Our operating results could be negatively impacted by generalglobal economicconditions.Our business is impacted by general economic conditions both domesticand trends, in the U.S and abroad. TheAmong these conditions are government deficit spending in the U.S. and other countries, ongoing uncertainty in global credit crisistrade, difficulties related to the refinancing of sovereign debt, and economic downturn that began in 2008 and continued throughout 2009currency stability. In addition, there continues to be risks related to one or more Euro-Zone countries discontinuing the use of the Euro as their currency. These conditions could negatively and materially affect future demand for our products and services. This downturnSuch difficulties could materially and adversely affect our business, includinginclude the ability to maintain client retention, wallet retention and consulting utilization rates, achieve contract value and consulting backlog growth, and attract attendees and exhibitors to our events.events or obtain new clients. Such developments could negatively impact our financial condition, results of operations, and cash flows.
We face significant competition and our failure to compete successfully couldmaterially adversely affect our results of operations and financial condition. We face direct competition from a significant number of independent providers of information products and services, including information available on the Internet free of charge. We also compete indirectly against consulting firms and other information providers, including electronic and print media companies, some of which may have greater financial, information gathering and marketing resources than we do. These indirect competitors could also choose to compete directly with us in the future. In addition, limited barriers to entry exist in the markets in which we do business. As a result, additional new competitors may emerge and existing competitors may start to provide additional or complementary services. Additionally, technological advances may provide increased competition from a variety of sources.
There can be no assurance that we will be able to successfully compete against current and future competitors and our failure to do so could result in loss of market share, diminished value in our products and services, reduced pricing and increased marketing expenditures. Furthermore, we may not be successful if we cannot compete effectively on quality of research and analysis, timely delivery of information, customer service, and the ability to offer products to meet changing market needs for information and analysis, or price.
We may not be able to maintain our existing products and services.We operate in a rapidly evolving market, and our success depends upon our ability to deliver high quality and timely research and analysis to our clients. Any failure to continue to provide credible and reliable information that is useful to our clients could have a material adverse effect on future business and operating results. Further, if our predictions prove to be wrong or are not substantiated by appropriate research, our reputation may suffer and demand for our products and services may decline. In addition, we must continue to improve our methods for delivering our products and services in a cost-effective manner. Failure to increase and improve our electronic delivery capabilities could adversely affect our future business and operating results.
We may not be able to enhance and develop our existing products and services,or introduce the new products and services that are needed to remaincompetitive.The market for our products and services is characterized by rapidly changing needs for information and analysis on the IT industry as a whole. The development of new products is a complex and time-consuming process. Nonetheless, to maintain our competitive position, we must continue to anticipate the needs of our client organizations, enhance and improve our products and services, develop or acquire new products and services, deliver all products and services in a timely manner, and appropriately position and price new products and services relative to the marketplace and our costs of producing them. Any failure to achieve successful client acceptance of new products and services could have a material adverse effect on our business, results of operations and financial position. Additionally, significant delays in new product or services releases or significant problems in creating new products or services could adversely affect our business, results of operations and financial position.
We depend on renewals of subscription-based services and sales of newsubscription-based services for a significant portion of our revenue, and ourfailure to renew at historical rates or generate new sales of such servicescould lead to a decrease in our revenues.A large portion of our success depends on our ability to generate renewals of our subscription-based research products and services and new sales of such products and services, both to new clients and existing clients. These products and services constituted 66%70% and 60%69% of our revenues for 20092012 and 2008,2011, respectively. Generating new sales of our subscription-based products and services, both to new and existing clients, is often a time consuming process. If we are unable to generate new sales, due to competition or other factors, our revenues will be adversely affected.
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Our research subscription agreements have terms thatare generally range fromfor twelve to thirty months. Our ability to maintain contract renewals is subject to numerous factors, including the following:
| • | delivering high-quality and timely analysis and advice to our clients; |
| • | understanding and anticipating market trends and the changing needs of our clients; and |
| • | delivering products and services of the quality and timeliness necessary to withstand competition. |
We depend on non-recurring consulting engagements and our failure to secure newengagements could lead to a decrease in our revenues.Consulting segment revenues constituted 25%19% of our total revenues for 20092012 and 27%21% for 2008. These consulting2011. Consulting engagements typically are project-based and non-recurring. Our ability to replace consulting engagements is subject to numerous factors, including the following:
| • | delivering consistent, high-quality consulting services to our clients; |
| • | tailoring our consulting services to the changing needs of our clients; and |
| • | our ability to match the skills and competencies of our consulting staff to the skills required for the fulfillment of existing or potential consulting engagements. |
Any material decline in our ability to replace consulting arrangements could have an adverse impact on our revenues and our financial condition.
The profitability and success of our conferences, symposia and events could beadversely affected by external factors beyond our control. The global credit crisis and economic downturn that began in 2008 and continued throughout 2009 severely impacted travel budgets of all organizations, which may continue to negatively impact our business. The market for desirable dates and locations for conferences, symposia and events is highly competitive. If we cannot secure desirable dates and locations for our conferences, symposia and events their profitability could suffer, and our financial condition and results of operations may be adversely affected. In addition, because our events are scheduled in advance and held at specific locations, the success of these events can be affected by circumstances outside of our control, such as labor strikes, transportation shutdowns and travel restrictions, economic slowdowns, terrorist attacks, weather, natural disasters, and other world eventsoccurrences impacting the global, regional, or national economy, the occurrence of any of which could negatively impact the success of the event.
Our sales to governments are subject to appropriations and may be terminated.We derive significant revenues from contracts with the U.S. government and its respective agencies, numerous state and local governments and their respective agencies, as well asand foreign governments and their agencies. At December 31, 20092012 and 2008,2011, approximately $182.0$255.0 million and $192.0$225.0 million, respectively, of our Research contract value and Consulting backlog was attributable to governments. We believe substantially all of the amount attributable to governments at December 31, 20092012 will be filled in 2010.2013. Our U.S. government contracts are subject to the approval of appropriations by the U.S. Congress to fund the agencies contracting for our services, and our contracts at the state and local levels are subject to various government authorizations and funding approvals and mechanisms. In general, most if not all of these contracts may be terminated at any time without cause (“termination for convenience”). Additionally, many state governments, their agencies, and municipalities across the United States are under severe financial strain and are considering significant budget cuts. Should appropriations for the governments and agencies that contract with us be curtailed, or should government contracts be terminated for convenience, we may experience a significant loss of revenue.
We may not be able to attract and retain qualified personnel which couldjeopardize the quality of our products and services.Our success depends heavily upon the quality of our senior management, research analysts, consultants, sales and other key personnel. We face competition for the limited pool of these qualified professionals from, among others, technology companies, market research firms, consulting firms, financial services companies and electronic and print media companies, some of which have a greater ability to attract and compensate these professionals. Some of the personnel that we attempt to hire are subject to non-compete agreements that could impede our short-term recruitment efforts. Any failure to retain key personnel or hire and train additional qualified personnel as required to support the evolving needs of clients or growth in our business, could adversely affect the quality of our products and services, as well as future business and operating results.
We may not be able to maintain the equity in our brand name.We believe that our “Gartner” brand, including our independence, is critical to our efforts to attract and retain clients and that the importance of brand recognition will increase as competition increases. We may expand our marketing activities to promote and strengthen the Gartner brand and may need to increase our marketing budget, hire additional marketing and public relations personnel, and expend additional sums to protect theour brand and otherwise increase
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expenditures to create and maintain client brand loyalty. If we fail to effectively promote and maintain the Gartner brand, or incur excessive expenses in doing so, our future business and operating results could be adversely impacted.
Our international operations expose us to a variety of operational risks whichcould negatively impact our future revenue and growth.We have clients in over 8085 countries and a significant partsubstantial amount of our revenue comes from international sales.revenues are earned outside of the U.S. Our operating results are subject to the risks inherent in international business activities, including general political and economic conditions in each country, changes in market demand as a result of tariffs and other trade barriers, challenges in staffing and managing foreign
Our international operations expose us to changesvolatility in foreign currencyexchange rates. Approximately 45% and 47% of our revenues for 2009 and 2008, respectively, were derived from sales outside of the U.S. Revenues earned outside the U.S. are typically transacted in local currencies, which may fluctuate significantly against the dollar. While we may use forward exchange contracts to a limited extent to seek to mitigate foreign currency risk, our revenues and results of operations could be adversely affected by unfavorable foreign currency fluctuations.
Catastrophic eventsNatural disasters or geo-political conditionsevents may disrupt our business.A disruption or failure of our systems or operations in the event of a major weather event, cyber-attack, terrorist attack, earthquake, flood, volcanic activity, or other catastrophic eventdisaster could significantly disrupt our operations. Such events could cause delays in initiating or completing sales, providingimpede delivery of our products and services to our clients, disrupt other critical client-facing and business processes, or performing other mission-critical functions.dislocate our critical internal functions and personnel. Our corporate headquarters is located approximately 30 miles from New York City, and we have an operations center located in Ft. Myers, Florida, in a hurricane-prone area. We also operate in numerous international locations. A catastrophic event that resultslocations, and we have offices in a number of major cities across the destruction or disruption of any of our critical business or information technology systems could harm our ability to conduct normal business operations and negatively impact our operating results.globe. Abrupt political change, terrorist activity, and armed conflict pose a risk of general economic disruption in affected countries and regions, which may negatively impact our sales and increase our operating costs. Additionally, these conditions also may add uncertainty to the timing and budget decisions of our clients.
Internet and critical internal computer system failures, cyber-attacks, or compromises of our systems or security could damage our reputation and harm our business. A significant portion of our business is conducted over the Internet and we rely heavily on computer systems. A cyber-attack, widespread Internet failure, or disruption of our critical information technology systems through viruses or other events could cause delays in initiating or completing sales, impede delivery of our products and services to our clients, disrupt other critical client-facing or business processes, or dislocate our critical internal functions. Such events could significantly harm our ability to conduct normal business operations and negatively impact our financial condition and operating results.
We take steps generally acknowledged as standard for the industry to secure our management information systems, including our computer systems, intranet, proprietary websites, email and other telecommunications and data networks, and we carefully scrutinize the security of outsourced website and service providers prior to retaining their services. However, the security measures implemented by us or by our outside service providers may not be effective and our systems (and those of our outside service providers) may be vulnerable to theft, loss, damage and interruption from a number of potential sources and events, including unauthorized access or security breaches, cyber-attacks, computer viruses, power loss, or other disruptive events. Our reputation, brand, financial condition and/or operating results could be adversely affected if, as a result of a significant cyber event or other technology-related catastrophe, our operations are disrupted or shutdown; our confidential, proprietary information is stolen or disclosed; we incur costs or are required to pay fines in connection with stolen customer, employee, or other confidential information; we are required to dedicate significant resources to system repairs or increase cyber security protection; or we otherwise incur significant litigation or other costs as a result of these occurrences.
We may experience outages and disruptions of our online services if we fail tomaintain an adequate operations infrastructure.Our increasing user traffic and complexity of our products and services demand more computing power. We have spent and expect to continue to spend substantial amounts to maintain data centers and equipment and to upgrade our technology and network infrastructure to handle increased traffic on our websites. However, any inefficiencies or operational failures could diminish the quality of our products, services, and user experience, resulting in damage to our reputation and loss of current and potential users, subscribers, and advertisers, potentially harming our financial condition and operating results and financial condition.results.
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Our outstanding debt obligationsobligation could impact our financial condition or future operating results. At December 31, 2009, we had $329.0 million outstanding under our Credit Agreement, whichWe have a credit arrangement that provides for two amortizinga five-year, $200.0 million term loans with quarterly paymentsloan and a $300.0$400.0 million revolving credit facility.facility (the “2010 Credit Agreement”). The credit arrangement contains an expansion feature by which the term loan and revolving credit facility may be increased, at our option and under certain conditions, by up to an additional $100.0$150.0 million at our lenders’ discretion (the “expansion feature”), for a total revolving credit facility of $400.0 million. However,in the $100.0 million expansion featureaggregate which may or may not be available to us depending upon prevailing credit market conditions.
The affirmative, negative and financial covenants of the 2010 Credit Agreement could limit our future financial flexibility. Additionally, a failure to comply with these covenants could result in acceleration of all amounts outstanding under the Credit Agreement,arrangement, which would materially impact our financial condition unless accommodations could be negotiated with our lenders. No assurance can be given that we would be successful in doing so in this current financial climate, or that any accommodations that we were able to negotiate would be on terms as favorable as those presently contained in the Credit Agreement.
We may require additional cash resources which may not be available onfavorable terms or at all.We believe that our existing cash balances, projected cash flow from operations, and the remaining borrowing capacity we have under our revolving credit facility will be sufficient to fund our plans for our expected short-termthe next 12 months and the foreseeable long-term operating needs.
However, we may however, require additional cash resources due to changed business conditions, implementation of our strategy and stock repurchase program, to repay indebtedness or to pursue future business opportunities requiring substantial investments of additional capital. If our existing financial resources are insufficient to satisfy our requirements, we may seek additional borrowings. Prevailing credit market conditions may negatively affect debt availability and cost, and, as a result, financing may not be available in amounts or on terms acceptable to us, if at all. In addition, the incurrence of additional indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would further restrict our operations.
If we are unable to enforce and protect our intellectual property rights ourcompetitive position may be harmed.We rely on a combination of copyright, trademark, trade secret, confidentiality, non-compete and other contractual provisions to protect our intellectual property rights. Despite our efforts to protect our intellectual property rights, unauthorized third parties may obtain and
We have grown, and may continue to grow, through acquisitions and strategicinvestments, which could involve substantial risks.We have made and may continue to make acquisitions of, or significant investments in, businesses that offer complementary products and services. The risks involved in each acquisition or investment include the possibility of paying more than the value we derive from the acquisition, dilution of the interests of our current stockholders or decreased working capital, increased indebtedness, the assumption of undisclosed liabilities and unknown and unforeseen risks, the ability to retain key personnel of the acquired company, the inability to integrate the business of the acquired company, the time to train the sales force to market and sell the products of the acquired business, the potential disruption of our ongoing business and the distraction of management from our business. The realization of any of these risks could adversely affect our business.
We face risks related to litigation.We are, and may in the future be, subject to a variety of legal actions, such as employment, breach of contract, intellectual property-related, and business torts, including claims of unfair trade practices and misappropriation of trade secrets. Given the nature of our business, we are also subject to defamation (including libel and slander), negligence, or other claims relating to the information we publish. Regardless of the merits, responding to any such claim could be time consuming, result in costly litigation and require us to enter into settlements, royalty and licensing agreements which may not be offered or available on reasonable terms. If a successful claim is made against us and we fail to settle the claim on reasonable terms, our business, results of operations or financial position could be materially adversely affected.
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We face risks related to taxation.We operate in numerous domestic and foreign taxing jurisdictions and ourjurisdictions. Changes to the tax laws as well as the level of operations and profitability in each jurisdiction may have an unfavorable impact upon the amount of income taxes that we recognize in any given year. In addition, our tax filings for various tax years are subject to audit by the tax authorities in jurisdictions where we conduct business, and in the ordinary course of business, we may be under audit by one or more tax authorities from time to time.
Our corporate compliance program cannot guarantee that we are in compliance with all applicable laws and regulations.We operate in a number of countries, and as a result we are required to comply with numerous, and in many cases, changing international and U.S. federal, state and local laws and regulations. As a result, we have developed and instituted a corporate compliance program which includes the creation of appropriate policies defining employee behavior that mandate adherence to laws, employee training, annual affirmations, monitoring and enforcement. However, if any employee fails to comply with, or intentionally disregards, any of these laws or regulations, a range of liabilities could result for the employee and for the Company, including, but not limited to, significant penalties and fines, sanctions and/or litigation, and the expenses associated with defending and resolving any of the foregoing, any of which could have a material impact on our business.
Risks related to our common stock
Our operating results may fluctuate from period to period and may not meet theexpectations of securities analysts or investors or guidance we have given,which may cause the price of our Common Stock to decline.Our quarterly and annual operating results may fluctuate in the future as a result of many factors, including the timing of the execution of research contracts, the extent of completion of consulting engagements, the timing of symposia and other events, the amount of new business generated, the mix of domestic and international business, currency fluctuations, changes in market demand for our products and services, the timing of the development, introduction and marketing of new products and services, and competition in the industry. An inability to generate sufficient earnings and cash flow, and achieve our forecasts, may impact our operating and other activities. The potential fluctuations in our operating results could causeperiod-to-period comparisons of operating results not to be meaningful and may provide an unreliable indication of future operating results. Furthermore, our operating results may not meet the expectations of securities analysts or investors in the future or guidance we have given. If this occurs, the price of our stock would likely decline.
Our stock price may be volatile,impacted by factors outside of our control and you maynot be able to resell shares of our Common Stock at or above the price youpaid.The trading prices of our Common Stock could be subject to significant fluctuations in response to, among other factors, variations in operating results, developments in the industries in which we do business, general economic conditions, general market conditions, changes in the nature and composition of our stockholder base, changes in securities analysts’ recommendations regarding our securities and our performance relative to securities analysts’ expectations for any quarterly period. Such volatilityperiod, as well as other factors outside of our control. These factors may adversely affect the market price of our Common Stock.
Future sales of our Common Stock in the public market could lower our stockprice.Sales of a substantial number of shares of Common Stock in the public market by our current stockholders, or the threat that substantial sales may occur, could cause the market price of our Common Stock to decrease significantly or make it difficult for us to raise additional capital by selling stock. Furthermore, we have various equity incentive plans that provide for awards in the form of stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards. awards which have the effect of adding shares of Common Stock into the public market.
As of December 31, 2009,2012, the aggregate number of shares of our Common Stock issuable pursuant to outstanding grants and awards under these plans was approximately 11.54.8 million shares (approximately 5.81.2 million of which have vested). In addition, approximately 7.46.4 million shares may be issued in connection with future
Interests of certain of our significant stockholders may conflict with yours.yours As of December 31, 2009, ValueAct Capital and affiliates (“ValueAct”) owned approximately 21.7% of our Common Stock.. To our knowledge, as of the date of this report,December 31, 2012, and based upon publicly-available SEC filings, four other institutional investors each presently hold over 5% of our Common Stock. Additionally, a representative of ValueAct presently holds one seat on our Board of Directors.
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Our anti-takeover protections may discourage or prevent a change of control,even if a change in control would be beneficial to our stockholders. Provisions of our restated certificate of incorporation and bylaws and Delaware law may make it difficult for any party to acquire control of us in a transaction not approved by our Board of Directors. These provisions include:
| • | the ability of our Board of Directors to issue and determine the terms of preferred stock; |
| • | advance notice requirements for inclusion of stockholder proposals at stockholder meetings; and |
| • | the anti-takeover provisions of Delaware law. |
These provisions could discourage or prevent a change of control or change in management that might provide stockholders with a premium to the market price of their Common Stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
The Company has no unresolved written comments that were received from the SEC staff 180 days or more before the end of our fiscal year relating to our periodic or current reports under the Exchange Act.
We lease 29 domestic and 49 international offices and we have a significant presence in Stamford, Connecticut; Ft. Myers, Florida; and Egham, the United Kingdom. The Company does not own any properties.
Our corporate headquarters is located in approximately 213,000 square feet of leased office space in three buildings located in Stamford, Connecticut. Our StamfordStamford. This facility also accommodates research and analysis, marketing, sales, client support, production, corporate services, executive offices, and administration. TheIn 2010, the Company entered into an amended and restated lease agreement for the Stamford headquarters facility expires in October 2010. We have completed negotiationsthat provides for a term of fifteen years. The amended lease also grants the Company three options to renew the lease at fair market value for five years each, an amendmentoption to purchase the facility at fair market value, and 15 year extension of this lease witha $25.0 million tenant improvement allowance provided by the landlord to renovate the three buildings comprising the facility. The renovation work commenced in 2011 and expect to executedate the amended lease agreementrenovation of two buildings has been completed. Renovation on the third building is expected to be completed in the first quarter of 2010.
Our Ft. Myers location consists of approximately 62,400operations are located in 120,000 square feet of leased office space located in one building for which the lease expireswill expire in January 2013.2026. Our Egham location has approximately 72,000 square feet of leased office space in two buildings for which the leases expire in 2020 and 2025, respectively. We lease an additional 16Our other domestic and 40 international locations that support our research, and analysis,consulting, domestic and international sales efforts, and other functions. The Company does not currently own any properties.
