||||||||
Gross contribution margin |
| 68 | % |
| 68 | % |
| — |
| — |
| 68 | % |
| 68 | % |
| — |
| — |
| 69 | % | 69 | % | — | — | ||||||||||||
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Business Measurements: |
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Contract value (1) |
| $ | 1,174,700 |
| $ | 1,035,926 |
| $ | 138,774 |
| 13 | % |
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| $ | 1,269,200 | $ | 1,110,928 | $ | 158,272 | 14 | % | ||||||||||
Client retention |
| 83 | % |
| 82 | % |
| 1 point |
| — |
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| 82 | % | 82 | % | — | — | ||||||||||||||
Wallet retention |
| 99 | % |
| 100 | % |
| (1) point |
| — |
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| 98 | % | 99 | % | (1 | %) | — | |||||||||||||
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(1) | ||
| Dollars in thousands. |
Research segment revenues increased 11% on a quarter-over-quarter basis but excluding the unfavorable effect13% quarter-over-quarter. The impact of foreign currency translation revenues increased 14%.was not significant. The segment gross contribution margin was 68% for both quarterly periods. When comparing the nine month periods, revenues increased 12% in the 2012 period, but increased 14% when adjusted for foreign currency impact. The segment gross contribution margin was 68% for both the nine months ended September 30, 2012 and 2011.
remained at 69%. Research contract value at September 30, 2012March 31, 2013 increased 13%14% compared to September 30, 2011 and 14% excluding theMarch 31, 2012 with only a minimal impact from foreign currency translation impact.translation. Contract value increased across all of the Company’s industry types, client sizes, and sales regions. Client retention increased by 1 pointwas 82% for both quarterly periods while wallet retention declined by 1 point.
Consulting
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| As Of And For The Three Months Ended March 31, 2013 | As Of And For The Three Months Ended March 31, 2012 | Increase (Decrease) | Percentage Increase (Decrease) | ||||||||||||||||||||||||||||||||||
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Revenues (1) |
| $ | 71,731 |
| $ | 70,815 |
| $ | 916 |
| 1 | % | $ | 222,970 |
| $ | 219,407 |
| $ | 3,563 |
| 2 | % | $ | 72,633 | $ | 74,563 | $ | (1,930 | ) | (3 | %) | |||||||
Gross contribution (1) |
| $ | 24,380 |
| $ | 24,458 |
| $ | (78 | ) | — |
| $ | 79,886 |
| $ | 78,820 |
| $ | 1,066 |
| 1 | % | $ | 22,538 | $ | 27,600 | $ | (5,062 | ) | (18 | %) | |||||||
Gross contribution margin |
| 34 | % |
| 35 | % |
| (1) point |
| — |
| 36 | % |
| 36 | % |
| — |
| — |
| 31 | % | 37 | % | (6 points | ) | — | |||||||||||
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Backlog (1) |
| $ | 106,100 |
| $ | 92,887 |
| $ | 13,213 |
| 14 | % |
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| $ | 97,500 | $ | 95,533 | $ | 1,967 | 2 | % | ||||||||||
Billable headcount |
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| 499 |
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| 482 |
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| 17 |
| 4 | % |
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| 528 | 476 | 52 | 11 | % | |||||||||||||
Consultant utilization |
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| 64 | % |
| 61 | % |
| 3 points |
| — |
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| 67 | % |
| 62 | % |
| 5 points |
| — |
| 65 | % | 70 | % | (5 points | ) | — | |||||||||
Average annualized revenue per billable headcount |
| $ | 415 |
| $ | 404 |
| $ | 11 |
| 3 | % | $ | 425 |
| $ | 404 |
| $ | 21 |
| 5 | % | ||||||||||||||||
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Average annualized revenue per billable headcount (1) | $ | 404 | $ | 437 | $ | (33 | ) | (8 | %) |
(1) | ||
| Dollars in thousands. |
Consulting revenues increased 1% quarter-over-quarter,decreased $1.9 million, or 3%, quarter-over-quarter. The decline was primarily due to higherlower revenues in the core consultingour Strategic advisory (SAS) business, primarily driven by higher utilization. This increase was partially offset byand to a lesser extent, lower revenues in our contract optimization business, which can fluctuate from quarter-to-quarter.business. Core consulting revenues were flat, but consultant utilization declined. Excluding the unfavorable impact of foreign currency translation, revenues increased 4%decreased 2% quarter-over-quarter. The gross contribution margin declined by 1 point,6 points, primarily driven by the decline in utilization, and to a lesser extent, lower revenues in ourSAS and contract optimization business, which has a higher contribution margin than core consulting or SAS.