We continue to constantly assessevaluate our space needs on a continuous basis as our business changes, but we believe thatchanges. While our existing facilities are adequate for our current and foreseeable needs, and thatshould additional space be necessary, we believe that it will be available as needed.
We are involved in various legal and administrative proceedings and litigation arising in the ordinary course of business. WeThe outcome of these individual matters is not predictable at this time. However, we believe that the potential liability, if any, in excessultimate resolution of these matters, after considering amounts already accrued from all proceedings, claims and litigationinsurance coverage, will not have a material adverse effect on our financial position, or results of operations, when resolvedor cash flows in a future period.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our Common Stock which is listed on the New York Stock Exchange under the symbol IT. As of January 31, 2013, there were 2,184 holders of record of our Common Stock. Our 2013 Annual Meeting of Stockholders will be held on May 30, 2013 at the Company’s corporate headquarters in Stamford, Connecticut. We did not submit any matter to a vote of our stockholders during the fourth quarter of 2012.
The following table sets forth the high and low sale prices for our common stockCommon Stock as reported on the New York Stock Exchange for the periods indicated:
| 2009 | 2008 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| Quarter ended March 31 | $ | 18.55 | $ | 8.33 | $ | 21.29 | $ | 13.75 | ||||||||
| Quarter ended June 30 | 16.54 | 10.55 | 24.80 | 19.50 | ||||||||||||
| Quarter ended September 30 | 18.50 | 14.14 | 28.39 | 19.20 | ||||||||||||
| Quarter ended December 31 | 20.27 | 16.85 | 22.80 | 13.07 | ||||||||||||
| 2012 | 2011 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| Quarter ended March 31 | $ | 43.19 | $ | 34.39 | $ | 41.68 | $ | 33.11 | ||||||||
| Quarter ended June 30 | 44.97 | 39.50 | 43.39 | 35.79 | ||||||||||||
| Quarter ended September 30 | 51.45 | 42.49 | 41.87 | 31.98 | ||||||||||||
| Quarter ended December 31 | 48.65 | 42.81 | 41.09 | 32.24 | ||||||||||||
DIVIDEND POLICY
We currently do not pay cash dividends on our Common Stock. OurIn addition, our 2010 Credit Agreement dated as of January 31, 2007, as amended, contains a negative covenant which may limit our ability to pay dividends.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The equity compensation plan information set forth in Part III, Item 12 of thisForm 10-K is hereby incorporated by reference into this Part II, Item 5.
SHARE REPURCHASES
The Company has a $250.0$500.0 million authorized stockshare repurchase program, that was authorized by the Board of Directors in February 2008. At the present time, as indicated in the table below, approximately $78.6which $210.2 million remainsremained available for share repurchases under this program.
The following table provides detail related to repurchases of our Common Stock in the three months ended December 31, 2009:
| Period | Total Number of Shares Purchased (#) | Average Price Paid Per Share ($) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (#) | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ($000’s) | ||||||||||||
| October | 205 | $ | 46.41 | 205 | ||||||||||||
| November | 475,282 | 46.03 | 475,282 | |||||||||||||
| December | 2,658 | 45.63 | 2,658 | |||||||||||||
| Total (1) | 478,145 | $ | 46.02 | 478,145 | $ | 210,200 | ||||||||||
| Maximum | ||||||||||||||||||
| Total Number | Approximate | |||||||||||||||||
| of Shares | Dollar Value | |||||||||||||||||
| Purchased | of Shares that | |||||||||||||||||
| as Part of | May Yet | |||||||||||||||||
| Total | Publicly | Be Purchased | ||||||||||||||||
| Number of | Average | Announced | Under the | |||||||||||||||
| Shares | Price Paid | Plans or | Plans or | |||||||||||||||
| Purchased | Per Share | Programs | Programs | |||||||||||||||
| Period | (#) | ($) | (#) | ($000’s) | ||||||||||||||
| October | 321 | $ | 19.67 | 321 | ||||||||||||||
| November | — | — | — | |||||||||||||||
| December | 229 | 18.43 | 229 | |||||||||||||||
| Total (1) | 550 | $ | 19.15 | 550 | $ | 78,636 | ||||||||||||
| (1) | For the year ended December 31, |
ITEM 6. SELECTED FINANCIAL DATA
The fiscal years presented below are for the respective twelve-month period from January 1 through December 31. Data for all years was derived or compiled from our audited consolidated financial statements included herein or from submissions of ourForm 10-K in prior years. The selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes contained in this Annual Report onForm 10-K.
| (In thousands, except per share data) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||||
| STATEMENT OF OPERATIONS DATA: | ||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||
| Research | $ | 752,505 | $ | 781,581 | $ | 683,380 | $ | 585,656 | $ | 536,591 | ||||||||||||
| Consulting | 286,847 | 347,404 | 325,030 | 305,231 | 301,074 | |||||||||||||||||
| Events | 100,448 | 150,080 | 160,065 | 146,412 | 126,475 | |||||||||||||||||
| Total revenues | 1,139,800 | 1,279,065 | 1,168,475 | 1,037,299 | 964,140 | |||||||||||||||||
| Operating income | 134,477 | 164,368 | 129,458 | 98,039 | 20,474 | |||||||||||||||||
| Income (loss) from continuing operations | 82,964 | 97,148 | 70,666 | 54,258 | (6,200 | ) | ||||||||||||||||
| Income from discontinued operations | — | 6,723 | 2,887 | 3,934 | 3,763 | |||||||||||||||||
| Net income (loss) | $ | 82,964 | $ | 103,871 | $ | 73,553 | $ | 58,192 | $ | (2,437 | ) | |||||||||||
| PER SHARE DATA: | ||||||||||||||||||||||
| Basic: | ||||||||||||||||||||||
| Income (loss) from continuing operations | $ | .88 | $ | 1.02 | $ | 0.68 | $ | 0.48 | $ | (0.05 | ) | |||||||||||
| Income from discontinued operations | — | 0.07 | 0.03 | 0.03 | 0.03 | |||||||||||||||||
| Income (loss) per share | $ | .88 | $ | 1.09 | $ | 0.71 | $ | 0.51 | $ | (0.02 | ) | |||||||||||
| Diluted: | ||||||||||||||||||||||
| Income (loss) from continuing operations | $ | .85 | $ | 0.98 | $ | 0.65 | $ | 0.47 | $ | (0.05 | ) | |||||||||||
| Income from discontinued operations | — | 0.07 | 0.03 | 0.03 | 0.03 | |||||||||||||||||
| Income (loss) per share | $ | .85 | $ | 1.05 | $ | 0.68 | $ | 0.50 | $ | (0.02 | ) | |||||||||||
| Weighted average shares outstanding | ||||||||||||||||||||||
| Basic | 94,658 | 95,246 | 103,613 | 113,071 | 112,253 | |||||||||||||||||
| Diluted | 97,549 | 99,028 | 108,328 | 116,203 | 112,253 | |||||||||||||||||
| OTHER DATA: | ||||||||||||||||||||||
| Cash and cash equivalents | $ | 116,574 | $ | 140,929 | $ | 109,945 | $ | 67,801 | $ | 70,282 | ||||||||||||
| Total assets | 1,215,279 | 1,093,065 | 1,133,210 | 1,039,793 | 1,026,617 | |||||||||||||||||
| Long-term debt | 124,000 | 238,500 | 157,500 | 150,000 | 180,000 | |||||||||||||||||
| Stockholders’ equity (deficit) | 112,535 | (21,316 | ) | 17,498 | 26,318 | 146,588 | ||||||||||||||||
| (In thousands, except per share data) | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
| STATEMENT OF OPERATIONS DATA: | ||||||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Research | $ | 1,137,147 | $ | 1,012,062 | $ | 865,000 | $ | 752,505 | $ | 781,581 | ||||||||||
| Consulting | 304,893 | 308,047 | 302,117 | 286,847 | 347,404 | |||||||||||||||
| Events | 173,768 | 148,479 | 121,337 | 100,448 | 150,080 | |||||||||||||||
| Total revenues | 1,615,808 | 1,468,588 | 1,288,454 | 1,139,800 | 1,279,065 | |||||||||||||||
| Operating income | 245,707 | 214,062 | 149,265 | 134,477 | 164,368 | |||||||||||||||
| Income from continuing operations | 165,903 | 136,902 | 96,285 | 82,964 | 97,148 | |||||||||||||||
| Income from discontinued operations | — | — | — | — | 6,723 | |||||||||||||||
| Net income | $ | 165,903 | $ | 136,902 | $ | 96,285 | $ | 82,964 | $ | 103,871 | ||||||||||
| PER SHARE DATA: | ||||||||||||||||||||
| Basic: | ||||||||||||||||||||
| Income from continuing operations | $ | 1.78 | $ | 1.43 | $ | 1.01 | $ | 0.88 | $ | 1.02 | ||||||||||
| Income from discontinued operations | — | — | — | — | 0.07 | |||||||||||||||
| Income per share | $ | 1.78 | $ | 1.43 | $ | 1.01 | $ | 0.88 | $ | 1.09 | ||||||||||
| Diluted: | ||||||||||||||||||||
| Income from continuing operations | $ | 1.73 | $ | 1.39 | $ | 0.96 | $ | 0.85 | $ | 0.98 | ||||||||||
| Income from discontinued operations | — | — | — | — | 0.07 | |||||||||||||||
| Income per share | $ | 1.73 | $ | 1.39 | $ | 0.96 | $ | 0.85 | $ | 1.05 | ||||||||||
| Weighted average shares outstanding | ||||||||||||||||||||
| Basic | 93,444 | 96,019 | 95,747 | 94,658 | 95,246 | |||||||||||||||
| Diluted | 95,842 | 98,846 | 99,834 | 97,549 | 99,028 | |||||||||||||||
| OTHER DATA: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 299,852 | $ | 142,739 | $ | 120,181 | $ | 116,574 | $ | 140,929 | ||||||||||
| Total assets | 1,621,277 | 1,379,872 | 1,285,658 | 1,215,279 | 1,093,065 | |||||||||||||||
| Long-term debt | 115,000 | 150,000 | 180,000 | 124,000 | 238,500 | |||||||||||||||
| Stockholders’ equity (deficit) | 306,673 | 181,784 | 187,056 | 112,535 | (21,316 | ) | ||||||||||||||
| Cash flow from operations | 279,814 | 255,566 | 205,499 | 161,937 | 184,350 | |||||||||||||||
The following items impact the comparability and presentation of our consolidated data:
| In | ||
| In 2012 we repurchased 2.7 million of our common shares under our share repurchase program at a total cost of $111.3 million. We also repurchased 5.9 million, 3.9 million, 0.3 million, and 9.7 million of our common shares in 2011, 2010, 2009, | ||
| In 2010 we refinanced our debt (see Note 5 — Debt in the Notes to the Consolidated Financial Statements). In conjunction with the refinancing, we recorded $3.7 million in incremental pre-tax charges in that year related to the termination of the previous credit arrangement. | ||
| · | In 2008 we sold our Vision Events business, which had been part of our Events |
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The purpose of the following Management’s Discussion and Analysis (“MD&A”) is to help facilitate the understanding of significant factors influencing the 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 consolidated financial statements and related notes included in this report. Historical results and percentage relationships are not necessarily indicative of operating results for future periods. References to “the Company,” “we,” “our,” and “us” are to Gartner, Inc. and its consolidated subsidiaries.
In 2012 we acquired AMR Research, and on December 30, 2009 we acquired Burton Group. The financial results of these businesses, which were not material to our 2009 results, have been included in our results beginning on their respective dates of acquisitionIdeas International Limited (“Ideas International”), a publicly-owned Australian corporation (see Note 2 — AcquisitionsAcquisition in the Notes to the Consolidated Financial Statements)Statements for additional information). The operating metrics of these acquired businessesIdeas International’s business operations have been excluded from our Business Measurements presentationsintegrated into the Company’s Research segment, and discussions below for comparability purposes.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report onForm 10-K contains certain forward-looking statements. 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 underin Part 1, Item 1A, Risk Factors. 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 ourother reports we filed with the SEC.
BUSINESS OVERVIEW
Gartner, Inc. is the world’s leading information technology research and advisory company that helps executives use technology to build, guide and grow their enterprises. We offer independent and objective research and analysis on the information technology, computer hardware, software, communications and related technology industries. We provide comprehensive coverage of the IT industry to approximately 10,000thousands of client organizations including approximately 400 ofacross the Fortune 500 companies, in over 80 countries.globe. Our client base consists primarily of CIOs and other senior IT and executives from a wide variety of business enterprises, government agencies and the investment community.
We have three business segments: Research, Consulting and Events.
| • | Researchprovides objective insight on critical and timely technology and supply chain initiatives for CIOs, other IT |
| • | Consulting |
| • | Events |
BUSINESS MEASUREMENTS
We believe the following business measurements are important performance indicators for our business segments:
| BUSINESS SEGMENT | BUSINESS MEASUREMENTS | |
| Research | Contract valuerepresents 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. |
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| Client retention raterepresents 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 raterepresents 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 backlogrepresents future revenue to be derived from in-process consulting, measurement and strategic advisory services engagements. | |
| Utilization | ||
| Billing | ||
| Average annualized revenue per billable headcountrepresents 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 eventsrepresents the total number of hosted events completed during the period. | |
| Number of attendeesrepresents the total number of people who attend events. | ||
EXECUTIVE SUMMARY OF OPERATIONS AND FINANCIAL POSITION
We purchased AMR Researchhave executed a consistent growth strategy since 2005 to drive double-digit annual revenue and Burton Group in December 2009. We believe eachearnings growth. The fundamentals of these companies is recognized asbest-in-class for what they do,our strategy include a focus on creating extraordinary research content, delivering innovative and will expandhighly differentiated product offerings, building a strong sales capability, providing world class client service with a focus on client engagement and retention, and continuously improving our research market opportunity and accelerate our growth rate over time.
We had total revenues of $1,139.8$1,615.8 million in 2009, a decline2012, an increase of 11% from the prior year. Revenues decreased in all 3 of our business segments and all of our geographic regions.10% over 2011 while diluted earnings per share increased by $.34 per share, to $1.73. Excluding the impact of foreign currency, translation,2012 total revenues were down about 8% in 2009. We attribute the decline in revenueincreased 12% over 2011.
Research revenues rose 12% year-over-year, to the global economic downturn that began in 2008.
Consulting revenues declined 17%year-over-year,in 2012 decreased 1% compared to $286.8 million in 2009 from $347.4 million in 2008, primarily due to a decline in core consulting. Excluding2011, while the unfavorable impact of foreign currency translation, revenues declined 15%. The Consulting segmentgross contribution margin declined 2 points, primarily duewas 36%. Consultant utilization was 67% for 2012 compared to lower revenue65% in our contract optimization business2011, and fewer SAS days filled, which have a higher contribution margin than core consulting. Utilization in core consulting was 68% for 2009.we had 503 billable consultants at December 31, 2012 compared to 481 at year-end 2011. Backlog was $90.9increased 2% year-over-year, to $102.7 million at December 31, 2009, a decline of 6% from December 31, 2008.
Events revenues decreased 33% in 2009 comparedincreased 17% year-over-year, to $173.8 million, while the prior year due to discontinued events and a decline in revenue from our on-going events. We discontinued a number of events in 2009 in response to the economic downturn, travel restrictions, and other
For a more detailed discussion of our segment results, see the Segment Results section below.
Cash flow from our operating activities increased 9% in 2012 compared to 2011, to $279.8 million. We continued ourto focus on enhancingmaximizing shareholder value by reducing our outstanding debt. We repaid $95.3in 2012, and we repurchased 2.7 million of our term loanscommon shares outstanding during 2009, which represented approximately 32% of the amount outstanding.year. We also used $104.5ended 2012 with almost $300.0 million in cash and cash equivalents. In addition to acquire AMR Research and Burton Group.
The Company’s 2010 Credit Agreement expires in December 2015. The Company is currently exploring refinancing options to take advantage of favorable market conditions.
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FLUCTUATIONS IN QUARTERLY RESULTS
Our quarterly and annual revenue, operating income, and cash flow fluctuate as a result of many factors, including: the timing of our SymposiumITxpoSymposium/ITxpo series, thatwhich are normally are held during the fourth calendar quarter, andas well as other events; the timing and amount of new business generated; the mix ofbetween domestic and international business; changes in market demand for our products and services; changes in foreign currency rates; the timing of the development, introduction and marketing of our new products and services; competition in the industry; general economic conditions; and other factors.factors which are beyond our control. The potential fluctuations in our operating income could causeperiod-to-period comparisons of operating results not to be meaningful and could provide an unreliable indication of future operating results.
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. Management considers the policies discussed below to be critical to an understanding of our financial statements because their application requires complex and subjective management judgments and estimates. Specific risks for these critical accounting policies are also described below.
The preparation of our financial statements also 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 from actual results. On-going changes in our estimates could be material and would be reflected in the Company’s financial statements in future periods.
Our critical accounting policies are as follows:
Revenue recognition – We recognize revenue— Revenue is recognized in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (“SAB 101”), and SEC Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”). OnceRevenue is only recognized once all required criteria for revenue recognition have been met, revenuemet. Revenue by significant source is accounted for as follows:
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, which have not produced material cancellations to date.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.
The following table provides our total fees receivable and the related allowance for losses (in thousands):
| December 31, | ||||||||
| 2012 | 2011 | |||||||
| Total fees receivable | $ | 470,368 | $ | 428,293 | ||||
| Allowance for losses | (6,400 | ) | (7,260 | ) | ||||
| Fees receivable, net | $ | 463,968 | $ | 421,033 | ||||
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| December 31, | ||||||||||
| 2009 | 2008 | |||||||||
| Total fees receivable | $ | 325,698 | $ | 326,311 | ||||||
| Allowance for losses | (8,100 | ) | (7,800 | ) | ||||||
| Fees receivable, net | $ | 317,598 | $ | 318,511 | ||||||
Impairment of goodwillGoodwill and other intangible assets –— The evaluation ofCompany evaluates recorded goodwill is performed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 350, which requires goodwill to be assessed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In addition, an impairment evaluation of our amortizable intangible assets ismay also be performed on a periodic basis.
| Significant under-performance relative | |
The annual assessment of the recoverability of recorded goodwill can be based on either a qualitative or qualitative assessment or a combination of the two. Both methods require the use of estimates which in turn contain judgments and assumptions relating to the valuation of the reporting unitsregarding future trends and the effects of changes in circumstances affecting these valuations,events. As a result, both the precision and reliability of the resulting estimates are subject to uncertainty, and as additional information becomes known,uncertainty. In 2012, we may change our estimates.
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 ourthe 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,
Determining the appropriate fair value model and calculating the fair value of stock compensation awards requires the input of certain highly complex and subjective assumptions, including the expected life of the stock compensation awardsaward 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 achievement of certain performance targets. The assumptions used in calculating the fair value of stock compensation awards and the associated periodic expense represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change and the Company deems it necessary in the future to modify the assumptions it made or to use different assumptions, 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 compensation expense could be materially different from what has been recorded in the current period.
Restructuring and other accruals –— We may record accruals for severance costs, costs associated with excess facilities that we have leased, contract terminations, asset impairments, and other costs as a result of on-going actions we undertake to streamline our organization, reposition certain businesses and reduce ongoing costs. Estimates of costs to be incurred to complete these actions, such as future lease payments, sublease income, the fair value of assets, and severance and related benefits, are based on assumptions at the time the actions are initiated. These accruals may need to be adjusted to the extent actual costs differ from such estimates. In addition, these actions may be revised due to changes in business conditions that we did not foresee at the time such plans were approved.
We also record accruals during the year for our various employee cash incentive programs. Amounts accrued at the end of each reporting period are based on our estimates and may require adjustment as the ultimate amount paid for these incentives are sometimes not known with certainty until after year end.
| 17 |
RESULTS OF OPERATIONS
Consolidated Results
The following table summarizestables summarize the changes in selected line items in our Consolidated Statements of Operation for the periods indicatedthree years ended December 31, 2012 (dollars in thousands):
| Twelve Months Ended December 31, 2012 | Twelve Months Ended December 31, 2011 | Increase (Decrease) $ | Increase (Decrease) % | |||||||||||||
| Total revenues | $ | 1,615,808 | $ | 1,468,588 | $ | 147,220 | 10 | % | ||||||||
| Costs and expenses: | ||||||||||||||||
| Cost of services & product development | 659,067 | 608,755 | (50,312 | ) | (8 | )% | ||||||||||
| Selling, general and administrative | 678,843 | 613,707 | (65,136 | ) | (11 | )% | ||||||||||
| Depreciation | 25,369 | 25,539 | 170 | 1 | % | |||||||||||
| Amortization of intangibles | 4,402 | 6,525 | 2,123 | 33 | % | |||||||||||
| Acquisition & integration charges | 2,420 | — | (2,420 | ) | (100 | )% | ||||||||||
| Operating income | 245,707 | 214,062 | 31,645 | 15 | % | |||||||||||
| Interest expense, net | (8,859 | ) | (9,967 | ) | 1,108 | 11 | % | |||||||||
| Other expense, net | (1,252 | ) | (1,911 | ) | 659 | 34 | % | |||||||||
| Provision for income taxes | (69,693 | ) | (65,282 | ) | (4,411 | ) | (7 | )% | ||||||||
| Net income | $ | 165,903 | $ | 136,902 | $ | 29,001 | 21 | % | ||||||||
| Twelve Months Ended December 31, 2011 | Twelve Months Ended December 31, 2010 | Increase (Decrease) $ | Increase (Decrease) % | |||||||||||||
| Total revenues | $ | 1,468,588 | $ | 1,288,454 | $ | 180,134 | 14 | % | ||||||||
| Costs and expenses: | ||||||||||||||||
| Cost of services & product development | 608,755 | 552,238 | (56,517 | ) | (10 | )% | ||||||||||
| Selling, general and administrative | 613,707 | 543,174 | (70,533 | ) | (13 | )% | ||||||||||
| Depreciation | 25,539 | 25,349 | (190 | ) | (1 | )% | ||||||||||
| Amortization of intangibles | 6,525 | 10,525 | 4,000 | 38 | % | |||||||||||
| Acquisition & integration charges | — | 7,903 | 7,903 | 100 | % | |||||||||||
| Operating income | 214,062 | 149,265 | 64,797 | 43 | % | |||||||||||
| Interest expense, net | (9,967 | ) | (15,616 | ) | 5,649 | 36 | % | |||||||||
| Other (expense) income, net | (1,911 | ) | 436 | (2,347 | ) | >(100 | )% | |||||||||
| Provision for income taxes | (65,282 | ) | (37,800 | ) | (27,482 | ) | (73 | )% | ||||||||
| Net income | $ | 136,902 | $ | 96,285 | $ | 40,617 | 42 | % | ||||||||
| 2009 vs. 2008 | 2008 vs. 2007 | |||||||||||||||||||||||||||||||
| Twelve Months | Twelve Months | Twelve Months | Twelve Months | |||||||||||||||||||||||||||||
| Ended | Ended | Dollar | Percentage | Ended | Ended | Dollar | Percentage | |||||||||||||||||||||||||
| December 31, | December 31, | Increase | Increase | December 31, | December 31, | Increase | Increase | |||||||||||||||||||||||||
| 2009 (a) | 2008 | (Decrease) | (Decrease) | 2008 | 2007 | (Decrease) | (Decrease) | |||||||||||||||||||||||||
| Total revenues | $ | 1,139,800 | $ | 1,279,065 | $ | (139,265 | ) | (11 | )% | $ | 1,279,065 | $ | 1,168,475 | $ | 110,590 | 9 | % | |||||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||||||||||
| Cost of services and product development | 498,363 | 572,208 | 73,845 | 13 | % | 572,208 | 546,569 | (25,639 | ) | (5 | )% | |||||||||||||||||||||
| Selling, general and administrative | 477,003 | 514,994 | 37,991 | 7 | % | 514,994 | 456,975 | (58,019 | ) | (13 | )% | |||||||||||||||||||||
| Depreciation | 25,387 | 25,880 | 493 | 2 | % | 25,880 | 24,298 | (1,582 | ) | (7 | )% | |||||||||||||||||||||
| Amortization of intangibles | 1,636 | 1,615 | (21 | ) | (1 | )% | 1,615 | 2,091 | 476 | (23 | )% | |||||||||||||||||||||
| Acquisition and integration charges | 2,934 | — | (2,934 | ) | (100 | )% | — | — | — | — | ||||||||||||||||||||||
| Other charges | — | — | — | — | — | 9,084 | 9,084 | 100 | % | |||||||||||||||||||||||
| Operating income | 134,477 | 164,368 | (29,891 | ) | (18 | )% | 164,368 | 129,458 | 34,910 | 27 | % | |||||||||||||||||||||
| Interest expense, net | (16,032 | ) | (19,269 | ) | 3,237 | 17 | % | (19,269 | ) | (22,154 | ) | 2,885 | 13 | % | ||||||||||||||||||
| Other (expense) income, net | (2,919 | ) | (358 | ) | (2,561 | ) | >(100 | )% | (358 | ) | 3,193 | (3,551 | ) | >(100 | )% | |||||||||||||||||
| Provision for income taxes | 32,562 | 47,593 | 15,031 | 32 | % | 47,593 | 39,831 | (7,762 | ) | (19 | )% | |||||||||||||||||||||
| Income from continuing operations | 82,964 | 97,148 | (14,184 | ) | (15 | )% | 97,148 | 70,666 | 26,482 | 37 | % | |||||||||||||||||||||
| Income from discontinued operations, net of taxes | — | 6,723 | (6,723 | ) | (100 | )% | 6,723 | 2,887 | 3,836 | >100 | % | |||||||||||||||||||||
| Net income | $ | 82,964 | $ | 103,871 | $ | (20,907 | ) | (20 | )% | $ | 103,871 | $ | 73,553 | $ | 30,318 | 41 | % | |||||||||||||||
2012 VERSUS 2008
TOTAL REVENUES for the twelve months ended December 31, 2009 decreased $139.32012 increased $147.2 million, or 11%10%, compared to the twelve months ended December 31, 2008.2011. Total revenues increased 12% excluding the unfavorable impact of foreign currency. Revenues increased by double-digits in both our Research and Events segments but declined slightly in Consulting. Revenues increased across all of our geographic regions, andwith a double-digit increase in all three of our business
An overview of our resultsrevenues by geographic region follows:
| 18 | |
An overview of our resultsrevenues by segment follows:
Please refer to the section of this MD&A below entitled “Segment Results” for a further discussion of revenues and results by segment.
COST OF SERVICES AND PRODUCT DEVELOPMENT decreased $73.8(“COS”) expense increased 8% in 2012, or $50.3 million,year-over-year, or 13%. to $659.1 million compared to $608.8 million in 2011. The increase was primarily due to higher payroll and related benefits costs from additional headcount as we continued to invest to support the growth in our business, and to a lesser extent, merit salary increases. We also had higher conference costs and related travel expenses due to an increase in the number of events, as well as additional attendees and exhibitors at our events. These additional costs were partially offset by the favorable impact of foreign currency translation reduced expense by about $19.0 million. We had lower conference expenses of $18.5 million primarily due to discontinued events. We also had reduced travel and internal meeting charges of $16.7 million and lower personnel costs of about $12.5 million, primarily due to our tight cost controls. The remaining $7.1 million net decrease was spread across a number of other expense categories. Cost of services and product developmentcurrency. COS as a percentage of sales declined by 1 point, to 44% in 2009 from 45% in 2008, primarily due to tight expense controls across our businesses.
SELLING, GENERAL AND ADMINISTRATIVE (“SG&A”) expense decreasedincreased by about $38.0$65.1 million in 2009,2012, or 7%11%, to $678.8 million compared to 2008, despite increasing our sales force.$613.7 million in 2011. The impact of foreign currency translation reduced expense by about $18.0 million. We also had lower travel, internal meeting, and recruiting costs of about $19.0 million, againincrease was primarily due to our tight cost controls. The remaining net reduction was spread across a number of other expense categories. Excluding the 60 sales associates that joined us from AMR Research and Burton Group, we had 942 quota-bearing sales associates at December 31, 2009, a 2% increase from the prior year end. This additional investment in sales associates resulted in $9.0 million of higher payroll and related benefits costs, which was partially offset by lower G&A charges.
DEPRECIATION expense decreased 2%slightly year-over-year due to certain assets becoming fully depreciated which reflects reduced capital spending during 2009.was only partially offset by the additional depreciation related to asset additions. Capital spending decreasedexpenditures increased to $15.1$44.3 million in 20092012 from $24.3$42.0 million in 2008, a 38% decline,2011, which reflectsincludes $17.0 million and $9.5 million, respectively, of expenditures for the Company’s reduced 2009 capital expenditures.
AMORTIZATION OF INTANGIBLES decreased year-over-year due to certain intangibles becoming fully amortized, which was $1.6 million for both 2009 and 2008.
ACQUISITION AND INTEGRATION CHARGES
wasOPERATING INCOME decreased 18%increased $31.6 million year-over-year, or 15%, to $134.5$245.7 million in 20092012 from $164.4$214.1 million in 2008.2011. Operating income as a percentage of revenues was 15% for both periods. Although both Research and Events had higher segment contributions in 2012, these increases were partially offset by a lower contribution in Consulting, as well as higher SG&A expenses, as discussed above.
INTEREST EXPENSE, NET declined 1 pointyear-over-year,by 11% in 2012 when compared to 2011. The decline was primarily due to a lower profitabilityaverage amount of debt outstanding, which declined to $207.0 million in our Consulting and Events segments and the $2.92012 from $220.0 million acquisition and integration charge related to AMR Research and Burton Group.
OTHER EXPENSE, NET was $16.0$1.3 million in 20092012 and $19.3$1.9 million in 2008, a 17% decline. The 2009 period includes $1.1 million of expense related to the discontinuance of hedge accounting on an interest rate swap contract (See Note 7 — Debt in the Notes to the Consolidated Financial Statements). Excluding the $1.1 million charge, Interest expense, net would have
PROVISION FOR INCOME TAXES on continuing operations was $32.6$69.7 million in 2009 as2012 compared to $47.6$65.3 million in 2008. The2011 and the effective tax rate was 28.2% in 2009 and 32.9% in 2008.29.6% for 2012 compared to 32.3% for 2011. The lower effective tax rate in 2009 as compared to 2008 is2012 was primarily attributable to several items. The most significantthe recognition of these items includetax benefits in 2012 resulting from the following: (a) the releasesettlement of reserves for uncertain tax positionsaudits, as well as benefits recorded in 2012 relating to the expirationrecognition of statutescertain state tax credits.
During 2012, the Company closed the Internal Revenue Service (“IRS”) audit of limitation was larger in 2009 than in 2008 while pretaxits 2007 federal income was lower, and (b) differences relating totax return. The resolution of the taxabilityaudit did not have a material adverse effect on the consolidated financial position, cash flows, or results of life insurance contractsyear-over-year.
In 2011 the IRS commenced an audit of the Company’s Vision Events business, which we soldfederal income tax returns 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 early 2008. 2013. Although the audit has not been fully resolved, the Company believes that the ultimate disposition will not have a material adverse effect on its consolidated financial position, cash flows, or results of operations.
| 19 |
The $6.7American Taxpayer Relief Act of 2012 (the “Tax Act”) was enacted in January of 2013 and contains beneficial tax provisions for the Company which apply retroactively to 2012. However, since the Tax Act was passed in 2013, approximately $1.5 million of income for 2008 includes a net gain on saletax benefits relating to its retroactive application will be recorded by the Company in the first quarter of approximately $7.1 million and a $(0.4) million operating loss.
NET INCOME was $83.0$165.9 million in 20092012 and $103.9$136.9 million in 2008, a decline2011, an increase of $20.9$29.0 million, or 20%. The decline21%, primarily due to a higher operating income, which was primarily drivenpartially offset by $4.4 million in higher income tax charges. Although the reduced contributions by our three business segmentsyear-over-year effective tax rate declined, pre-tax income increased substantially, resulting in the 2009 periodhigher dollar amount of tax charges. Both basic and diluted earnings per share increased 24% year-over-year due to the higher net income and to a lesser extent the $2.9 million acquisition and integration charge we recorded related to AMR Research and Burton Group. These decreases were partially offset by lower SG&A charges, a lower effective income tax rate, and reduced interest expense. Also contributing to theyear-over-year decline in net income was the $6.7 million net gain from the salenumber of the Company’s former Vision Events business recorded in the 2008 period.
2011 VERSUS 2007
TOTAL REVENUES for the twelve months ended December 31, 20082011 increased $110.6$180.1 million, or 9%14%, compared to the twelve months ended December 31, 2007.2010. Total revenues increased 11% excluding the impact of foreign currency. Revenues increased across all of our geographic regions and in all three of our Research and Consulting segments. Excluding the favorable effect of foreign currency translation, total revenues for 2008 would have increased 8% over 2007.
An overview of our results by geographic region follows:
An overview of our results by segment follows:
Please refer to the section of this MD&A below entitled “Segment Results” for a further discussion of revenues and results by segment.
COST OF SERVICES AND PRODUCT DEVELOPMENT (“COS”) expense increased $25.610% in 2011, or $56.5 million, to $608.8 million compared to $552.2 million in 2010. Approximately half of the increase was due to higher payroll and related benefits costs resulting from our investment in additional headcount and merit salary increases. The rest of the increase was primarily due to the negative impact of foreign currency translation, as well as incremental expenses and additional investment in the Events business. COS as a percentage of revenues improved by 2 points year-over-year, primarily driven by higher research revenues and the operating leverage inherent in our Research business.
SELLING, GENERAL AND ADMINISTRATIVE (“SG&A”) expense increased by $70.5 million in 2011, or 5%.13%, to $613.7 million from $543.2 million in 2010. The increase was primarily due to higher payroll and to a lesser extent, the negative impact of foreign currency translation. Excluding the unfavorable impact of foreign exchange, Cost of service and product development would haveSG&A expense increased by about 4%.
DEPRECIATION expense increased 7%slightly year-over-year. Capital spending increased to $42.0 million in 2008,2011 from $21.7 million in 2010. The $42.0 million of capital expenditures in 2011 included $9.5 million of expenditures related to $25.9the renovation of our Stamford headquarters facility, of which $9.0 million compared to $24.3 million for the prior year. The increase was primarily due to a changereimbursed by our landlord in the mix of investment in capital expenditures.
AMORTIZATION OF INTANGIBLES was $1.6 million in 2008 compared to $2.1 million in 2007. The decrease wasdecreased 38% year-over-year due to certain intangibles becoming fully amortized in 2007.
ACQUISITION AND INTEGRATION CHARGES was zero in 20082011 and $9.1$7.9 million in 2007. The $9.1 million included2010. These charges of $8.7 million related to the settlementacquisitions of litigationAMR Research and $2.7 million ofBurton Group in December 2009 and included legal, consulting, severance, costs related to the Company’s exit from consulting operations in Asia. Offsetting these charges was a credit of $2.3 million related to an excess facility which the Company returned to service.and other costs.
| 20 |
OPERATING INCOME was $164.4increased $64.8 million and $129.5year-over-year, or 43%, to $214.1 million in 2008 and 2007, respectively, an increase of $34.92011 from $149.3 million or 27%.in 2010. Operating income as a percentage of revenues was 13%improved by 3 points year-over-year, to 15% in 2008 and 11%2011 compared to 12% in 2007, a 2 point increase, which is2010, primarily due to a number of factors,significantly higher segment contribution from the most significant being the impact from higher revenues in our Research business and Consulting businesses. The improved operating margin also reflects our tight focus on expense management,to a lesser extent, lower intangible amortization and charges of $9.1 million in 2007 related to the settlement of litigationacquisition and other items.
INTEREST EXPENSE, NET was $19.3 million and $22.2$10.0 million in 2008 and 2007, respectively,2011 compared to $15.6 million in 2010, a decrease36% decline. The $15.6 million of $2.9 million. The decrease wasinterest expense in 2010 included $3.7 million of incremental expense related to the refinancing of our debt (See Note 5 — Debt in the Notes to the Consolidated Financial Statements). Excluding the $3.7 million incremental charge, Interest expense, net declined approximately 15% year-over-year, primarily due to a decline in the weighted-average interest rate on our outstanding debt. The weighted-average interest rate on our debt, including the impact of our interest rate swaps, was 4.8% in 2008 and 6.0% in 2007. The impact of the lower average rate was partially offset by an increase in the weighted-average amount of debt outstanding, of approximately $50.0which declined to $220.0 million during 2008. In 2008 we also had about $0.2in 2011 from $326.0 million of additional interest income, as well as a $0.2 million decrease in the amortization of debt issuance costs, both of which are recorded in Interest Expense, net.
OTHER (EXPENSE) INCOME, NET was $(0.4)$(1.9) million in 2008 and $3.2 million in 2007. The $(0.4) million Other expense in 20082011, which primarily consisted of net foreign currency exchange losses, and $0.4 million in 2010, which consisted of a $1.2$2.4 million gain from an insurance recovery related to the settlement of a litigation matterprior period loss, offset by net foreign currency exchange losses. The $3.2 million of Other income in 2007 primarily consisted of a $1.8 million gain from the settlement of a claim and net foreign currency exchange gains.
PROVISION FOR INCOME TAXES on continuing operations was $47.6$65.3 million in 2008 as2011 compared to $39.8$37.8 million 2007. Thein 2010 and the effective tax rate was 32.9% in 2008 and 36.0% in 2007.32.3% for 2011 compared to 28.2% for 2010. The lower effective tax rate in 2008 as compared to 20072010 was primarily attributable to several items. The most significantthe release of these items included the following: (a) the Company generated a larger percentage of its income in low tax jurisdictions in 2008 as compared to 2007, and (b) differencesvaluation allowances relating to the tax impact of repatriated funds in 2008 as compared to 2007.
NET INCOME was $103.9$136.9 million in 2011 and $73.6$96.3 million for 2008 and 2007, respectively,in 2010, an increase of $30.3$40.6 million, or 41%.
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, and SG&A, Depreciation, Acquisition and integration charges, and Amortization of intangibles, and Other charges.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
| 2012 vs. 2011 | 2011 vs. 2010 | |||||||||||||||||||||||||||||||
| As Of And For The Twelve Months Ended December 31, 2012 | As Of And For the Twelve Months Ended December 31, 2011 | Increase (Decrease) | Percentage Increase (Decrease) | As Of And For The Twelve Months Ended December 31, 2011 | As Of And For the Twelve Months Ended December 31, 2010 | Increase (Decrease) | Percentage Increase (Decrease) | |||||||||||||||||||||||||
| Financial Measurements: | ||||||||||||||||||||||||||||||||
| Revenues (1) | $ | 1,137,147 | $ | 1,012,062 | $ | 125,085 | 12 | % | $ | 1,012,062 | $ | 865,000 | $ | 147,062 | 17 | % | ||||||||||||||||
| Gross contribution (1) | $ | 774,342 | $ | 682,136 | $ | 92,206 | 14 | % | $ | 682,136 | $ | 564,527 | $ | 117,609 | 21 | % | ||||||||||||||||
| Gross contribution margin | 68 | % | 67 | % | 1 point | — | 67 | % | 65 | % | 2 points | — | ||||||||||||||||||||
| Business Measurements: | ||||||||||||||||||||||||||||||||
| Contract value (1) | $ | 1,262,865 | $ | 1,115,801 | $ | 147,064 | 13 | % | $ | 1,115,801 | $ | 977,710 | $ | 138,091 | 14 | % | ||||||||||||||||
| Client retention | 83 | % | 82 | % | 1 point | — | 82 | % | 83 | % | (1) point | — | ||||||||||||||||||||
| Wallet retention | 99 | % | 99 | % | — | — | 99 | % | 98 | % | 1 point | — | ||||||||||||||||||||
| 2009 vs. 2008 | 2008 vs. 2007 | |||||||||||||||||||||||||||||||
| As Of And | As Of And | As Of And | As Of And | |||||||||||||||||||||||||||||
| For The | For the | For the | For the | |||||||||||||||||||||||||||||
| Twelve Months | Twelve Months | Twelve Months | Twelve Months | |||||||||||||||||||||||||||||
| Ended | Ended | Percentage | Ended | Ended | Percentage | |||||||||||||||||||||||||||
| December 31, | December 31, | Increase | Increase | December 31, | December 31, | Increase | Increase | |||||||||||||||||||||||||
| 2009 | 2008 | (Decrease) | (Decrease) | 2008 | 2007 | (Decrease) | (Decrease) | |||||||||||||||||||||||||
Financial Measurements:(1) | ||||||||||||||||||||||||||||||||
| Revenues (2) | $ | 752,505 | $ | 781,581 | $ | (29,076) | (4 | )% | $ | 781,581 | $ | 683,380 | $ | 98,201 | 14 | % | ||||||||||||||||
| Gross contribution (2) | $ | 489,862 | $ | 495,440 | $ | (5,578) | (1 | )% | $ | 495,440 | $ | 419,639 | $ | 75,801 | 18 | % | ||||||||||||||||
| Gross contribution margin | 65 | % | 63 | % | 2 points | — | 63 | % | 61 | % | 2 points | — | ||||||||||||||||||||
Business Measurements:(3) | ||||||||||||||||||||||||||||||||
| Contract value (2) | $ | 784,443 | $ | 834,321 | $ | (49,878) | (6 | )% | $ | 834,321 | $ | 752,533 | $ | 81,788 | 11 | % | ||||||||||||||||
| Client retention | 78 | % | 82 | % | (4) points | — | 82 | % | 82 | % | — | — | ||||||||||||||||||||
| Wallet retention | 87 | % | 95 | % | (8) points | — | 95 | % | 98 | % | (3 | ) points | — | |||||||||||||||||||
| Exec. program members | 3,651 | 3,733 | (82) | (2 | )% | 3,733 | 3,753 | (20 | ) | — | ||||||||||||||||||||||
| (1) | ||
| Dollars in thousands. | ||
2012 VERSUS 2008
Research segment revenues declined 4%year-over-year,increased 12% in 2012 compared to 2011 but excluding the unfavorable effect of foreign currency translation, Research segment revenues were down about 1%increased 14%.