For the nine month periods, revenuesrevenue. Backlog at March 31, 2013 increased 2% in 2012, again due to higher core consulting revenues, which was partially offset by lower contract optimization and SAS revenues. Consulting revenues increased 4% excluding the unfavorable impact of foreign currency translation. The gross contribution margin was 36% for both nine month periods. Backlog at September 30, 2012 increased 14% compared to September 30, 2011.March 31, 2012.
23 |
Events
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Revenues (1) |
| $ | 18,627 |
| $ | 18,990 |
| $ | (363 | ) | (2 | )% | $ | 81,119 |
| $ | 72,058 |
| $ | 9,061 |
| 13 | % |
Gross contribution (1) |
| $ | 4,511 |
| $ | 5,550 |
| $ | (1,039 | ) | (19 | )% | $ | 32,867 |
| $ | 28,533 |
| $ | 4,334 |
| 15 | % |
Gross contribution margin |
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| 24 | % |
| 29 | % |
| (5) points |
| — |
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| 41 | % |
| 40 | % |
| 1 point |
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Business Measurements: |
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Number of events |
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| 14 |
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| 16 |
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| (2 | ) | (13 | )% |
| 48 |
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| 48 |
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| — |
| — |
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Number of attendees |
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| 5,566 |
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| 6,676 |
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| (1,110 | ) | (17 | )% |
| 23,759 |
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| 22,308 |
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| 1,451 |
| 7 | % |
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As Of And For The Three Months Ended March 31, 2013 | As Of And For The Three Months Ended March 31, 2012 | Increase (Decrease) | Percentage Increase (Decrease) | |||||||||||||
Financial Measurements: | ||||||||||||||||
Revenues (1) | $ | 23,790 | $ | 19,988 | $ | 3,802 | 19 | % | ||||||||
Gross contribution (1) | $ | 7,108 | $ | 7,895 | $ | (787 | ) | (10 | %) | |||||||
Gross contribution margin | 30 | % | 39 | % | (9 points | ) | — | |||||||||
Business Measurements: | ||||||||||||||||
Number of events | 12 | 13 | (1 | ) | (8 | %) | ||||||||||
Number of attendees | 5,788 | 5,707 | 81 | 1 | % |
(1) | ||
| Dollars in thousands. |
Events revenues were $18.6$23.8 million in the thirdfirst quarter of 2012, a decrease2013, an increase of 2%19% compared to thirdfirst quarter 2011, due to a shift in the events calendar and the impact of foreign exchange.2012. Excluding the foreign exchange impact, total Events revenues increased 2%20%. We held 12 events in the thirdfirst quarter of 2013, which consisted of 10 ongoing events and 2 events that were moved into the quarter that were held in a different quarter in 2012. Two events that were held in the first quarter of 2012 will be held later in 2013.
Approximately $2.2 million of the revenue increase was due to the two events that were moved into the quarter. We also had $1.6 million in additional revenues from the 10 on-going events held in the quarter. Both attendees and exhibitors delivered double-digit revenue increases over the first quarter of 2012. The number of attendees was flat quarter-over-quarter while the number of exhibitors increased by double-digits. The gross contribution margin decreased 59 points in the third quarter of 2012 as compared to the third quarter of 2011. Both revenues and the gross contribution margin were adversely impacted by the move of two large events into the fourth quarter of 2012 that previously were held in the third quarter of 2011.
For the nine month periods, Events revenues increased $9.1 million in 2012, or 13%, primarily due to higher revenues from our ongoing events. Adjusted for the unfavorable impact of foreign currency translation, revenues increased 16%. The 48 events held through September 30, 2012 consisted of 43 ongoing events and 5 new events. Overall, we had a 7% increase in the number of attendees and a 15% increase in exhibitors, while average revenue increased 4% for attendees but declined 3% for exhibitors. The gross contribution margin increased 1 point, primarily due to a combination of factors, including higher contributionoperating expenses from our ongoing events.several events that were upgraded or moved to larger facilities.
LIQUIDITY AND CAPITAL RESOURCES
The Company hasentered into a new five-year credit agreement in March 2013 that provides for a $200.0$150.0 million term loan and a $400.0$600.0 million revolving credit facility (the “2010“2013 Credit Agreement”). Under the revolving credit facility, amounts may be borrowed, repaid, and re-borrowed through the maturity date of the agreement in December 2015.March 2018. The credit arrangement contains an expansion feature by which the term loan and revolving credit facility may be increased, at the Company’s option and under certain conditions, up to an additional $150.0$250.0 million in the aggregate.