Research contract value increased 13% in lower costs concentrated in personnel, travel, and internal meetings, and our ability2012, to implement price increases for our products.
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2011 VERSUS 2007
Research segment revenues increased 17% in our Research business was up 14% in 2008,2011 compared to $781.6 million. We had growth across our entire product portfolio in 2008. Foreign currency translation impact was not significant.
Consulting
| 2012 vs. 2011 | 2011 vs. 2010 | |||||||||||||||||||||||||||||||
| As Of And For The Twelve Months Ended December 31, 2012 | As Of And For the Twelve Months Ended December 31, 2011 | Increase (Decrease) | Percentage Increase (Decrease) | As Of And For The Twelve Months Ended December 31, 2011 | As Of And For the Twelve Months Ended December 31, 2010 | Increase (Decrease) | Percentage Increase (Decrease) | |||||||||||||||||||||||||
| Financial Measurements: | ||||||||||||||||||||||||||||||||
| Revenues (1) | $ | 304,893 | $ | 308,047 | $ | (3,154 | ) | (1 | )% | $ | 308,047 | $ | 302,117 | $ | 5,930 | 2 | % | |||||||||||||||
| Gross contribution (1) | $ | 109,253 | $ | 114,838 | $ | (5,585 | ) | (5 | )% | $ | 114,838 | $ | 121,885 | $ | (7,047 | ) | (6 | )% | ||||||||||||||
| Gross contribution margin | 36 | % | 37 | % | (1) point | — | 37 | % | 40 | % | (3) points | — | ||||||||||||||||||||
| Business Measurements: | ||||||||||||||||||||||||||||||||
| Backlog (1) | $ | 102,718 | $ | 100,564 | $ | 2,154 | 2 | % | $ | 100,564 | $ | 100,839 | $ | (275 | ) | — | ||||||||||||||||
| Billable headcount | 503 | 481 | 22 | 5 | % | 481 | 473 | 8 | 2 | % | ||||||||||||||||||||||
| Consultant utilization | 67 | % | 65 | % | 2 points | — | 65 | % | 68 | % | (3) points | — | ||||||||||||||||||||
| Average annualized revenue per billable headcount (1) | $ | 430 | $ | 424 | $ | 6 | 1 | % | $ | 424 | $ | 424 | $ | — | — | |||||||||||||||||
| 2009 vs. 2008 | 2008 vs. 2007 | |||||||||||||||||||||||||||||||
| As Of And | As Of And | As Of And | As Of And | |||||||||||||||||||||||||||||
| For the | For the | For the | For the | |||||||||||||||||||||||||||||
| Twelve Months | Twelve Months | Twelve Months | Twelve Months | |||||||||||||||||||||||||||||
| Ended | Ended | Percentage | Ended | Ended | Percentage | |||||||||||||||||||||||||||
| December 31, | December 31, | Increase | Increase | December 31, | December 31, | Increase | Increase | |||||||||||||||||||||||||
| 2009 | 2008 | (Decrease) | (Decrease) | 2008 | 2007 | (Decrease) | (Decrease) | |||||||||||||||||||||||||
Financial Measurements:(1) | ||||||||||||||||||||||||||||||||
| Revenues (2) | $ | 286,847 | $ | 347,404 | $ | (60,557) | (17 | )% | $ | 347,404 | $ | 325,030 | $ | 22,374 | 7 | % | ||||||||||||||||
| Gross contribution (2) | $ | 112,099 | $ | 141,395 | $ | (29,296) | (21 | )% | $ | 141,395 | $ | 128,215 | $ | 13,180 | 10 | % | ||||||||||||||||
| Gross contribution margin | 39 | % | 41 | % | (2) points | — | 41 | % | 39 | % | 2 points | — | ||||||||||||||||||||
Business Measurements:(3) | ||||||||||||||||||||||||||||||||
| Backlog (2) | $ | 90,891 | $ | 97,169 | $ | (6,278) | (6 | % | $ | 97,169 | $ | 121,400 | $ | (24,231 | ) | (20 | )% | |||||||||||||||
| Billable headcount | 442 | 499 | (57) | (11 | % | 499 | 472 | 27 | 6 | % | ||||||||||||||||||||||
| Consultant utilization | 68 | % | 72 | % | (4) points | — | 72 | % | 69 | % | 3 points | — | ||||||||||||||||||||
| Average annualized revenue per billable headcount (2) | $ | 435 | $ | 460 | $ | (25) | (5 | )% | $ | 460 | $ | 430 | $ | 30 | 7 | % | ||||||||||||||||
| (1) | ||
| Dollars in thousands. | ||
2012 VERSUS 2008
Consulting revenues declined 17% when comparing 2009 with 2008, with the majority of the decline in core consulting, anddecreased 1% year-over-year due to a lesser extent, in our SAS and contract optimization businesses. The decline in core consulting was driven by lower headcount, utilization, and billing rates. The decline in revenuerevenues in our contract optimization business reflectsbusiness. Contract optimization revenues, which can fluctuate from period to period, currently represent about 10% of total Consulting segment revenues and have been declining over time as a largepercentage of overall segment revenue. The decrease in contract received at the end of 2008optimization revenue was substantially offset by higher core consulting revenues, which was not repeatedincreased 5% year-over-year, driven by additional demand and increased headcount. Strategic advisory (“SAS”) revenues were flat year-over-year, in 2009. SAS revenues declined due to approximately 17% fewer fulfilled SAS days.accordance with our segment plan. Excluding the unfavorable impact of foreign currency overall Consulting revenues were down about 15%.
2011 VERSUS 2010
| 2009 vs. 2008 | 2008 vs. 2007 | |||||||||||||||||||||||||||||||
| As Of And | As Of And | As Of And | As Of And | |||||||||||||||||||||||||||||
| For the | For the | For the | For the | |||||||||||||||||||||||||||||
| Twelve Months | Twelve Months | Twelve Months | Twelve Months | |||||||||||||||||||||||||||||
| Ended | Ended | Percentage | Ended | Ended | Percentage | |||||||||||||||||||||||||||
| December 31, | December 31, | Increase | Increase | December 31, | December 31, | Increase | Increase | |||||||||||||||||||||||||
| 2009 | 2008 | (Decrease) | (Decrease) | 2008 | 2007 | (Decrease) | (Decrease) | |||||||||||||||||||||||||
Financial Measurements:(1) | ||||||||||||||||||||||||||||||||
| Revenues(2) | $ | 100,448 | $ | 150,080 | $ | (49,632) | (33 | )% | $ | 150,080 | $ | 160,065 | $ | (9,985 | ) | (6 | )% | |||||||||||||||
| Gross contribution(2) | $ | 40,945 | $ | 64,954 | $ | (24,009) | (37 | )% | $ | 64,954 | $ | 81,908 | $ | (16,954 | ) | (21 | )% | |||||||||||||||
| Gross contribution margin | 41 | % | 43 | % | (2) points | — | 43 | % | 51 | % | (8 | ) points | — | |||||||||||||||||||
Business Measurements:(3) | ||||||||||||||||||||||||||||||||
| Number of events | 54 | 70 | (16) | (23 | )% | 70 | 62 | (8 | ) | (13 | )% | |||||||||||||||||||||
| Number of attendees | 30,610 | 41,352 | (10,742) | (26 | )% | 41,352 | 44,216 | (2,864 | ) | (6 | )% | |||||||||||||||||||||
Consulting revenues were down 32%year-over-year.
Events
| 2012 vs. 2011 | 2011 vs. 2010 | |||||||||||||||||||||||||||||||
| As Of And For The Twelve Months Ended December 31, 2012 | As Of And For the Twelve Months Ended December 31, 2011 | Increase (Decrease) | Percentage Increase (Decrease) | As Of And For The Twelve Months Ended December 31, 2011 | As Of And For the Twelve Months Ended December 31, 2010 | Increase (Decrease) | Percentage Increase (Decrease) | |||||||||||||||||||||||||
| Financial Measurements: | ||||||||||||||||||||||||||||||||
| Revenues (1) | $ | 173,768 | $ | 148,479 | $ | 25,289 | 17 | % | $ | 148,479 | $ | 121,337 | $ | 27,142 | 22 | % | ||||||||||||||||
| Gross contribution (1) | $ | 80,119 | $ | 66,265 | $ | 13,854 | 21 | % | $ | 66,265 | $ | 55,884 | $ | 10,381 | 19 | % | ||||||||||||||||
| Gross contribution margin | 46 | % | 45 | % | 1 point | — | 45 | % | 46 | % | (1) point | — | ||||||||||||||||||||
| Business Measurements: | ||||||||||||||||||||||||||||||||
| Number of events | 62 | 60 | 2 | 3 | % | 60 | 56 | 4 | 7 | % | ||||||||||||||||||||||
| Number of attendees | 46,307 | 42,748 | 3,559 | 8 | % | 42,748 | 37,219 | 5,529 | 15 | % | ||||||||||||||||||||||
| (1) | Dollars in thousands. |
| 22 |
2012 VERSUS 2011
Events revenues increased 17% year-over-year, or $25.3 million, but excluding the unfavorable impact of foreign currency translation, revenues increased 20% year-over-year. We held 62 events in 2012 compared to 60 in 2011. The 62 events held in 2012 consisted of 57 ongoing events and 5 new event launches, with 3 events held in prior years discontinued, while the overall number of attendees and exhibitors increased 8% and 20%, respectively. Average revenue per attendee rose 3% and average revenue per exhibitor increased 1%. Both the additional revenue and the higher contribution margin in 2012 were primarily due to the significantly higher exhibitor volume at our ongoing events.
2011 VERSUS 2010
Events revenues increased 22% year-over-year, or $27.1 million. Excluding the favorable impact of foreign currency translation, revenues increased 21%. We held 60 events in 2011, which consisted of 53 ongoing events and 7 new event launches, compared to 56 events in 2010. We discontinued 3 events in 2011 that had been held in prior years. The additional revenue we earned in 2011 was attributable to significantly higher revenue at our ongoing events, with double-digit increases in the number of attendees and exhibitors. Average revenue per attendee rose 2% and average revenue per exhibitor increased 5%. For full year 2011, gross contribution margin wasdecreased 1 point, primarily due to lower revenues, higher fulfillment costs,incremental expenses and additional investment in the impact of lower margin new events,business to strengthen the portfolio and severance charges related to our reduction in force.
LIQUIDITY AND CAPITAL RESOURCES
We finance our operations primarily through cash generated from our on-going operating activities. As of December 31, 2009,For 2012, we had $116.5operating cash flow of $279.8 million, which was the highest in the Company’s history and an increase of 9% over 2011. Our operating cash flow has been continuously enhanced by the leverage characteristics of our subscription-based business model as well as our focus on operational efficiencies. Revenues in our Research segment, which increased 12% in 2012 compared to 2011, constituted 70% and 69% of our total revenues in 2012 and 2011, respectively. Our Research contracts generally renew annually and typically are paid in advance, and combined with a strong customer retention rate and high incremental margins, has generally resulted in strong growth in operating cash flow each year. Our cash flow generation has also been enhanced by our continuing efforts to improve the operating efficiencies of our businesses as well as the effective management of our working capital as we increase our sales volume.
In addition to the strong increase in our operating cash flows, we also had almost $300.0 million of cash and cash equivalents at year-end 2012, which was the highest cash balance in the Company’s history, and $170.0$347.0 million of available borrowing capacity under our revolving credit facility (not including the $100.0 million expansion feature). at year-end 2012. We believe that our strong operating cash flow, as well as our existing cash balances and our available borrowing capacity, provide us with adequate liquidity to meet our currently anticipated needs.
The Company’s 2010 Credit Agreement expires in December 2015. The Company is currently exploring refinancing options to take advantage of favorable market conditions.
Our cash and cash equivalents are held in numerous locations throughout the world, withworld. At December 31, 2012, approximately 60%$167.0 million of our cash was held outside the United States asU.S. Approximately half of December 31, 2009.
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Changes in cash in December 2009 and $13.1 million in January 2010 for the acquisitions of AMR Research and Burton Group.
The following tabledisclosure summarizes and explains the Company’s changes in our cash and cash equivalents for the three years ending December 31, 2009:
| 2009 vs. 2008 | 2008 vs. 2007 | |||||||||||||||||||||||
| Twelve Months | Twelve Months | Twelve Months | Twelve Months | |||||||||||||||||||||
| Ended | Ended | Dollar | Ended | Ended | Dollar | |||||||||||||||||||
| December 31, | December 31, | Increase | December 31, | December 31, | Increase | |||||||||||||||||||
| 2009 | 2008 | (Decrease) | 2008 | 2007 | (Decrease) | |||||||||||||||||||
| Cash provided by operating activities | $ | 161,937 | $ | 184,350 | $ | (22,413 | ) | $ | 184,350 | $ | 148,335 | $ | 36,015 | |||||||||||
| Cash used by investing activities | (119,665 | ) | (16,455 | ) | (103,210 | ) | (16,455 | ) | (24,136 | ) | 7,681 | |||||||||||||
| Cash used in financing activities | (73,780 | ) | (119,835 | ) | 46,055 | (119,835 | ) | (93,695 | ) | (26,140 | ) | |||||||||||||
| Net (decrease) increase | (31,508 | ) | 48,060 | (79,568 | ) | 48,060 | 30,504 | 17,556 | ||||||||||||||||
| Effects of exchange rates | 7,153 | (17,076 | ) | 24,229 | (17,076 | ) | 11,640 | (28,716 | ) | |||||||||||||||
| Beginning cash and cash equivalents | 140,929 | 109,945 | 30,984 | 109,945 | 67,801 | 42,144 | ||||||||||||||||||
| Ending cash and cash equivalents | $ | 116,574 | $ | 140,929 | $ | (24,355 | ) | $ | 140,929 | $ | 109,945 | $ | 30,984 | |||||||||||
| 2012 vs. 2011 | 2011 vs. 2010 | |||||||||||||||||||||||
| Twelve Months Ended December 31, 2012 | Twelve Months Ended December 31, 2011 | Increase (Decrease) | Twelve Months Ended December 31, 2011 | Twelve Months Ended December 31, 2010 | Increase (Decrease) | |||||||||||||||||||
| Cash provided by operating activities | $ | 279,813 | $ | 255,566 | $ | 24,247 | $ | 255,566 | $ | 205,499 | $ | 50,067 | ||||||||||||
| Cash used for investing activities | (54,673 | ) | (41,954 | ) | (12,719 | ) | (41,954 | ) | (33,845 | ) | (8,109 | ) | ||||||||||||
| Cash used in financing activities | (72,570 | ) | (186,559 | ) | 113,989 | (186,559 | ) | (171,556 | ) | (15,003 | ) | |||||||||||||
| Net increase | 152,570 | 27,053 | 125,517 | 27,053 | 98 | 26,955 | ||||||||||||||||||
| Effects of exchange rates | 4,543 | (4,495 | ) | 9,038 | (4,495 | ) | 3,509 | (8,004 | ) | |||||||||||||||
| Beginning cash and cash equivalents | 142,739 | 120,181 | 22,558 | 120,181 | 116,574 | 3,607 | ||||||||||||||||||
| Ending cash and cash equivalents | $ | 299,852 | $ | 142,739 | $ | 157,113 | $ | 142,739 | $ | 120,181 | $ | 22,558 | ||||||||||||
2012 VERSUS 2008
Operating
Operating cash flow increased by 9%, or $24.2 million, in 2012 compared to 2011, which was primarily due to higher net income. We also had lower cash payments for interest on our debt and other items, as well as higher cash reimbursements related to the renovation of our Stamford headquarters facility. These increased cash flows were partially offset by higher cash payments for income taxes during 2012.
Investing
Cash used for investing purposes was $54.7 million in 2012, an increase in cash used of $12.7 million compared to 2011, due to $10.3 million of cash used for the acquisition of Ideas International and higher capital expenditures.
Capital expenditures were $44.3 million in 2012 compared to $42.0 million in 2011, which included $17.0 million and $9.5 million, respectively, which we paid for the renovation of our Stamford headquarters facility. Up to $25.0 million of these expenditures are reimbursable by the facility landlord, and $13.0 million was reimbursed in 2012 and $9.0 million in 2011. The reimbursements are included in operating cash flow decreased by 12%flows.
Financing
We used $114.0 million less cash in 2009, or $22.4 million. We hadour financing activities in 2012 compared to 2011, primarily due to a declinelower number of approximately $23.0shares repurchased. Cash used for share repurchases was $111.3 million in 2012 compared to $212.0 million in 2011, with 2.7 million and 5.9 million of shares repurchased, respectively. Cash used also declined due to net debt activity, as we borrowed an additional $5.0 million in 2012 compared to $20.1 million of debt repayments in 2011.
2011 VERSUS 2010
Operating
Operating cash from our core operations, along with $14.5flow increased by 24%, or $50.1 million more in cash taxes paid and $8.02011 compared to 2010. The increase was primarily due to $40.6 million in higher net income and lower cash payments for acquisition costs, severance, and other costs. We also received $9.0 million in landlord cash reimbursements for capital expenditures on the renovation of our Stamford headquarters facility. These increased cash flows were partially offset by higher cash bonus and commission payments we paid in 2011 due to the workforce reduction completed in early January 2009. Partially offsetting the declines were $14.8 million in lower interest payments on our debt, bonus payments, and payments on our excess facilities, and an $8.3 million improvement in working capital. The improved working capital primarily reflects improved cash collection on receivables.
Investing
We used an additional $103.2$8.1 million of additional cash in our investing activities in 20092011 compared to 2010, due to higher capital expenditures. Capital expenditures were $42.0 million in 2011 compared to $21.7 million in 2010. We also made $12.2 million in payments related to the $104.5 millionacquisition of cash used for the acquisitions of AMR Research and Burton Group. We had $15.1Group in early 2010, which we acquired in December 2009. The $42.0 million of capital expenditures in 2009, a declinethe 2011 period included $9.5 million we paid for the renovation of 38% compared toour Stamford headquarters facility, which is fully reimbursable by the $24.3landlord. The Company received reimbursement of $9.0 million of capital expendituresthis amount in 2008. The decline reflects the Company’s tight focus on reducing costs. 2011.
Financing
We also realized $7.8used an additional $15.0 million of cash proceeds in 2008 from the sale of our Vision Events business.
| 24 |
OBLIGATIONS AND COMMITMENTS
At December 31, 2009,2012, we had $329.0$200.0 million outstanding under our 2010 Credit Agreement which provides for two amortizinga five-year, $200.0 million term loansloan and a $300.0$400.0 million revolving credit facility. The 2010 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 $100.0$150.0 million at our lenders’ discretion (the “expansion feature”), for a total revolving credit facility of $400.0 million. However,in the $100.0 million expansion feature may or may not be available to us depending upon prevailing credit market conditions.