We finance our operations primarily through cash generated from our on-going operating activities. At September 30, 2012,March 31, 2013, we had $255.4$269.1 million of cash and cash equivalents and over $354.0$546.7 million of available borrowing capacity under our revolving credit facility. Our cash and cash equivalents are held in numerous locations throughout the world, with approximately 65%62% held outside the United States at September 30, 2012.March 31, 2013. We believe that we have adequate liquidity and that the cash we expect to earn from our on-going operating activities, our existing cash balances, and the borrowing capacity we have under our revolving credit facility will be sufficient for our currently anticipated needs.
The following table summarizes the changes in the Company’s cash and cash equivalents (in thousands):
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| Nine Months |
| Cash |
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Cash provided by operating activities |
| $ | 208,751 |
| $ | 176,465 |
| $ | 32,286 |
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Cash used in investing activities |
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| (41,136 | ) |
| (23,720 | ) |
| (17,416 | ) |
Cash used by financing activities |
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| (58,374 | ) |
| (111,141 | ) |
| 52,767 |
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Net increase in cash and cash equivalents |
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| 109,241 |
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| 41,604 |
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| 67,637 |
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Effects of exchange rates |
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| 3,411 |
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| (4,882 | ) |
| 8,293 |
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Beginning cash and cash equivalents |
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| 142,739 |
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| 120,181 |
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| 22,558 |
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Ending cash and cash equivalents |
| $ | 255,391 |
| $ | 156,903 |
| $ | 98,488 |
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Three Months Ended March 31, 2013 | Three Months Ended March 31, 2012 | Cash Increase (Decrease) | ||||||||||
Cash provided by operating activities | $ | 19,693 | $ | 18,679 | $ | 1,014 | ||||||
Cash used in investing activities | (9,648 | ) | (7,118 | ) | (2,530 | ) | ||||||
Cash used by financing activities | (36,906 | ) | (17,556 | ) | (19,350 | ) | ||||||
Net decrease in cash and cash equivalents | (26,861 | ) | (5,995 | ) | (20,866 | ) | ||||||
Effects of exchange rates | (3,928 | ) | 2,241 | (6,169 | ) | |||||||
Beginning cash and cash equivalents | 299,852 | 142,739 | 157,113 | |||||||||
Ending cash and cash equivalents | $ | 269,063 | $ | 138,985 | $ | 130,078 |
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Operating
Operating cash flow increased by $32.3$1.0 million when comparing the ninethree months ended September 30, 2012March 31, 2013 to the same period in 2011.2012. The increase was primarily due to $15.2$2.5 million in higher net income and significantly higher collections on receivables and other positive working capital changes. We also hadto a lesser extent, lower cash payments for interest on our debt.debt and higher landlord reimbursements from the renovation of our Stamford headquarters facility. These increases were partially offset by higher cash payments for income taxes in 2012.bonus and commissions.
Investing
We used an additional $17.4$2.5 million of cash in our investment activities in the 2012 period. The increase2013 period which was primarily due to $8.0 million in additional capital expenditures from the on-going renovation of our Stamford headquarters facility, which are fully reimbursable byfacility. As of April 2013, the facility landlord, and $10.3 million of cash used for our acquisition of Ideas International.renovation was substantially completed.
Financing
We used significantly less$36.9 million of cash in our financing activities in the 2013 period compared to $17.6 million in 2012, an increase in cash used of $19.4 million. We had lower net cash proceeds from borrowings in the 2013 period, and we also paid $3.6 million of debt issuance costs related to our debt refinancing, and cash proceeds from employee stock compensation exercises also declined, primarily due to a lower number of shares repurchased.because there are fewer remaining stock options outstanding. Cash used for share repurchases declined $51.9 million, from $141.2 million in the 2011 periodfirst quarter of 2013 declined by $28.6 million compared to $89.3 million in the 2012 period. The Company repurchased 2.3 million shares through September 30, 2012 compared to 3.9 million shares through September 30, 2011. The decrease in the number of shares repurchased was due to the substantially higher market value of our Common Stock in the 2012 period.first quarter 2012.