Cash Commitments
The Company has certain contractual commitments that require future payment. The following table presents ourthe Company’s contractual cash commitments due after December 31, 20092012 (in thousands):
| Due In | Due In | Due In | Due In | |||||||||||||||||
| Commitment Description: | Less Than 1 Year | 2-3 Years | 4-5 Years | More Than 5 Years | Total | |||||||||||||||
| Debt – principal and interest (1) | $ | 47,100 | $ | 168,900 | $ | 300 | $ | 5,300 | $ | 221,600 | ||||||||||
| Operating leases (2) | 37,820 | 53,9550 | 24,590 | 75,055 | 191,420 | |||||||||||||||
| Deferred compensation arrangement (3) | 2,730 | 5,185 | 3,160 | 20,240 | 31,315 | |||||||||||||||
| Tax liabilities (4) | 2,225 | — | — | — | 2,225 | |||||||||||||||
| Other (5) | 16,500 | 13,900 | 1,790 | — | 32,190 | |||||||||||||||
| Totals | $ | 106,375 | $ | 241,940 | $ | 29,840 | $ | 100,595 | $ | 478,750 | ||||||||||
| Less Than | 1-3 | 4-5 | More Than | |||||||||||||||||
| Commitment Type: | Total | 1 Year | Years | Years | 5 Years | |||||||||||||||
| Operating leases (1) | $ | 137,158 | $ | 33,946 | $ | 39,309 | $ | 19,821 | $ | 44,082 | ||||||||||
| Debt outstanding (2) | 329,000 | 77,000 | 252,000 | — | — | |||||||||||||||
| Acquisition payables (3) | 13,059 | 13,059 | — | — | — | |||||||||||||||
| Deferred compensation arrangement (4) | 22,996 | 1,878 | 3,722 | 2,518 | 14,878 | |||||||||||||||
| Tax liabilities (5) | 1,310 | 1,310 | — | — | — | |||||||||||||||
| Totals | $ | 503,523 | $ | 127,193 | $ | 295,031 | $ | 22,339 | $ | 58,960 | ||||||||||
| (1) | ||
| Interest payments on | ||
| (2) | The Company leases various facilities, furniture, autos, and computer equipment. These leases expire between 2013 and 2027 (see Note | |
| (3) | ||
| (4) | Includes interest and penalties. In addition to the | |
| (5) | Includes contractual commitments for software, building maintenance, and telecom services. |
| 25 |
QUARTERLY FINANCIAL DATA
The following tables present our quarterly operating results for the two year period ended December 31, 2009:
| (In thousands, except per share data) | ||||||||||||||||
| 2009 | First | Second | Third | Fourth | ||||||||||||
| Revenues | $ | 273,533 | $ | 269,971 | $ | 267,469 | $ | 328,827 | ||||||||
| Operating income | 34,451 | 30,761 | 27,521 | 41,744 | ||||||||||||
| Net income | 19,996 | 17,185 | 20,067 | 25,716 | ||||||||||||
| Net income per share(1) | ||||||||||||||||
| Basic | $ | 0.21 | $ | 0.18 | $ | 0.21 | $ | 0.27 | ||||||||
| Diluted | $ | 0.21 | $ | 0.18 | $ | 0.21 | $ | 0.26 | ||||||||
| 2012 (In thousands, except per share data) | First | Second | Third | Fourth | ||||||||||||
| Revenues | $ | 369,171 | $ | 397,482 | $ | 374,406 | $ | 474,749 | ||||||||
| Operating income | 53,556 | 62,722 | 49,768 | 79,661 | ||||||||||||
| Net income | 34,221 | 41,484 | 31,375 | 58,823 | ||||||||||||
| Net income per share: (1) | ||||||||||||||||
| Basic | $ | 0.37 | $ | 0.44 | $ | 0.34 | $ | 0.63 | ||||||||
| Diluted | $ | 0.36 | $ | 0.43 | $ | 0.33 | $ | 0.61 | ||||||||
| 2011 (In thousands, except per share data) | First | Second | Third | Fourth | ||||||||||||
| Revenues | $ | 329,567 | $ | 365,543 | $ | 345,784 | $ | 427,694 | ||||||||
| Operating income | 45,781 | 51,568 | 47,250 | 69,463 | ||||||||||||
| Net income | 29,191 | 32,223 | 30,464 | 45,024 | ||||||||||||
| Net income per share: (1) | ||||||||||||||||
| Basic | $ | 0.30 | $ | 0.33 | $ | 0.32 | $ | 0.48 | ||||||||
| Diluted | $ | 0.29 | $ | 0.32 | $ | 0.31 | $ | 0.46 | ||||||||
| (In thousands, except per share data) | ||||||||||||||||
| 2008 | First | Second | Third | Fourth | ||||||||||||
| Revenues | $ | 290,099 | $ | 343,939 | $ | 297,706 | $ | 347,321 | ||||||||
| Operating income | 26,330 | 47,575 | 34,682 | 55,781 | ||||||||||||
| Net income | 21,544 | 29,900 | 18,781 | 33,646 | ||||||||||||
| Net income per share (1) | ||||||||||||||||
| Basic: | ||||||||||||||||
| From continuing operations | $ | 0.15 | $ | 0.32 | $ | 0.20 | $ | 0.36 | ||||||||
| From discontinued operations (2) | 0.07 | — | — | — | ||||||||||||
| $ | 0.22 | $ | 0.32 | $ | 0.20 | $ | 0.36 | |||||||||
| Diluted: | ||||||||||||||||
| From continuing operations | $ | 0.14 | $ | 0.30 | $ | 0.19 | $ | 0.35 | ||||||||
| From discontinued operations (2) | 0.07 | — | — | — | ||||||||||||
| $ | 0.21 | $ | 0.30 | $ | 0.19 | $ | 0.35 | |||||||||
| (1) | The aggregate of the four quarters’ basic and diluted earnings per common share may not equal the reported full calendar year amounts due to the effects of share repurchases, dilutive equity compensation, and rounding. | |
RECENTLY ISSUED ACCOUNTING STANDARDS
The FASB has issued new accounting rules which have not yet become effective. These new rules are described below, together with our assessment of the potential impact they may have on our financial statements and related disclosures in future periods:
Other Comprehensive Income Reclassifications. In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02,Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The standard requires that public companies present information about reclassification adjustments from accumulated other comprehensive income in their financial statements in a single note or on the face of the financial statements. Public companies will also have to provide this information in both their annual and interim financial statements. The new requirements will take effect for Gartner beginning January 2010,1, 2013 and will be applied prospectively. While the Company has not completed its analysis of the new standard, it believes the new rule may result in additional disclosures and changes to the presentation of the Statement of Comprehensive Income.
Balance Sheet Offsetting. In December 2011, theFASB issued ASU2010-6,No. 2011-11,Improving Disclosures About Fair Value Measurementsabout Offsetting Assets and Liabilities, which. The new guidance requires reporting entities to make new disclosures about recurringassets and liabilities that are offset or nonrecurring fair-value measurements including significant transfers intohave the potential to be offset under U.S. GAAP rules. The new disclosure requirements mandate that entities disclose both gross and out of Level 1net information about financial instruments and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basistransactions eligible for offset in the reconciliationstatement of Level 3 fair-value measurements. ASU2010-6 isfinancial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, the standard requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. These disclosures are intended to address differences in the asset and liability offsetting requirements under U.S. GAAP and International Financial Reporting Standards. This new guidance will be effective for Gartner for interim and annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliationJanuary 1, 2013, with retrospective application required. While the adoption of this new guidance may result in additional disclosures, which are effective for annual periods beginning after December 15, 2010. Wewe do not expect the adoption of ASU2010-6it to have a materialan impact on our consolidated financial statements.
The FASB also continues to work on a number of significant accounting rules which may impact the Company’s accounting and disclosures in future periods. Since these rules have not yet been issued, the effective dates and potential impact are unknown.
INTEREST RATE RISK
We have exposure to changes in interest rates resultingarising from the $201.0borrowings under our 2010 Credit Agreement. At December 31, 2012, we had $150.0 million outstanding on our twounder the term loansloan and $128.0$50.0 million outstanding on our revolver as of December 31, 2009. All of these borrowingsunder the revolver. Borrowings under this facility are floating rate, which may be either prime-based or LIBOR-based. Interest rates underEurodollar-based. The rate paid for these borrowings includeincludes a base floating rate plus a margin currently between 0.00%0.50% and 0.75%1.25% on prime borrowings and between .625%1.50% and 1.75%2.25% on LIBOR-basedEurodollar-based borrowings.
We have an interest rate swap contract which effectively converts the floating base rate on the original term loanfirst $200.0 million of our borrowings to a 2.26% fixed rate. As a result, our exposure toThe Company only hedges the base interest rate risk on the original term loan is capped. Including the effectfirst $200.0 million of the interest rate swap, the annualized interest rate on the original term loan was 5.81% as of December 31, 2009.
| 26 |
Approximately 46% of our revenues for both the fiscal years ended December 31, 2012 and as2011 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,Eurodollar, 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. As ofAt December 31, 2009,2012, we had $116.6almost $300.0 million of cash and cash equivalents, of whichwith approximately $70.0 million washalf denominated in foreign currencies. If the foreign exchange rates of the major currencies in which we operate changed in comparison to the U.SU.S. dollar changed by 10%, the amount of cash and cash equivalents we would have reported on December 31, 20092012 would have increased or decreased by approximately $4.0$12.0 million.
Because our foreign subsidiaries generally operate in a local functional currency that differs from the U.S. dollar. Revenuesdollar, 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 also have foreign exchange transaction risk since weforeign subsidiaries typically enter into transactions in the normal course of business that are denominated in foreign currencies that differ from the local functional currenciescurrency in which the foreign subsidiaries operate.
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 equivalent investmentsand cash equivalents and its two interest rate swap contracts are with large investment grade commercial banks that are participants in the Company’s 2010 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our consolidated financial statements for 2009, 2008,2012, 2011, and 2007,2010, together with the reports of KPMG LLP, our independent registered public accounting firm, are included herein in this Annual Report onForm 10-K.
None.
DISCLOSURE CONTROLS AND PROCEDURES
Management conducted an evaluation, as of December 31, 2009,2012, of the effectiveness of the design and operation of our disclosure controls and procedures, (as such term is defined inRules 13a- 15(e) and15d- 15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) 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 our 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 or submitted under the Act.
| 27 |
Gartner management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange ActRules 13a-15(f) and15d-15(f). Gartner’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009.2012. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment was reviewed with the Audit Committee of the Board of Directors.
Based on its assessment of internal control over financial reporting, management has concluded that, as of December 31, 2009,2012, Gartner’s internal control over financial reporting was effective.
The effectiveness of management’s internal control over financial reporting as of December 31, 20092012 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included in this Annual Report onForm 10-K in Part IV, Item 15.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal controls over financial reporting during the quarter ended December 31, 20092012 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Not applicable.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required to be furnished pursuant to this item will be set forth under the captions “Proposal One: Election of Directors,” “Executive Officers,” “Corporate Governance,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Miscellaneous — Available Information” in the Company’s Proxy Statement to be filed with the SEC no later than April 30, 2010.2013. If the Proxy Statement is not filed with the SEC by April 30, 2010,2013, such information will be included in an amendment to this Annual Report filed by April 30, 2010.2013. See also Item 1. Business — Available Information.
ITEM 11. EXECUTIVE COMPENSATION.
The information required to be furnished pursuant to this item is incorporated by reference from the information set forth under the caption “Executive Compensation” in the Company’s Proxy Statement to be filed with the SEC no later than April 30, 2010.2013. If the Proxy Statement is not filed with the SEC by April 30, 2010,2013, such information will be included in an amendment to this Annual Report filed by April 30, 2010.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERS.
The information required to be furnished pursuant to this item will be set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Company’s Proxy Statement to be filed with the SEC by April 30, 2010.2013. If the Proxy Statement is not filed with the SEC by April 30, 2010,2013, such information will be included in an amendment to this Annual Report filed by April 30, 2010.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTORINDEPENDENCE.
The information required to be furnished pursuant to this item will be set forth under the captions “Transactions With Related Persons” and “Corporate Governance — Director Independence” in the Company’s Proxy Statement to be filed with the SEC by April 30, 2010.2013. If the Proxy Statement is not filed with the SEC by April 30, 2010,2013, such information will be included in an amendment to this Annual Report filed by April 30, 2010.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required to be furnished pursuant to this item will be set forth under the caption “Principal Accountant Fees and Services” in the Company’s Proxy Statement to be filed with the SEC no later than April 30, 2010.2013. If the Proxy Statement is not filed with the SEC by April 30, 2010,2013, such information will be included in an amendment to this Annual Report filed by April 30, 2010.2013.
| 29 |
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) 1. and 2. Consolidated Financial Statements and Schedules
The reports of our independent registered public accounting firm and consolidated financial statements listed in the Index to Consolidated Financial Statements herein are filed as part of this report.
All financial statement schedules not listed in the Index have been omitted because the information required is not applicable or is shown in the consolidated financial statements or notes thereto.
3. Exhibits
| EXHIBIT | ||
| NUMBER | DESCRIPTION OF DOCUMENT | |
| Restated Certificate of Incorporation of the Company. | ||
| Bylaws as amended through | ||
| 4.1(1) | Form of Certificate for Common Stock as of June 2, 2005. | |
| 4.2(3) | Credit Agreement, dated as of | |
| Lease dated | ||
| 10.2(4) | First Amendment to Lease dated | |
| 10.4(5)+ | ||
| 2003 Long-Term Incentive Plan, as amended and restated on June 4, 2009. | ||
| Amended and Restated Employment Agreement between Eugene A. Hall and the Company dated as of | ||
| Company Deferred Compensation Plan, effective January 1, 2009. | ||
| 10.9(9)+ | Form of Stock Appreciation Right Agreement for executive officers. | |
| 10.10(9)+ | Form of | |
| 21.1* | Subsidiaries of Registrant. | |
| 23.1* | Consent of Independent Registered Public Accounting Firm | |
| 24.1 | Power of Attorney (see Signature Page). | |
| 31.1* | Certification of chief executive officer under Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2* | Certification of chief financial officer under Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32* | Certification under Section 906 of the Sarbanes-Oxley Act of 2002. |
| * | Filed with this document. |
| + | Management compensation plan or arrangement. |
| (1) | Incorporated by reference from the Company’s Current Report onForm 8-K dated June 29, 2005 as filed on July 6, 2005. | |
| (2) | Incorporated by reference from the Company’s Current Report onForm 8-K dated | |
| (3) | Incorporated by reference from the Company’s Annual Report onForm 10-K as filed on | |
| (4) | Incorporated by reference from the Company’s Quarterly Report on | |
| (5) | Incorporated by reference from the Company’s |
| 30 |
| (6) | Incorporated by reference from the Company’s Proxy Statement (Schedule 14A) as filed on April 21, 2009. | |
| Incorporated by reference from the Company’s Quarterly Report on Form 10-Q as filed on August 2, 2011. | ||
| (8) | Incorporated by reference from the Company’s Annual Report onForm 10-K as filed on February 20, 2009. | |
| (9) | Incorporated by reference from the Company’s Current Report on Form 8-K dated February 12, 2013 as filed on February 13, 2013. |
| 31 |
GARTNER, INC.
CONSOLIDATED FINANCIAL STATEMENTS
| 33 | ||||
| 34 | ||||
| 35 | ||||
| 36 | ||||
| 37 | ||||
| Consolidated Statements of Stockholders’ Equity | 38 | |||
| 39 | ||||
| 40 |
All financial statement schedules have been omitted because the information required is not applicable or is shown in the consolidated financial statements or notes thereto.
| 32 |
The Board of Directors and Stockholders
Gartner, Inc.:
We have audited the accompanying consolidated balance sheets of Gartner, Inc. and subsidiaries (the Company) as of December 31, 20092012 and 2008,2011, and the related consolidated statements of operations, stockholders’ equity (deficit) and comprehensive income, (loss),stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2009.2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Gartner, Inc. and subsidiaries as of December 31, 20092012 and 2008,2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009,2012, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009,2012, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 19, 201022, 2013 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
(KPMG LLP LOGO)
/s/ KPMG LLP
New York, New York
February 22, 2013
| 33 |
The Board of Directors and Stockholders
Gartner, Inc.:
We have audited Gartner, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2009,2012, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009,2012, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Gartner, Inc. and subsidiaries as of December 31, 20092012 and 2008,2011, and the related consolidated statements of operations, stockholders’ equity (deficit) and comprehensive income, (loss),stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2009,2012, and our report dated February 19, 201022, 2013 expressed an unqualified opinion on those consolidated financial statements.
(KPMG LLP LOGO)
/s/ KPMG LLP
New York, New York
February 22, 2013
| 34 |
(IN THOUSANDS, EXCEPT SHARE DATA)
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 116,574 | $ | 140,929 | ||||
| Fees receivable, net of allowances of $8,100 and $7,800 respectively | 317,598 | 318,511 | ||||||
| Deferred commissions | 70,253 | 52,149 | ||||||
| Prepaid expenses and other current assets | 53,400 | 42,935 | ||||||
| Total current assets | 557,825 | 554,524 | ||||||
| Property, equipment and leasehold improvements, net | 52,466 | 61,869 | ||||||
| Goodwill | 513,612 | 398,737 | ||||||
| Intangible assets, net | 24,113 | 2,015 | ||||||
| Other assets | 67,263 | 75,920 | ||||||
| Total assets | $ | 1,215,279 | $ | 1,093,065 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 255,966 | $ | 219,381 | ||||
| Deferred revenues | 437,207 | 395,278 | ||||||
| Current portion of long-term debt | 205,000 | 177,750 | ||||||
| Total current liabilities | 898,173 | 792,409 | ||||||
| Long-term debt | 124,000 | 238,500 | ||||||
| Other liabilities | 80,571 | 83,472 | ||||||
| Total liabilities | 1,102,744 | 1,114,381 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity (deficit): | ||||||||
| Preferred stock: | ||||||||
| $.01 par value, authorized 5,000,000 shares; none issued or outstanding | — | — | ||||||
| Common stock: | ||||||||
| $.0005 par value, authorized 250,000,000 shares for both periods; 156,234,416 shares issued for both periods | 78 | 78 | ||||||
| Additional paid-in capital | 590,864 | 570,667 | ||||||
| Accumulated other comprehensive income (loss), net | 11,322 | (1,741 | ) | |||||
| Accumulated earnings | 509,392 | 426,428 | ||||||
| Treasury stock, at cost, 60,356,672 and 62,353,575 common shares, respectively | (999,121 | ) | (1,016,748 | ) | ||||
| Total stockholders’ equity (deficit) | 112,535 | (21,316 | ) | |||||
| Total liabilities and stockholders’ equity (deficit) | $ | 1,215,279 | $ | 1,093,065 | ||||
| December 31, | ||||||||
| 2012 | 2011 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 299,852 | $ | 142,739 | ||||
| Fees receivable, net of allowances of $6,400 and $7,260 respectively | 463,968 | 421,033 | ||||||
| Deferred commissions | 87,933 | 78,492 | ||||||
| Prepaid expenses and other current assets | 75,713 | 63,521 | ||||||
| Total current assets | 927,466 | 705,785 | ||||||
| Property, equipment and leasehold improvements, net | 89,089 | 68,132 | ||||||
| Goodwill | 519,506 | 508,550 | ||||||
| Intangible assets, net | 11,821 | 7,060 | ||||||
| Other assets | 73,395 | 90,345 | ||||||
| Total Assets | $ | 1,621,277 | $ | 1,379,872 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 287,763 | $ | 259,490 | ||||
| Deferred revenues | 692,237 | 611,647 | ||||||
| Current portion of long-term debt | 90,000 | 50,000 | ||||||
| Total current liabilities | 1,070,000 | 921,137 | ||||||
| Long-term debt | 115,000 | 150,000 | ||||||
| Other liabilities | 129,604 | 126,951 | ||||||
| Total liabilities | 1,314,604 | 1,198,088 | ||||||
| Stockholders’ equity: | ||||||||
| Preferred stock: | ||||||||
| $.01 par value, authorized 5,000,000 shares; none issued or outstanding | — | — | ||||||
| Common stock: | ||||||||
| $.0005 par value, authorized 250,000,000 shares for both periods; 156,234,415 shares issued for both periods | 78 | 78 | ||||||
| Additional paid-in capital | 679,871 | 646,815 | ||||||
| Accumulated other comprehensive income, net | 5,968 | 5,793 | ||||||
| Accumulated earnings | 908,482 | 742,579 | ||||||
| Treasury stock, at cost, 62,873,100 and 62,891,251 common shares, respectively | (1,287,726 | ) | (1,213,481 | ) | ||||
| Total stockholders’ equity | 306,673 | 181,784 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 1,621,277 | $ | 1,379,872 | ||||
See Notes to Consolidated Financial Statements.