OBLIGATIONS AND COMMITMENTS
20102013 Credit Agreement
The 20102013 Credit Agreement provides for a five-year, $200.0$150.0 million term loan and a $400.0$600.0 million revolving credit facility, and an expansion feature by which the term loan and revolving credit facility may be increased, at the Company’s option and under certain conditions, by up to an additional $150.0$250.0 million in the aggregate. To date, the Company has not borrowed under the expansion feature. The Company had $200.0 million outstanding under the 20102013 Credit Agreement as of September 30, 2012,March 31, 2013, which included $157.5$150.0 million outstanding under the term loan and $42.5$50.0 million outstanding under the revolver.
The term loan will be repaid in 1916 consecutive quarterly installments which commencedwill commence on March 31, 2011,June 30, 2013, plus a final payment due on December 22, 2015,March 7, 2018, and may be prepaid at any time without penalty or premium at the Company’s option. The revolving credit facility may be used for loans, and up to $40.0 million may be used for letters of credit. The revolving loans may be borrowed, repaid and re-borrowed until December 22, 2015,March 7, 2018, at which time all amounts borrowed must be repaid. See Note 7 — Debt herein in the Notes to the Condensed Consolidated Financial Statements for additional information regarding the 20102013 Credit Agreement.
Off-Balance Sheet Arrangements
Through September 30, 2012,March 31, 2013, we have not entered into any off-balance sheet arrangements or transactions with unconsolidated entities or other persons.
BUSINESS AND TRENDS
Our quarterly and annual revenues, operating income, and cash flows fluctuate as a result of many factors, including: the timing of our Symposium/ITxpo series that normally occurs during the fourth calendar quarter, as well as our other events; the amount of new business generated; the mix of domestic and international business; domestic and international economic conditions; changes in market demand for our products and services; changes in foreign currency rates; the timing of the development, introduction and marketing of new products and services; competition in the industry; the payment of performance compensation; and other factors. The potential fluctuations in our operating income could cause period-to-period comparisons of operating results not to be meaningful and could provide an unreliable indication of future operating results.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
We operate in a very competitive and rapidly changing environment that involves numerous risks and uncertainties, some of which are beyond our control. A description of the risk factors associated with our business is included under “Risk Factors” contained in Item 1A. of our 20112012 Annual Report on Form 10-K which is incorporated herein by reference.
RECENTLY ISSUED ACCOUNTING STANDARDS
Accounting rules issued by the various U.S. standard setting and governmental authorities that have not yet become effective and may impact our Consolidated Financial Statements in future periods are described below, together with our assessment of the potential impact they may have on our Consolidated Financial Statements and related disclosures in future periods:
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In December 2011,March 2013, the FASB issued ASU No. 2011-11,2013-05,Disclosures about OffsettingParent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets and Liabilitieswithin a Foreign Entity or of an Investment in a Foreign Entity.. The newASU No. 2013-05 provides updated guidance requires disclosures aboutto resolve diversity in practice concerning the release of the cumulative foreign currency translation adjustment into net income when a parent sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets and liabilities that are offsetwithin a foreign entity. When a company ceases to have a controlling financial interest in a subsidiary within a foreign entity, the company should recognize any related cumulative translation adjustment into net income only if the sale or have the potential to be offset. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offsettransfer results in the statementcomplete or substantially complete liquidation of financial position as well as instruments and transactions subject tothe foreign entity in which the subsidiary had resided. Upon the partial sale of an agreement similar toequity method investment that is a master netting arrangement. In addition,foreign entity, the standard requires disclosurecompany should release into earnings a pro rata portion of collateral received and posted in connection with master netting agreementsthe cumulative translation adjustment. Upon the partial sale of an equity method investment that is not a foreign entity, the company should release into earnings the cumulative translation adjustment if the partial sale represents a complete or similar arrangements. These disclosures are intended to address differences insubstantially complete liquidation of the asset and liability offsetting requirements under U.S. GAAP and International Financial Reporting Standards. This new guidance will beforeign entity that holds the equity method investment.
ASU No. 2013-05 is effective for Gartner for interim and annual reporting periods beginning January 1, 2013, with retrospective application required. While the Company’s quarter ending March 31, 2014. The adoption of this new guidance may result in additional disclosures, we dois not expect itexpected to have a material impacteffect on the Company’s results of operations, cash flows,financial position or financial position.liquidity.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
We have exposure to changes in interest rates arising from borrowings under our 20102013 Credit Agreement. At September 30, 2012,March 31, 2013, we had $157.5$150.0 million outstanding under the term loan and $42.5$50.0 million outstanding under the revolver. Borrowings under this facility are floating rate, which may be either prime-based or Eurodollar-based. The rate paid for these borrowings includes a base floating rate plus a margin between 0.50%0.25% and 1.25%0.75% on prime borrowings and between 1.50%1.25% and 2.25%1.75% on Eurodollar-based borrowings.
We have an interest rate swap contract which effectively converts the floating base rate on the first $200.0 million of our borrowings to a 2.26% fixed rate. The Company only hedges the base interest rate risk on the first $200.0 million of its outstanding borrowings. Accordingly, we are exposed to interest rate risk on borrowings in excess of $200.0 million. A 25 basis point increase or decrease in interest rates would change pre-tax annual interest expense on the additional revolver borrowing capacity under the 20102013 Credit Agreement (not including the expansion feature) by approximately $0.9$1.4 million.
FOREIGN CURRENCY RISK
We have customers in numerous countries, and 46% and 44% of our revenues for the fiscal yearsyear ended December 31, 2011 and 2010, respectively,2012 were derived from sales outside of the U.S. As a result, we conduct business in numerous currencies other than the U.S dollar. Among the major foreign currencies in which we conduct business are the Euro, the British Pound, the Japanese Yen, the Australian dollar, and the Canadian dollar. Our foreign currency exposure results in both translation risk and transaction risk:
Translation Risk
We are exposed to foreign currency translation risk since the functional currencies of our foreign operations are generally denominated in the local currency. Translation risk arises since the assets and liabilities that we report for our foreign subsidiaries are translated into U.S. dollars at the exchange rates in effect at the balance sheet dates, and these exchange rates fluctuate over time. These foreign currency translation adjustments are deferred and are recorded as a component of stockholders’ equity and do not impact our operating results.
A measure of the potential impact of foreign currency translation on our Condensed Consolidated Balance Sheets can be determined through a sensitivity analysis of our cash and cash equivalents. At September 30, 2012,March 31, 2013, we had over $255.0$269.1 million of cash and cash equivalents, a substantial portion of which was denominated in foreign currencies. If the foreign exchange rates of the major currencies in which we operate changed in comparison to the U.S. dollar by 10%, the amount of cash and cash equivalents we would have reported on September 30, 2012, wouldMarch 31, 2013, could have increased or decreased by approximately $12.0 million.
Because our foreign subsidiaries generally operate in a local functional currency that differs from the U.S. dollar, revenues and expenses in these foreign currencies translate into higher or lower revenues and expenses in U.S. dollars as the U.S. dollar continuously weakens or strengthens against these other currencies. Therefore, changes in exchange rates may affect our consolidated revenues and expenses (as expressed in U.S. dollars) from foreign operations. Historically, this impact on our consolidated earnings has not been material since foreign currency movements in the major currencies in which we operate tend to impact our revenues and expenses fairly equally.
Transaction Risk
We have foreign exchange transaction risk since we typically enter into transactions in the normal course of business that are denominated in foreign currencies that differ from the local functional currency in which the foreign subsidiary operates. We typically enter into foreign currency forward exchange contracts to offset the effects of foreign currency transaction risk. These contracts are normally short term in duration and unrealized and realized gains and losses are recognized in current period earnings. At September 30, 2012,March 31,
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2013, we had 3043 outstanding foreign currency forward contracts with a total notional amount of $40.5$48.3 million and an immaterial net unrealized loss. AllMost of these outstanding contracts matured by the end of October 2012.April 2013.
CREDIT RISK
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of short-term, highly liquid investments classified as cash equivalents, accounts receivable, and interest rate swap contracts. The majority of the Company’s cash and cash equivalents and its interest rate swap contractscontract are with large investment grade commercial banks that are participants in the Company’s 20102013 Credit Agreement. Accounts receivable balances deemed to be collectible from customers have limited concentration of credit risk due to our diverse customer base and geographic dispersion.
ITEM 4. CONTROLS AND PROCEDURES
We have established disclosure controls and procedures that are designed to ensure that the information we are required to disclose in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported in a timely manner. Specifically, these controls and procedures ensure that the information is accumulated and communicated to our executive management team, including our chief executive officer and our chief financial officer, to allow timely decisions regarding required disclosure.
Management conducted an evaluation, as of September 30, 2012,March 31, 2013, of the effectiveness of the design and operation of our disclosure controls and procedures, under the supervision and with the participation of our chief executive officer and chief financial officer. Based upon that evaluation, our chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures are effective in alerting them in a timely manner to material Company information required to be disclosed by us in reports filed under the Exchange Act.