| 35 |
(IN THOUSANDS, EXCEPT PER SHARE DATA)
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Revenues: | ||||||||||||
| Research | $ | 752,505 | $ | 781,581 | $ | 683,380 | ||||||
| Consulting | 286,847 | 347,404 | 325,030 | |||||||||
| Events | 100,448 | 150,080 | 160,065 | |||||||||
| Total revenues | 1,139,800 | 1,279,065 | 1,168,475 | |||||||||
| Costs and expenses: | ||||||||||||
| Cost of services and product development | 498,363 | 572,208 | 546,569 | |||||||||
| Selling, general and administrative | 477,003 | 514,994 | 456,975 | |||||||||
| Depreciation | 25,387 | 25,880 | 24,298 | |||||||||
| Amortization of intangibles | 1,636 | 1,615 | 2,091 | |||||||||
| Acquisition and integration charges | 2,934 | — | — | |||||||||
| Other charges | — | — | 9,084 | |||||||||
| Total costs and expenses | 1,005,323 | 1,114,697 | 1,039,017 | |||||||||
| Operating income | 134,477 | 164,368 | 129,458 | |||||||||
| Interest income | 830 | 3,121 | 2,912 | |||||||||
| Interest expense | (16,862 | ) | (22,390 | ) | (25,066 | ) | ||||||
| Other (expense) income, net | (2,919 | ) | (358 | ) | 3,193 | |||||||
| Income before income taxes | 115,526 | 144,741 | 110,497 | |||||||||
| Provision for income taxes | 32,562 | 47,593 | 39,831 | |||||||||
| Income from continuing operations | 82,964 | 97,148 | 70,666 | |||||||||
| Income from discontinued operations, net of taxes | — | 6,723 | 2,887 | |||||||||
| Net income | $ | 82,964 | $ | 103,871 | $ | 73,553 | ||||||
| Net income per share: | ||||||||||||
| Basic: | ||||||||||||
| Income from continuing operations | $ | 0.88 | $ | 1.02 | $ | 0.68 | ||||||
| Income from discontinued operations | — | .07 | .03 | |||||||||
| $ | 0.88 | $ | 1.09 | $ | 0.71 | |||||||
| Diluted: | ||||||||||||
| Income from continuing operations | $ | 0.85 | $ | 0.98 | $ | 0.65 | ||||||
| Income from discontinued operations | — | .07 | .03 | |||||||||
| $ | 0.85 | $ | 1.05 | $ | 0.68 | |||||||
| Weighted average shares outstanding: | ||||||||||||
| Basic | 94,658 | 95,246 | 103,613 | |||||||||
| Diluted | 97,549 | 99,028 | 108,328 | |||||||||
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Revenues: | ||||||||||||
| Research | $ | 1,137,147 | $ | 1,012,062 | $ | 865,000 | ||||||
| Consulting | 304,893 | 308,047 | 302,117 | |||||||||
| Events | 173,768 | 148,479 | 121,337 | |||||||||
| Total revenues | 1,615,808 | 1,468,588 | 1,288,454 | |||||||||
| Costs and expenses: | ||||||||||||
| Cost of services and product development | 659,067 | 608,755 | 552,238 | |||||||||
| Selling, general and administrative | 678,843 | 613,707 | 543,174 | |||||||||
| Depreciation | 25,369 | 25,539 | 25,349 | |||||||||
| Amortization of intangibles | 4,402 | 6,525 | 10,525 | |||||||||
| Acquisition and integration charges | 2,420 | — | 7,903 | |||||||||
| Total costs and expenses | 1,370,101 | 1,254,526 | 1,139,189 | |||||||||
| Operating income | 245,707 | 214,062 | 149,265 | |||||||||
| Interest income | 1,046 | 1,249 | 1,156 | |||||||||
| Interest expense | (9,905 | ) | (11,216 | ) | (16,772 | ) | ||||||
| Other (expense) income, net | (1,252 | ) | (1,911 | ) | 436 | |||||||
| Income before income taxes | 235,596 | 202,184 | 134,085 | |||||||||
| Provision for income taxes | 69,693 | 65,282 | 37,800 | |||||||||
| Net income | $ | 165,903 | $ | 136,902 | $ | 96,285 | ||||||
| Net income per share: | ||||||||||||
| Basic | $ | 1.78 | $ | 1.43 | $ | 1.01 | ||||||
| Diluted | $ | 1.73 | $ | 1.39 | $ | 0.96 | ||||||
| Weighted average shares outstanding: | ||||||||||||
| Basic | 93,444 | 96,019 | 95,747 | |||||||||
| Diluted | 95,842 | 98,846 | 99,834 | |||||||||
See Notes to Consolidated Financial Statements.
| 36 |
(IN THOUSANDS)
| Accumulated | ||||||||||||||||||||||||||||
| Other | Total | |||||||||||||||||||||||||||
| Additional | Unearned | Comprehensive | Stockholders’ | |||||||||||||||||||||||||
| Common | Paid-In | Compensation, | Income (Loss), | Accumulated | Treasury | Equity | ||||||||||||||||||||||
| Stock | Capital | Net | Net | Earnings | Stock | (Deficit) | ||||||||||||||||||||||
| Balance at December 31, 2006 | $ | 78 | $ | 544,686 | $ | (2,208 | ) | $ | 13,097 | $ | 249,004 | $ | (778,339 | ) | $ | 26,318 | ||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||
| Net income | — | — | — | — | 73,553 | — | 73,553 | |||||||||||||||||||||
| Other comprehensive income: | ||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | 10,570 | — | — | 10,570 | |||||||||||||||||||||
| Interest rate swap, net of tax | — | — | — | (2,966 | ) | — | — | (2,966 | ) | |||||||||||||||||||
| Pension unrecognized gain, net of tax | — | — | — | 2,940 | — | — | 2,940 | |||||||||||||||||||||
| Other comprehensive income | 10,544 | 10,544 | ||||||||||||||||||||||||||
| Comprehensive income | 84,097 | |||||||||||||||||||||||||||
| Issuances under stock plans | — | (36,210 | ) | — | — | — | 73,357 | 37,147 | ||||||||||||||||||||
| Excess tax benefits from stock compensation | — | 14,759 | — | — | — | — | 14,759 | |||||||||||||||||||||
| Purchase of shares for treasury stock | — | — | — | — | — | (169,064 | ) | (169,064 | ) | |||||||||||||||||||
| Stock compensation expense (net of forfeitures) | — | 22,419 | 1,822 | — | — | — | 24,241 | |||||||||||||||||||||
| Balance at December 31, 2007 | $ | 78 | $ | 545,654 | $ | (386 | ) | $ | 23,641 | $ | 322,557 | $ | (874,046 | ) | $ | 17,498 | ||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||
| Net income | — | — | — | — | 103,871 | — | 103,871 | |||||||||||||||||||||
| Other comprehensive loss: | ||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | (20,497 | ) | — | — | (20,497 | ) | |||||||||||||||||||
| Interest rate swaps, net of tax | — | — | — | (6,060 | ) | — | — | (6,060 | ) | |||||||||||||||||||
| Pension unrecognized gain, net of tax | — | — | — | 1,175 | — | — | 1,175 | |||||||||||||||||||||
| Other comprehensive loss | (25,382 | ) | (25,382 | ) | ||||||||||||||||||||||||
| Comprehensive income | 78,489 | |||||||||||||||||||||||||||
| Issuances under stock plans | — | (10,128 | ) | — | — | — | 55,874 | 45,746 | ||||||||||||||||||||
| Excess tax benefits from stock compensation | — | 14,831 | — | — | — | — | 14,831 | |||||||||||||||||||||
| Purchase of shares for treasury stock | — | — | — | — | — | (198,576 | ) | (198,576 | ) | |||||||||||||||||||
| Stock compensation expense (net of forfeitures) | — | 20,310 | 386 | — | — | — | 20,696 | |||||||||||||||||||||
| Balance at December 31, 2008 | $ | 78 | $ | 570,667 | $ | — | $ | (1,741 | ) | $ | 426,428 | $ | (1,016,748 | ) | $ | (21,316 | ) | |||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||
| Net income | — | — | — | — | 82,964 | — | 82,964 | |||||||||||||||||||||
| Other comprehensive income: | ||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | 9,088 | — | — | 9,088 | |||||||||||||||||||||
| Interest rate swaps, net of tax | — | — | — | 3,535 | — | — | 3,535 | |||||||||||||||||||||
| Pension unrecognized gain, net of tax | — | — | — | 440 | — | — | 440 | |||||||||||||||||||||
| Other comprehensive income | 13,063 | 13,063 | ||||||||||||||||||||||||||
| Comprehensive income | 96,027 | |||||||||||||||||||||||||||
| Issuances under stock plans | — | (6,522 | ) | — | — | — | 21,371 | 14,849 | ||||||||||||||||||||
| Excess tax benefits from stock compensation | — | 653 | — | — | — | — | 653 | |||||||||||||||||||||
| Purchase of shares for treasury stock | — | — | — | — | — | (3,744 | ) | (3,744 | ) | |||||||||||||||||||
| Stock compensation expense (net of forfeitures) | — | 26,066 | — | — | — | — | 26,066 | |||||||||||||||||||||
| Balance at December 31, 2009 | $ | 78 | $ | 590,864 | $ | — | $ | 11,322 | $ | 509,392 | $ | (999,121 | ) | $ | 112,535 | |||||||||||||
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Net income | $ | 165,903 | $ | 136,902 | $ | 96,285 | ||||||
| Other comprehensive income (loss) | ||||||||||||
| Foreign currency translation adjustments | 4,318 | (4,454 | ) | 582 | ||||||||
| Interest rate swap hedge - deferred (loss) gain | (127 | ) | (7,790 | ) | 6,243 | |||||||
| Pension - deferred actuarial (loss) gain | (5,993 | ) | 283 | (1,012 | ) | |||||||
| Subtotal | (1,802 | ) | (11,961 | ) | 5,813 | |||||||
| Tax effect of comprehensive income (loss) items | 1,977 | 3,116 | (2,497 | ) | ||||||||
| Other comprehensive income (loss) | 175 | (8,845 | ) | 3,316 | ||||||||
| Comprehensive income | $ | 166,078 | $ | 128,057 | $ | 99,601 | ||||||
See Notes to Consolidated Financial Statements.
| 37 |
(IN THOUSANDS)
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Operating activities: | ||||||||||||
| Net income | $ | 82,964 | $ | 103,871 | $ | 73,553 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Gain on sale of Vision Events business | — | (7,061 | ) | — | ||||||||
| Depreciation and amortization of intangibles | 27,023 | 27,495 | 26,389 | |||||||||
| Stock-based compensation expense | 26,066 | 20,696 | 24,241 | |||||||||
| Excess tax benefits from stock-based compensation expense | (2,392 | ) | (14,831 | ) | (14,759 | ) | ||||||
| Deferred taxes | 5,003 | 2,617 | 6,740 | |||||||||
| Amortization and write-off of debt issue costs | 1,480 | 1,222 | 1,363 | |||||||||
| Changes in assets and liabilities: | ||||||||||||
| Fees receivable, net | 25,349 | 20,987 | (10,880 | ) | ||||||||
| Deferred commissions | (16,750 | ) | (1,403 | ) | (5,266 | ) | ||||||
| Prepaid expenses and other current assets | 13,059 | (21 | ) | (857 | ) | |||||||
| Other assets | 532 | 2,907 | (12,288 | ) | ||||||||
| Deferred revenues | 5,101 | (308 | ) | 26,858 | ||||||||
| Accounts payable, accrued, and other liabilities | (5,498 | ) | 28,179 | 33,241 | ||||||||
| Cash provided by operating activities | 161,937 | 184,350 | 148,335 | |||||||||
| Investing activities: | ||||||||||||
| Proceeds from sale of Vision Events business | — | 7,847 | — | |||||||||
| Additions to property, equipment and leasehold improvements | (15,142 | ) | (24,302 | ) | (24,136 | ) | ||||||
| Acquisitions (net of cash received) | (104,523 | ) | — | — | ||||||||
| Cash used in investing activities | (119,665 | ) | (16,455 | ) | (24,136 | ) | ||||||
| Financing activities: | ||||||||||||
| Proceeds from terminated interest rate swap | — | — | 1,167 | |||||||||
| Proceeds from stock issued for stock plans | 14,822 | 44,702 | 34,458 | |||||||||
| Proceeds from debt issuance | 78,000 | 180,000 | 525,000 | |||||||||
| Payments for debt issuance costs | — | (801 | ) | (1,257 | ) | |||||||
| Payments on debt | (165,250 | ) | (157,750 | ) | (501,000 | ) | ||||||
| Purchases of treasury stock | (3,744 | ) | (200,817 | ) | (166,822 | ) | ||||||
| Excess tax benefits from stock-based compensation expense | 2,392 | 14,831 | 14,759 | |||||||||
| Cash used by financing activities | (73,780 | ) | (119,835 | ) | (93,695 | ) | ||||||
| Net (decrease) increase in cash and cash equivalents | (31,508 | ) | 48,060 | 30,504 | ||||||||
| Effects of exchange rates on cash and cash equivalents | 7,153 | (17,076 | ) | 11,640 | ||||||||
| Cash and cash equivalents, beginning of period | 140,929 | 109,945 | 67,801 | |||||||||
| Cash and cash equivalents, end of period | $ | 116,574 | $ | 140,929 | $ | 109,945 | ||||||
| Supplemental disclosures of cash flow information: | ||||||||||||
| Cash paid during the period for: | ||||||||||||
| Interest | $ | 13,942 | $ | 22,380 | $ | 24,100 | ||||||
| Income taxes, net of refunds received | $ | 34,438 | $ | 19,961 | $ | 3,564 | ||||||
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income, Net | Accumulated Earnings | Treasury Stock | Total Stockholders’ Equity | |||||||||||||||||||
| Balance at December 31, 2009 | $ | 78 | $ | 590,864 | $ | 11,322 | $ | 509,392 | $ | (999,121 | ) | $ | 112,535 | |||||||||||
| Net income | — | — | — | 96,285 | — | 96,285 | ||||||||||||||||||
| Other comprehensive income | — | — | 3,316 | — | — | 3,316 | ||||||||||||||||||
| Issuances under stock plans | — | (30,254 | ) | — | — | 53,822 | 23,568 | |||||||||||||||||
| Stock compensation tax benefits | — | 18,520 | — | — | — | 18,520 | ||||||||||||||||||
| Common share repurchases | — | — | — | — | (99,820 | ) | (99,820 | ) | ||||||||||||||||
| Stock compensation expense | — | 32,652 | — | — | — | 32,652 | ||||||||||||||||||
| Balance at December 31, 2010 | $ | 78 | $ | 611,782 | $ | 14,638 | $ | 605,677 | $ | (1,045,119 | ) | $ | 187,056 | |||||||||||
| Net income | — | — | — | 136,902 | — | 136,902 | ||||||||||||||||||
| Other comprehensive loss | — | — | (8,845 | ) | — | — | (8,845 | ) | ||||||||||||||||
| Issuances under stock plans | — | (23,579 | ) | — | — | 43,624 | 20,045 | |||||||||||||||||
| Stock compensation tax benefits | — | 25,778 | — | — | — | 25,778 | ||||||||||||||||||
| Common share repurchases | — | — | — | — | (211,986 | ) | (211,986 | ) | ||||||||||||||||
| Stock compensation expense | — | 32,834 | — | — | — | 32,652 | ||||||||||||||||||
| Balance at December 31, 2011 | $ | 78 | $ | 646,815 | $ | 5,793 | $ | 742,579 | $ | (1,213,481 | ) | $ | 181,784 | |||||||||||
| Net income | — | — | — | 165,903 | — | 165,903 | ||||||||||||||||||
| Other comprehensive income | — | — | 175 | — | — | 175 | ||||||||||||||||||
| Issuances under stock plans | — | (24,626 | ) | — | — | 37,059 | 12,433 | |||||||||||||||||
| Stock compensation tax benefits | — | 21,304 | — | — | — | 21,304 | ||||||||||||||||||
| Common share repurchases | — | — | — | — | (111,304 | ) | (111,304 | ) | ||||||||||||||||
| Stock compensation expense | — | 36,378 | — | — | — | 36,378 | ||||||||||||||||||
| Balance at December 31, 2012 | $ | 78 | $ | 679,871 | $ | 5,968 | $ | 908,482 | $ | (1,287,726 | ) | $ | 306,673 | |||||||||||
See Notes to Consolidated Financial Statements.
| 38 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Operating activities: | ||||||||||||
| Net income | $ | 165,903 | $ | 136,902 | $ | 96,285 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization of intangibles | 29,771 | 32,064 | 35,874 | |||||||||
| Stock-based compensation expense | 36,378 | 32,865 | 32,634 | |||||||||
| Excess tax benefits from employee stock-based compensation exercises | (21,304 | ) | (25,572 | ) | (18,364 | ) | ||||||
| Deferred taxes | 973 | (965 | ) | (2,609 | ) | |||||||
| Amortization and write-off of debt issue costs | 2,008 | 2,288 | 1,567 | |||||||||
| Changes in assets and liabilities: | ||||||||||||
| Fees receivable, net | (38,617 | ) | (58,887 | ) | (48,177 | ) | ||||||
| Deferred commissions | (8,871 | ) | (6,928 | ) | (2,184 | ) | ||||||
| Prepaid expenses and other current assets | (10,604 | ) | 3,540 | (376 | ) | |||||||
| Other assets | 15,113 | 4,397 | (34,130 | ) | ||||||||
| Deferred revenues | 71,645 | 91,765 | 85,336 | |||||||||
| Accounts payable, accrued, and other liabilities | 37,418 | 44,097 | 59,643 | |||||||||
| Cash provided by operating activities | 279,813 | 255,566 | 205,499 | |||||||||
| Investing activities: | ||||||||||||
| Additions to property, equipment and leasehold improvements | (44,337 | ) | (41,954 | ) | (21,694 | ) | ||||||
| Acquisitions (net of cash received) | (10,336 | ) | — | (12,151 | ) | |||||||
| Cash used in investing activities | (54,673 | ) | (41,954 | ) | (33,845 | ) | ||||||
| Financing activities: | ||||||||||||
| Proceeds from employee stock-based compensation plans and ESP Plan | 12,430 | 20,011 | 23,527 | |||||||||
| Proceeds from borrowings | 35,000 | — | 200,000 | |||||||||
| Payments on debt | (30,000 | ) | (20,156 | ) | (313,627 | ) | ||||||
| Purchases of treasury stock | (111,304 | ) | (211,986 | ) | (99,820 | ) | ||||||
| Excess tax benefits from employee stock-based compensation exercises | 21,304 | 25,572 | 18,364 | |||||||||
| Cash used by financing activities | (72,570 | ) | (186,559 | ) | (171,556 | ) | ||||||
| Net increase in cash and cash equivalents | 152,570 | 27,053 | 98 | |||||||||
| Effects of exchange rates on cash and cash equivalents | 4,543 | (4,495 | ) | 3,509 | ||||||||
| Cash and cash equivalents, beginning of period | 142,739 | 120,181 | 116,574 | |||||||||
| Cash and cash equivalents, end of period | $ | 299,852 | $ | 142,739 | $ | 120,181 | ||||||
| Supplemental disclosures of cash flow information: | ||||||||||||
| Cash paid during the period for: | ||||||||||||
| Interest | $ | 8,968 | $ | 13,312 | $ | 11,484 | ||||||
| Income taxes, net of refunds received | $ | 46,907 | $ | 24,126 | $ | 25,486 | ||||||
See Notes to Consolidated Financial Statements.
| 39 |
1 — BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business.Gartner, Inc. is a global information technology research and advisory company founded in 1979 with its headquarters in Stamford, Connecticut. Gartner Inc. delivers its principal products and services through three business segments: Research, Consulting, and Events.