In addition, there have been no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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We are involved in legal and administrative proceedings and litigation arising in the ordinary course of business. We believe that the potential liability, if any, in excess of amounts already accrued from all proceedings, claims and litigation will not have a material effect on our financial position or results of operations when resolved in a future period.
The Internal Revenue Service (“IRS”) has completed its examination of the federal income tax return of the Company for the tax year ended December 31, 2007. The Company disagrees with certain of the proposed adjustments and is disputing this matter through applicable IRS and judicial procedures, as appropriate. Separately, in the second quarter of 2011 the IRS commenced an audit of the Company’s 2008 and 2009 tax years. The Company continues to comply with all information requests and no material adjustments of the Company’s tax positions have been proposed at this time for the 2008 and 2009 tax years. Although the final resolution of these audits is uncertain and there are no assurances that the ultimate resolution will not exceed the amounts recorded, the Company believes that the ultimate disposition of these matters will not have a material adverse effect on its consolidated financial position, cash flows, or results of operations.
A description of the risk factors associated with our business is included under “Risk Factors” contained in Item 1A. of our 20112012 Annual Report on Form 10-K and is incorporated herein by reference.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no unregistered sales of equity securities during the period covered by this report.
Issuer Purchases of Equity Securities
The Company has a $500.0 million share repurchase program to be utilized to acquire shares of Common Stock. Repurchases may be made from time-to-time through open market purchases, private transactions, tender offers or other transactions. The amount and timing of repurchases will be 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 also be made from time-to-time in connection with the settlement of the Company’s shared-based compensation awards. Repurchases will be funded from cash flow from operations and borrowings under the Company’s Credit Agreement. The following table provides detail related to repurchases of our Common Stock for treasury in the ninethree months ended September 30, 2012:March 31, 2013:
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|
|
|
|
|
|
|
|
|
|
Period |
| Total |
| Average |
| Approximate |
| |||
|
|
|
| |||||||
2012 (1) |
|
|
|
|
|
|
|
|
|
|
January |
|
| 86,123 |
| $ | 34.89 |
|
|
|
|
February |
|
| 1,287,473 |
|
| 38.70 |
|
|
|
|
March |
|
| 605,833 |
|
| 40.16 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Total |
|
| 1,979,429 |
| $ | 38.98 |
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
April |
|
| 1,113 |
| $ | 42.94 |
|
|
|
|
May |
|
| 38,824 |
|
| 42.97 |
|
|
|
|
June |
|
| 144,894 |
|
| 40.04 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Total |
|
| 184,831 |
| $ | 40.67 |
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
July |
|
| 784 |
| $ | 45.63 |
|
|
|
|
August |
|
| 87,101 |
|
| 48.07 |
|
|
|
|
September |
|
| 7,948 |
|
| 50.68 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Total |
|
| 95,833 |
| $ | 48.27 |
| $ | 231 |
|
|
|
|
|
|
|
|
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Approximate Dollar Value of Shares that may yet be Purchased Under our Share Repurchase Program (in thousands) | |||||||||
2013(1) | ||||||||||||
January | 1,841 | $ | 50.07 | |||||||||
February | 774,917 | 49.32 | ||||||||||
March | 200,185 | 51.02 | ||||||||||
Total | 976,943 | $ | 49.67 | $ | 187,000 |
(1) | ||
| The Company paid a total of |
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EXHIBIT NUMBER | DESCRIPTION OF DOCUMENT | ||
10.1 | Credit Agreement dated as of March 7, 2013 among Gartner, Inc.; Wells Fargo Bank, National Association and RBS Citizens, N.A., as Co-Syndication Agents; HSBC Bank USA, National Association, Keybank National Association, TD Bank, N.A., U.S. Bank National Association and Union Bank, N.A., as Co-Documentation Agents; JP Morgan Chase Bank, N.A., as Administrative Agent; and the several lenders thereto. |
| |
|
| ||
| Certification of chief executive officer under Rule 13a — 14(a)/15d — 14(a). | ||
31.2 | Certification of chief financial officer under Rule 13a — 14(a)/15d — 14(a). | ||
32 | Certification under 18 U.S.C. 1350. | ||
101 | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets at |
Items 3, 4, and 5 of Part II are not applicable and have been omitted.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Gartner, Inc. | ||
Date: | /s/ Christopher J. Lafond | |
Christopher J. Lafond | ||
Executive Vice President and Chief Financial Officer | ||
(Principal Financial and Accounting Officer) |
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