Basis of presentation.The accompanying 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 financial information and with the applicable instructions of U.S. Securities & Exchange Commission (“SEC”) Regulation S-X. The fiscal year of Gartner Inc. (the “Company”) represents the twelve-month period from January 1 through December 31. Certain prior year amounts have been reclassifiedAll references to conform2012, 2011, and 2010 herein refer to the currentfiscal year presentation. When used in these notes, the terms “Company,” “we,” “us,” or “our” mean Gartner, Inc. and its consolidated subsidiaries.
Principles of consolidation.The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated.
Use of estimates.The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 the accompanying consolidated financial statements to be reasonable.
Management continuously evaluates and revises its estimates on an ongoing basis using historical experience and other factors, including the general economic environment and actions it may take in the future. We adjust suchManagement adjusts these estimates when facts and circumstances dictate. However, these estimates may involve significant uncertainties and judgments and cannot be determined with precision. In addition, these estimates are based on ourmanagement’s best judgment at a point in timetime. As a result, differences between our estimates and as such these estimates may ultimately differ from actual results.
Reclassifications.Revenues. Effective January 1, 2009, the Company has reclassified certain amounts presentedRevenue is recognized in itsaccordance with U.S. GAAP and SEC Staff Accounting Bulletin No. 101,Revenue Recognitionin Financial Statements (“SAB 101”), and SEC Staff Accounting Bulletin No. 104,Revenue Recognition(“SAB 104”). Revenues are only recognized once all required criteria for recognition have been met. The accompanying Consolidated Statements of Operations presents revenues net of any sales or value-added taxes that we collect from customers and remit to government authorities.
The Company’s revenues by significant source are as follows:
Research
Research revenues —The Company eliminated its previously reported “Other” revenue line. The “Other” revenue line primarily consisted of fees earned are derived from Research reprints and other miscellaneous products, and theseannual subscription contracts for research products. These revenues and related expenses are now included in the Research segment. The Company made this change because the “Other” revenue has declined in magnitude, from approximately $10.0 million in 2007, slightly less than 1.0% of total revenues in that year, to about $8.3 million in 2008, about half a percent of total revenues in that year, and this trend is continuing. The revenue decline reflects the Company’s decision to discontinue some of these products.
The majority of research contracts are billable upon signing, absent special terms granted on a limited basis from time to time. All researchResearch contracts are non-cancelable and non-refundable, except for government contracts that may have cancellation or fiscal funding clauses, which historically have not produced material cancellations to date. With the exception of certain government contracts which permit termination and contracts with special billing terms, itcancellations. It is Companyour policy to record the entire amount of the contract that is billable as a fee receivable at the time the contract is signed which represents a legally enforceable claim, andwith a corresponding amount as deferred revenue. For those government contracts that permit termination, the Company bills the client the full amount billable underrevenue, since the contract but only recordsrepresents a receivable equal to the earned portion of the contract. In addition, the Company only records deferred revenue on these government contracts when cash is received.
Consulting
Consulting revenues, primarily derived from consulting, measurement and strategic advisory services (paidone-day analyst engagements), are principally generated from fixed fee or time and materials for discrete projects.engagements. Revenues for such projectsfrom fixed fee engagements are recognized on a proportional performance basis, while revenues from time and material engagements are recognized as work is deliveredand/or services are provided. Unbilled fees receivable associated with consulting engagements were $30.0 million at December 31, 2009 and $35.3 million at December 31, 2008. Revenues related to contract optimization contractsengagements are contingent in nature and are only recognized upon satisfaction of all conditions related to their payment. Unbilled fees receivable associated with consulting engagements were $34.0 million at December 31, 2012 and $29.2 million at December 31, 2011.
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Events
Events revenues are deferred and recognized upon the completion of the related symposium, conference or exhibition. In addition, the Company defers certain costs directly related to events and expenses these costs in the period during which the related symposium, conference or exhibition occurs. The Company policy is to defer only those costs, primarily prepaid site and production services costs, which are incremental and are directly attributable to a specific event. Other costs of organizing and producing our events, primarily Company personnel and non-event specific expenses, are expensed in the period incurred. At the end of each fiscal quarter, the Company assesses on anevent-by-event basis whether expected direct costs of producing a scheduled event will exceed expected revenues. If such costs are expected to exceed revenues, the Company records the expected loss in the period determined.
Allowance for losses.The Company maintains 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 as an increase to expense. The amount of the allowance for losses is based on historical loss experience, aging of outstanding receivables, anour assessment of current economic conditions and the financial health of specific clients.
Cost of services and product development.development (“COS”). IncludesCOS expense includes the direct costs incurred in the creation and delivery of our products and services.
Selling, general and administrative (“SG&A”).SG&A expense includes direct and indirect selling costs, and general and administrative costs.
Commission expense.The Company records the commission obligation related to research contractsobligations upon the signing of the contractcustomer contracts and amortizes the corresponding deferred obligation as commission expense over the contract period in which the related revenues are earned. The Company records commissionCommission expense is included in SG&A in the Consolidated Statements of Operations.
Stock-based compensation expense.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”). Stock-based compensation cost is based on the fair value of the award on the date of grant, which is expensed over the related service period, net of estimated forfeitures. The service period is the period over which the employee performs the related services,
Income tax expense. The provision forAs we prepare our consolidated financial statements, we estimate our income taxes is the sumin each of the amountjurisdictions where we operate. This process involves estimating our current tax expense together with assessing temporary differences resulting from differing treatment of incomeitems for tax paid or payable for the year as determined by applying the provisions of enacted tax laws to taxable income for that year and the net changes during the yearaccounting purposes. These differences result in deferred tax assets and liabilities. Deferredliabilities, 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 liabilitiesongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. In the event we determine that we are recognized based on differences betweenable to realize our deferred tax assets in the bookfuture in excess of the 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 basis of assets and liabilities using presently enacted tax rates. We credit additional paid-in capital for realized tax benefits arising from stock transactions with employees. The tax benefit on a nonqualified stock option is equalasset in the future, an adjustment to the tax effect of the difference between the market price of Common Stock on the date of exercise and the exercise price.
Cash and cash equivalents. AllIncludes cash and all highly liquid investments with original maturities of three months or less, which are classified asconsidered cash equivalents. The carrying value of these investmentscash equivalents approximates fair value based upondue to their short-term maturity. Investments with maturities of more than three months are classified as marketable securities. Interest earned on investments is classified in Interest income in the Consolidated Statements of Operations.
Property, equipment and leasehold improvements.The Company leases all of its facilities and certain equipment. These leases are all classified as operating leases in accordance with FASB ASC Topic 840. The cost of these operating leases, including any contractual rent concessions, contractualincreases, rent increases,concessions, and landlord incentives, are recognized ratably over the life of the related lease agreement. Lease expense was $22.5$30.3 million, $26.2 million, and $23.5 million in both 20092012, 2011, and 2008 and $23.8 million in 2007.
Equipment, leasehold improvements, and other fixed assets owned by the Company are recorded at cost less accumulated depreciation and amortization anddepreciation. Except for leasehold improvements, these fixed assets are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the assetsimprovements or the remaining term of the related leases. The Company had total depreciation expense of $25.4 million, $25.5 million, and $25.3 million in 2012, 2011, and 2010, respectively.
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Property, equipment and leasehold improvements, less accumulated depreciation and amortization, consist of the following (in thousands):
| Useful Life | December 31, | |||||||||
| (Years) | 2012 | 2011 | ||||||||
| Computer equipment and software | 2 - 7 | $ | 135,167 | $ | 130,733 | |||||
| Furniture and equipment | 3 - 8 | 29,907 | 34,828 | |||||||
| Leasehold improvements | 2 - 15 | 64,346 | 63,773 | |||||||
| 229,420 | 229,334 | |||||||||
| Less — accumulated depreciation and amortization | (140,331 | ) | (161,202 | ) | ||||||
| $ | 89,089 | $ | 68,132 | |||||||
| December 31, | ||||||||||||
| Useful Life | ||||||||||||
| (Years) | 2009 | 2008 | ||||||||||
| Computer equipment and software | 2 - 7 | $ | 118,487 | $ | 123,970 | |||||||
| Furniture and equipment | 3 - 8 | 32,183 | 34,220 | |||||||||
| Leasehold improvements | 2 - 10 | 46,945 | 49,110 | |||||||||
| 197,615 | 207,300 | |||||||||||
| Less — accumulated depreciation and amortization | (145,149 | ) | (145,431 | ) | ||||||||
| $ | 52,466 | $ | 61,869 | |||||||||
The Company also capitalizes certain developmentincurs costs incurred to develop internal use software used in accordance withour operations, and certain costs meeting the criteria outlined in FASB ASC Topic 350.350 are capitalized and amortized over future periods. At December 31, 20092012 and 2008,2011, net capitalized development costs for internal use software were $16.1$14.4 million and $19.6 million, respectively, net of accumulated amortization of $20.4 million and $18.9$13.6 million, respectively. Amortization of capitalized internal software development costs, which is classified in Depreciation in the Consolidated Statements of Operations, totaled $8.3 million, $7.4 million, $7.8 million, and $6.5$7.9 million during 2009, 2008,2012, 2011, and 2007,2010, respectively.
Stamford headquarters lease renewal
The Company’s corporate headquarters is located in 213,000 square feet of leased office space in three buildings in Stamford, Connecticut. The Stamford facility accommodates research and analysis, marketing, sales, client support, production, corporate services, executive offices, and administration. In 2010 the Company entered into a new 15 year lease agreement for this facility which provides for a reduced rental until completion of certain renovation work. In accordance with FASB ASC Topic 840, the Company accounted for the new Stamford lease as an operating lease arrangement. The total minimum payments the Company is obligated to pay under this lease, including contractual escalation clauses and reduced rents during the renovation period, are being expensed on a straight-line basis over the lease term.
Under this arrangement, the landlord has provided a $25.0 million tenant improvement allowance to be used to renovate the three buildings. The renovation work began in 2011 and is expected to be completed in early 2013. The $25.0 million contractual amount due from the landlord was recorded as a tenant improvement allowance in Other assets and as deferred rent in Other Liabilities on the Consolidated Balance Sheets. As the renovation work progresses and payments are received from the landlord, the tenant improvement receivable is relieved and leasehold improvement assets are recorded in Property, equipment, and leasehold improvements. The leasehold improvement assets are being amortized to Depreciation expense over their useful lives, beginning when the assets are placed in service. The amount recorded as deferred rent is being amortized as a reduction to rent expense (SG&A) on a straight-line basis over the term of the lease.
As of December 31, 2012, the Company had $21.0 million of remaining unamortized deferred rent resulting from the tenant improvement allowance, of which $1.5 million is recorded in Accounts payable and accrued liabilities and $19.5 million is recorded in Other liabilities on the Company’s Consolidated Balance Sheets. The Company had total depreciation expense of $25.4 million, $25.9paid $17.0 million and $24.3$9.5 million in 2009, 2008,renovation costs for this project in 2012 and 2007, respectively.
Intangible assets. IntangibleThe Company has amortizable intangible assets which are amortized against earnings using the straight-line method over their expected useful lives. IntangibleChanges in intangible assets subject to amortization includeduring the followingtwo year period ended December 31, 2012 are as follows (in thousands):
| December 31, 2012 | Trade Name | Customer Relationships | 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 impact | 21 | 182 | 277 | 169 | 649 | |||||||||||||||
| Gross cost | 6,019 | 10,562 | 3,447 | 2,124 | 22,152 | |||||||||||||||
| Accumulated amortization (2) | (3,531 | ) | (5,896 | ) | (497 | ) | (407 | ) | (10,331 | ) | ||||||||||
| Balance, December 31, 2012 | $ | 2,488 | $ | 4,666 | $ | 2,950 | $ | 1,717 | $ | 11,821 | ||||||||||
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| Customer | Noncompete | |||||||||||||||||||
| December 31, 2009 | Content | Trade Name | Relationships | Agreements | Total | |||||||||||||||
| Gross cost (1) | $ | 10,634 | $ | 5,758 | $ | 14,910 | $ | 416 | $ | 31,718 | ||||||||||
| Accumulated amortization | — | — | (7,315 | ) | (290 | ) | (7,605 | ) | ||||||||||||
| Net | $ | 10,634 | $ | 5,758 | $ | 7,595 | $ | 126 | $ | 24,113 | ||||||||||
| Customer | Noncompete | |||||||||||
| December 31, 2008 | Relationships | Agreements | Total | |||||||||
| Gross cost | $ | 7,700 | $ | 278 | $ | 7,978 | ||||||
| Accumulated amortization | (5,775 | ) | (188 | ) | (5,963 | ) | ||||||
| Net | $ | 1,925 | $ | 90 | $ | 2,015 | ||||||
| December 31, 2011 | Trade Name | Customer Relationships | Total | |||||||||
| Gross cost, December 31, 2010 | $ | 5,758 | $ | 7,210 | $ | 12,968 | ||||||
| Foreign currency translation impact | — | — | — | |||||||||
| 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 | ||||||
| (1) |
| (2) | ||||
| 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 $4.4 million, $6.5 million, and $10.5 million in 2012, 2011, and 2010, respectively. | ||||
The estimated future amortization expense by year from purchasedamortizable intangibles is as follows (in thousands):
| 2010 | $ | 10,541 | ||
| 2011 | 6,530 | |||
| 2012 | 2,958 | |||
| 2014 | 2,958 | |||
| 2015 and thereafter | 1,126 | |||
| $ | 24,113 | |||
| 2013 | $ | 5,490 | ||
| 2014 | 3,615 | |||
| 2015 | 2,005 | |||
| 2016 | 711 | |||
| $ | 11,821 |
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 the recoverability of goodwill is performed in accordance with FASB ASC Topic 350, which requires an annual assessment of potential goodwill impairment at the reporting unit level. A reporting unitlevel and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. The annual assessment of the recoverability of recorded goodwill can be an operating segmentbased on either a qualitative or qualitative assessment or a business if discrete financial information is preparedcombination of the two. Both methods utilize estimates which in turn require judgments and reviewed by management. Underassumptions regarding future trends and events. As a result, both the impairment test, ifprecision and reliability of the resulting estimates are subject to uncertainty.
The Company conducted a reporting unit’s carrying amount exceeds its estimated fair value, goodwill impairment is recognized toqualitative assessment of the extent that the reporting unit’s carrying amount of goodwill exceeds the implied fair value of the goodwill. The fair value ofits three reporting units is estimated using discounted cash flows,as of September 30, 2012 based in part on the demonstrated historical trend of the fair values of the Company’s reporting units substantially exceeding their carrying values and its recent financial performance. Among the factors included in the Company’s qualitative assessment were general economic conditions and the competitive environment; actual and projected reporting unit financial performance; forward-looking business measurements; and external market multiples, and other valuation techniques.
The following table presents changes to the carrying amount of goodwill by reporting segmentunit during the two yearsyear period ended December 31, 20092012 (in thousands):
| Research | Consulting | Events | Total | |||||||||||||
| Balance, December 31, 2010 (1) | $ | 368,521 | $ | 99,817 | $ | 41,927 | $ | 510,265 | ||||||||
| Foreign currency translation adjustments | (1,541 | ) | (140 | ) | (34 | ) | (1,715 | ) | ||||||||
| Balance, December 31, 2011 | $ | 366,980 | $ | 99,677 | $ | 41,893 | $ | 508,550 | ||||||||
| Addition due to acquisition (2) | 7,455 | — | — | 7,455 | ||||||||||||
| Foreign currency translation adjustments | 2,790 | 672 | 39 | 3,501 | ||||||||||||
| Balance, December 31, 2012 | $ | 377,225 | $ | 100,349 | $ | 41,932 | $ | 519,506 | ||||||||
| Research | Consulting | Events | Total | |||||||||||||
| Balance, January 1, 2008 (1) | $ | 291,281 | $ | 88,425 | $ | 36,475 | $ | 416,181 | ||||||||
| Purchase accounting adjustments (2) | (520 | ) | — | — | (520 | ) | ||||||||||
| Foreign currency translation adjustments | (10,600 | ) | (4,377 | ) | (107 | ) | (15,084 | ) | ||||||||
| Divestitures (3) | — | — | (1,840 | ) | (1,840 | ) | ||||||||||
| Balance, December 31, 2008 | $ | 280,161 | $ | 84,048 | $ | 34,528 | $ | 398,737 | ||||||||
| Foreign currency translation adjustments | 4,386 | 1,434 | 73 | 5,893 | ||||||||||||
| Additions due to acquisitions (4) | 86,083 | 15,262 | 7,637 | 108,982 | ||||||||||||
| Balance, December 31, 2009 | $ | 370,630 | $ | 100,744 | $ | 42,238 | $ | 513,612 | ||||||||
| (1) | The Company | |
| (2) | The Company | |
Impairment of long-lived assets and intangible assets.The Company reviews its long-lived assets and intangible assets other than goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of the respective asset may not be recoverable. Such evaluation may be based on a number of factors including current and projected operating results and cash flows, changes in management’s strategic direction as well as otherexternal economic and market variables.factors. The Company’s policy regarding long-lived assets and intangible assets other than goodwill is to evaluate the recoverability of these assets by determining whether the balance can be recovered through undiscounted future operating cash flows. Should events or circumstances indicate that the carrying value might not be recoverable based on undiscounted future operating cash flows, an impairment loss would be recognized. The
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amount of impairment, if any, is measured based on the difference between projected discounted future operating cash flows using a discount rate reflecting the Company’s average cost of funds and the carrying value of the asset.
Debt.The Company presents amounts borrowed in the Consolidated Balance Sheets at amortized cost. Accrued interest on amounts borrowed is classified in Interest expense in the Consolidated Statements of Operations. The Company had $205.0 million and $200.0 million of debt outstanding at December 31, 2012 and 2011. See Note 5—Debt for additional information regarding the Company’s debt.
Foreign currency exposure.All assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at average exchange rates for the year. The resulting translation adjustments are recorded as foreign currency translation adjustments, a component of Accumulated Other Comprehensive Income (Loss),other comprehensive income, net within the Stockholders’ equity section of the Consolidated Balance Sheets. Income and expense items are translated at average exchange rates for the year.
Currency transaction gains or losses arising from transactions denominated in currencies other than the functional currency of a subsidiary are includedrecognized in results of operations withinin Other (expense) income, (expense), net within the Consolidated Statements of Operations. Net currency transaction (losses) gains were $(3.6)$(2.3) million, $(0.9)$(1.3) million, and $4.1$(4.8) million in 2009, 2008,2012, 2011, and 2007,2010, respectively.
Comprehensive income.On January 1, 2012, the Company retrospectively adopted FASB 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 theConsolidated Statements of Comprehensive Income,which is included herein.While the Company’s presentation of comprehensive income has changed, there were no changes to the components or amounts that are recognized in net income or other comprehensive income under existing 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.
In February 2013, the FASB issued ASU No. 2013-02,Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,whichupdates ASU No. 2011-05. The standard requires that public companies present information about reclassification adjustments from accumulated other comprehensive income in their financial statements in a single note or on the face of the financial statements. Public companies will have to provide this information in both their annual and interim financial statements. The new requirements will take effect for 2009, 2008,Gartner beginning January 1, 2013 and 2007, respectively.
Fair value disclosures.The Company has a limited number of assets and liabilities that are adjusted to fair value at each balance sheet date. The Company’s fair value disclosures are included in Note 1412 — Fair Value Disclosures.
Concentrations of credit risk. ItemsAssets that potentiallymay subject the Company to concentration of credit risk at December 31, 2009 consist primarily of short-term, highly liquid investments classified as cash equivalents, accounts receivable, interest rate swaps, and a pension reinsurance asset. The majority of the Company’s cash equivalent investments and its two interest rate swap contractscontract are with investment grade commercial banks that are participants in the Company’s Credit Agreement.credit facility. Accounts receivable balances deemed to be collectible from customers have limited concentration of credit risk due to our diverse customer base and geographic dispersion. The Company’s pension reinsurance asset (see Note 13 — Employee Benefits) is maintained with a large international insurance company that was rated investment grade as of December 31, 2009.
Stock repurchase programs.The Company records the cost to repurchase its own common shares to treasury stock. During 2009, 20082012, 2011 and 2007,2010 the Company recorded $3.7$111.3 million, $198.6$212.0 million, and $169.1$99.8 million, respectively, of stock repurchases (seeNote 9-Equity)7 — Stockholders’ Equity). Shares repurchased by the Company are added to treasury shares and are not retired.
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Recent accounting developments.Accounting rules that have been issued by the FASB that have not yet become effective and that may impact the Company’s consolidated financial statements or related disclosures in future periods are described below:
Balance sheet offsetting.In January 2010,December 2011, theFASB issued ASU2010-6,No. 2011-11,Improving Disclosures About Fair Value Measurementsabout Offsetting Assets and Liabilities, which. The new guidance requires reporting entities to make new disclosures about recurringassets and liabilities that are offset or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basishave the potential to be offset under U.S. GAAP rules. These disclosures are intended to address differences in the reconciliationasset and liability offsetting requirements under U.S. GAAP and International Financial Reporting Standards. The new disclosure requirements mandate that entities disclose both gross and net information about financial instruments and transactions eligible for offset in the statement of Level 3 fair-value measurements.financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, the standard requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. However, as of year-end 2012, the FASB is considering certain amendments to ASU2010-6 is No. 2011-11 which may limit the scope of the new rules. ASU No. 2011-11 will be effective for Gartner for interim and annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliationJanuary 1, 2013, with retrospective application required. While the adoption of this new guidance may result in additional disclosures, which are effective for annual periods beginning after December 15, 2010.
Other comprehensive income disclosures.See discussion above inComprehensive Income.
2 — ACQUISITIONS
2012
In May 2012 the Company acquired allIdeas International Limited (“Ideas International”), a publicly-owned Australian corporation (ASX: IDE) headquartered outside of Sydney with 40 employees. Ideas International provided intelligence on IT infrastructure configurations and pricing data to IT professionals and vendors. The Company paid aggregate cash consideration of $18.8 million for 100% of the outstanding shares of AMR Research, Inc. (“AMR Research”), a privately-owned, Boston-based firm with 170 employees, for approximately $63.0 million in cash. AMR is a leading authority on global supply chain and supporting technologies. AMR offers operations and technology executives of manufacturing and retail companies an integrated set of services, including written research, access to research analysts, peer networking through its forum advisory services, consulting and participation at its executive conferences. Gartner’sIdeas International. The Company’s strategic objectiveobjectives in acquiring AMR isIdeas International are to leverage Gartner’s scale and worldwide distribution capability, introduce Ideas International’s products and sell AMR’s suite of research, consulting, and events offeringsservices to Gartner’s much larger end user client base, with supply chainand further penetrate the technology concerns, as well as introduce AMR’s supply chain clients to Gartner’s suite of products. The combination is also expected to drive operational efficiencies and cost savings.
The final acquisition costs are subject to certain post-closing and other adjustments. The acquisitions are beingwas accounted for under the acquisition method in accordance withof accounting as prescribed by FASB ASC Topic 805,Business Combination,Combinations.whichThe 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. Anydate, and any excess of the purchase price over the estimated fair value of the net assets acquired, including identifiable intangible assets, wasmust be allocated to goodwill.
| Assets: | ||||
| Fees receivable, net | $ | 16,919 | ||
| Prepaid expenses and other current assets | 19,015 | |||
| Property, equipment, and leasehold improvements, net | 2,666 | |||
| Intangible assets: | ||||
| Trade name | 5,758 | |||
| Content | 10,634 | |||
| Customer relationships | 7,210 | |||
| Total intangible assets | 23,602 | |||
| Goodwill | 108,983 | |||
| Other assets | 1,014 | |||
| Total assets | $ | 172,199 | ||
| Liabilities: | ||||
| Accounts payable and accrued liabilities | $ | 27,175 | ||
| Deferred revenues | 26,402 | |||
| Other liabilities | 1,045 | |||
| Total liabilities | $ | 54,622 | ||
The following table summarizes the preliminary allocation of the purchase price allocation includes an estimate ofto the fair value of the cost to fulfillassets acquired and liabilities assumed in the deferred revenue obligations which was determined by estimating the costs to provide the services plus a normal profit margin, and did not include any costs associated with selling efforts. The preliminary amount that is expected to be deductible for tax purposes is approximately $55.4 million.
| Assets: | ||||
| Cash | $ | 8,502 | ||
| Fees receivable | 1,310 | |||
| Prepaid expenses and other current assets | 560 | |||
| Goodwill and amortizable intangible assets (1) | 15,990 | |||
| Total assets | $ | 26,362 | ||
| Liabilities: | ||||
| Accounts payable and accrued liabilities | $ | 2,203 | ||
| Deferred revenues (2) | 5,321 | |||
| Total liabilities | $ | 7,524 |
| (1) | Includes $7.5 million allocated to goodwill and $8.5 million allocated to amortizable intangible assets (see Note 1—Business and Significant Accounting Policies above for additional information). |
| (2) | The fair value of the cost to fulfill the deferred revenue obligations was determined by estimating the costs to provide the services plus a normal profit margin, and did not include costs associated with selling efforts. |
2009
The Company has received contractual indemnifications from the selling shareholders for certain pre-acquisition liabilitiesacquired all of the acquired companies. The Company estimates these liabilities at approximately $6.1 million. In accordance with FASB ASC Topic 805, the Company has recorded a $6.1 million receivableoutstanding shares of AMR Research and Burton Group in Prepaid expenses and other current assets and a $6.1 million liability in Accrued liabilities, which are included in the purchase price allocation table above. The Company believes the indemnification assets are fully collectible since a portion of the sale proceeds have been escrowed pending resolution of the liabilities.
| Workforce | Excess | Asset | ||||||||||||||
| Reduction | Facilities | Impairments | ||||||||||||||
| Costs | Costs | and Other | Total | |||||||||||||
| Accrued liability at December 31, 2006 | $ | 681 | $ | 15,030 | $ | — | $ | 15,711 | ||||||||
| Charges during 2007 | 2,682 | — | 8,681 | 11,363 | ||||||||||||
| Adjustment for excess facility | — | (2,280 | ) | — | (2,280 | ) | ||||||||||
| Currency translation and reclassifications | (156 | ) | 164 | — | 8 | |||||||||||
| Payments | (2,871 | ) | (5,138 | ) | (8,681 | ) | (16,690 | ) | ||||||||
| Accrued liability at December 31, 2007 | $ | 336 | $ | 7,776 | $ | — | $ | 8,112 | ||||||||
| Charges during 2008 | — | — | — | — | ||||||||||||
| Currency translation and reclassifications | (114 | ) | — | — | (114 | ) | ||||||||||
| Payments | (222 | ) | (4,117 | ) | — | (4,339 | ) | |||||||||
| Accrued liability at December 31, 2008 | $ | — | $ | 3,659 | $ | — | $ | 3,659 | ||||||||
| Charges during 2009 | — | — | — | — | ||||||||||||
| Currency translation and reclassifications | — | — | — | — | ||||||||||||
| Payments | — | (2,856 | ) | — | (2,856 | ) | ||||||||||
| Accrued liability at December 31, 2009(1),(2) | $ | — | $ | 803 | $ | — | $ | 803 | ||||||||
3 — OTHER ASSETS
Other assets consist of the following (in thousands):
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| Security deposits | $ | 3,545 | $ | 2,796 | ||||
| Debt issuance costs | 1,384 | 2,376 | ||||||
| Benefit plan related assets | 30,903 | 23,095 | ||||||
| Non-current deferred tax assets | 29,527 | 46,378 | ||||||
| Other | 1,904 | 1,275 | ||||||
| Total other assets | $ | 67,263 | $ | 75,920 | ||||
| December 31, | ||||||||
| 2012 | 2011 | |||||||
| Security deposits | $ | 7,740 | $ | 6,581 | ||||
| Debt issuance costs | 2,768 | 3,866 | ||||||
| Benefit plan-related assets | 37,016 | 38,403 | ||||||
| Non-current deferred tax assets | 22,527 | 22,795 | ||||||
| Tenant improvement allowance (1) | — | 16,062 | ||||||
| Other | 3,344 | 2,638 | ||||||
| Total other assets | $ | 73,395 | $ | 90,345 | ||||
| (1) | The balance as of December 31, 2011 represented the landlord receivable related to the renovation of the Company’s Stamford headquarters facility, the majority of which was collected during 2012, with the balance reclassified to current assets. See Note 1 — Business and Significant Accounting Policies for additional information. |
4 — ACCOUNTS PAYABLE, ACCRUED, AND OTHER LIABILITIES
Accounts payable and accrued liabilities consist of the following (in thousands):
| December 31, | ||||||||
| 2012 | 2011 | |||||||
| Accounts payable | $ | 27,344 | $ | 27,573 | ||||
| Payroll, employee benefits, severance | 71,892 | 66,110 | ||||||
| Bonus payable | 68,776 | 62,191 | ||||||
| Commissions payable | 49,128 | 42,328 | ||||||
| Taxes payable | 18,897 | 15,917 | ||||||
| Rent and other facilities costs | 4,310 | 5,046 | ||||||
| Professional, consulting, audit fees | 8,355 | 6,907 | ||||||
| Events fulfillment liabilities | 4,209 | 2,255 | ||||||
| Other accrued liabilities | 34,852 | 31,163 | ||||||
| Total accounts payable and accrued liabilities | $ | 287,763 | $ | 259,490 | ||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| Accounts payable | $ | 14,312 | $ | 12,130 | ||||
| Payroll, employee benefits, severance | 63,600 | 58,840 | ||||||
| Bonus payable | 53,264 | 45,040 | ||||||
| Commissions payable | 39,705 | 33,797 | ||||||
| Taxes payable | 17,693 | 29,508 | ||||||
| Acquisition payables (1) | 13,059 | — | ||||||
| Rent and other facilities costs | 9,666 | 6,575 | ||||||
| Professional and consulting fees | 4,112 | 4,007 | ||||||
| Other accrued liabilities | 40,555 | 29,484 | ||||||
| Total accounts payable and accrued liabilities | $ | 255,966 | $ | 219,381 | ||||
Other liabilities consist of the following (in thousands):
| December 31, | ||||||||
| 2012 | 2011 | |||||||
| Non-current deferred revenue | $ | 5,508 | $ | 4,572 | ||||
| Interest rate swap liabilities | 10,017 | 9,891 | ||||||
| Long-term taxes payable | 16,760 | 20,141 | ||||||
| Deferred rent (1) | 19,586 | 21,046 | ||||||
| Benefit plan-related liabilities | 54,779 | 47,326 | ||||||
| Other | 22,954 | 23,975 | ||||||
| Total other liabilities | $ | 129,604 | $ | 126,951 | ||||
| 46 |
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| Non-current deferred revenue | $ | 3,912 | $ | 1,913 | ||||
| Long-term taxes payable | 15,064 | 15,386 | ||||||
| Benefit plan-related liabilities | 37,977 | 30,098 | ||||||
| Other | 23,618 | 36,075 | ||||||
| Total other liabilities | $ | 80,571 | $ | 83,472 | ||||
| (1) | Represents the remaining unamortized long-term deferred rent on the $25.0 million tenant improvement allowance on the Company’s Stamford headquarters facility. See Note 1 — Business and Significant Accounting Policies above for additional information. |
5 — DEBT
2010 Credit Agreement
The Company has a Credit Agreement dated as of January 31, 2007credit arrangement that provides for a $300.0five-year, $200.0 million term loan and a $400.0 million revolving credit facility which it entered into in December 2010 (the “2010 Credit Agreement”). The Company terminated its prior credit arrangement when it entered into the 2010 Credit Agreement and a five-year, $180.0 millionpaid down the remaining amounts outstanding. The 2010 Credit Agreement contains an expansion feature by which the term loan (the “original term loan”). On April 9, 2008, the Company entered into a First Amendment (the “First Amendment”) with the lenders to the Credit Agreement, which provided for a new $150.0 million term loan (the “2008 term loan”). Theand revolving credit facility may be increased, at the Company’s option and under certain conditions, by up to an additional $100.0$150.0 million atin the discretion of the Company’s lenders (the “expansion feature”), for a total revolving credit facility of $400.0 million. However, the $100.0 million expansion feature may or may not be available to the Company depending upon prevailing credit market conditions. To date the Company has not sought to borrow under the expansion feature.
| Amount | Amount | Annualized | ||||||||||
| Outstanding | Outstanding | Effective | ||||||||||
| December 31, 2008 | December 31, 2009 | Interest Rate | ||||||||||
| (In thousands) | (In thousands) | December 31, 2009(2) | ||||||||||
Description: | ||||||||||||
| Original Term Loan (1) | $ | 157,500 | $ | 126,000 | 5.81 | % | ||||||
| 2008 Term Loan (1) | 138,750 | 75,000 | 1.26 | % | ||||||||
| Revolver (3) | 120,000 | 128,000 | 1.00 | % | ||||||||
| Total | $ | 416,250 | $ | 329,000 | ||||||||
Amounts borrowed under the 2010 Credit Agreement bear interest at a rate equal to, at the Company’s option, either (i) the greatest of: the administrative 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% and 1.25% depending on the Company’s leverage ratio as of the Company. The 2008 term loan is co-terminus withend of the original 2007 term loan underfour consecutive fiscal quarters most recently ended, or (ii) the Credit Agreement and will be repaid in 16 consecutive quarterly installments which commenced June 30, 2008,eurodollar rate (adjusted for statutory reserves) plus a final payment duemargin equal to between 1.50% and 2.25%, depending on January 31, 2012, and may be prepaid at any time without penalty or premium at the optionCompany’s leverage ratio as of Gartner.
The 2010 Credit Agreement contains certain customary restrictive loan covenants, including, among others, financial covenants requiring a maximum leverage ratio, a minimum fixed chargeinterest expense coverage ratio, and a minimum annualized contract value ratio, and covenants limiting Gartner’sthe Company’s ability to incur indebtedness, grant liens, make acquisitions, be acquired, dispose of assets, pay dividends, repurchase stock, make capital expenditures, make investments and make investments.enter into certain transactions with affiliates. The Company was in full compliance with its financialthese covenants as of December 31, 2009, after giving effect2012.
In December 2010, the Company recorded certain incremental pre-tax charges due to the acquisitions. A failuretermination of the prior credit arrangement. The majority of these charges would have been recognized as expenses in 2011, but accounting rules required their accelerated recognition in 2010. These accelerated pre-tax charges included $3.3 million for deferred losses on interest rate swap contracts that had been recorded in Other Comprehensive Income (OCI) since the swaps had previously been designated as accounting hedges, and $0.4 million for the write-off of a portion of capitalized debt issuance costs related to complythe previous debt. In accordance with these covenantsFASB ASC Topic 815, the deferral of the unrealized losses on the swaps recorded in OCI was no longer permitted since the forecasted interest payments related to the previous debt would not occur. Both the capitalized debt issuance write-off and the interest rate swap charge were classified in Interest expense in the future could result in accelerationConsolidated Statements of all amountsOperations for the year ended December 31, 2010.
The following table provides information regarding the Company’s total outstanding under the Credit Agreement, which would materially impact our financial condition unless accommodations could be negotiated with our lenders.
| Description: | Amount Outstanding December 31, 2012 (In thousands) | Contractual Annualized Interest Rate December 31, 2012 | Amount Outstanding December 31, 2011 (In thousands) | |||||||||
| 2010 Credit Facility - term loan (1) | $ | 150,000 | 1.81 | % | $ | 180,000 | ||||||
| 2010 Credit Facility - revolver (1), (2) | 50,000 | 1.81 | % | 20,000 | ||||||||
| Other (3) | 5,000 | 3.00 | % | — | ||||||||
| Total | $ | 205,000 | $ | 200,000 | ||||||||
| (1) | Both the term and revolver loan rates consisted of a floating Eurodollar base rate of 0.31% plus a margin of 1.5%. However, the Company has an interest rate swap contract which converts the floating Eurodollar base rate to a 2.26% fixed base rate on the first $200.0 million of Company borrowings (see below). As a result, the Company’s effective annual interest rate on the $200.0 million of outstanding debt under the 2010 Credit Facility as of December 31, 2012, including the margin, was 3.76%. |
| (2) | The Company had $346.6 million of available borrowing capacity on the revolver (not including the expansion feature) as of December 31, 2012. |
| 47 |
| (3) | In December 2012 the Company borrowed $5.0 million under a previously disclosed financial assistance package provided by 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% 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 Contracts
The Company has twoentered into a $200.0 million notional fixed-for-floating interest rate swap contracts:
The Company accounts for the interest rate swap on its original term loan as a cash flow hedge in accordance with FASB ASC Topic 815. Since the swap is hedging the forecasted interest payments, on the term loan and qualifies as a cash flow hedge, changes in the fair value of the swap are recorded in Other comprehensive incomeOCI as long as the swap continues to be a highly effective hedge of the basedesignated interest rate risk on the term loan.risk. Any ineffective portion of change in the fair value of the hedge is recorded in earnings. At December 31, 2009,2012, there was no ineffective portion of the hedge. The interest rate swap had a negative fair value to the Company of approximately $6.6$10.0 million at December 31, 2009,2012, which is recordedclassified in Other comprehensive income,OCI, net of tax effect.
Letters of Credit
The Company issueshad $10.1 million of letters of credit and related guarantees outstanding at year-end 2012. The Company issues these instruments in the ordinary course of business. At December 31, 2009, the Company had outstanding letters of creditbusiness to facilitate transactions with customers and guarantees of approximately $2.5 million.
6 — COMMITMENTS AND CONTINGENCIES
Contractual Lease Commitments.The Company leases various facilities, furniture, and computer and office equipment under operating lease arrangements expiring between 20102013 and 2026.2027. The future minimum annual cash payments under non-cancelable operating lease agreements at December 31, 2009,2012, are as follows (in thousands):
| Year ended December 31, | ||||
| 2013 | $ | 37,820 | ||
| 2014 | 31,660 | |||
| 2015 | 22,295 | |||
| 2016 | 14,680 | |||
| 2017 | 9,910 | |||
| Thereafter | 75,055 | |||
| Total minimum lease payments (1) | $ | 191,420 | ||
| Year ended December 31, | ||||
| 2010 | $ | 33,946 | ||
| 2011 | 23,344 | |||
| 2012 | 15,965 | |||
| 2013 | 11,554 | |||
| 2014 | 8,267 | |||
| Thereafter | 44,082 | |||
| Total minimum lease payments (1) | $ | 137,158 | ||
| (1) | Excludes |
Legal Matters.We are involved in various legal and administrative proceedings and litigation arising in the ordinary course of business. WeThe outcome of these individual matters is not predictable at this time. However, we believe that the potential liability, if any, in excessultimate resolution of these matters, after considering amounts already accrued from all proceedings, claims and litigationinsurance coverage, will not have a material adverse effect on our financial position, or results of operations, when resolvedor cash flows in a future period.
Indemnifications.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 December 31, 2009,2012, we did not have any indemnification agreements that wouldcould require material payments.
7 — STOCKHOLDERS’ EQUITY
CapitalCommon stock.Holders of Gartner’s Common Stock, par value $.0005 per share (“Common Stock”) are entitled to one vote per share on all matters to be voted by stockholders. The Company does not currently pay cash dividends on its Common Stock. Also, our credit arrangement contains a negative covenant which may limit our ability to pay dividends.
| 48 |
The following table summarizes transactions relating to Common Stock for the three years’ ending December 31, 2009:
| Issued Shares | Treasury Stock Shares | |||||||
| Balance at December 31, 2009 | 156,234,415 | 60,356,672 | ||||||
| Issuances under stock plans | — | (4,029,673 | ) | |||||
| Purchases for treasury | — | 3,918,719 | ||||||
| Balance at December 31, 2010 | 156,234,415 | 60,245,718 | ||||||
| Issuances under stock plans | — | (3,244,705 | ) | |||||
| Purchases for treasury (1) | — | 5,890,238 | ||||||
| Balance at December 31, 2011 | 156,234,415 | 62,891,251 | ||||||
| Issuances under stock plans | — | (2,756,389 | ) | |||||
| Purchases for treasury | — | 2,738,238 | ||||||
| Balance at December 31, 2012 | 156,234,415 | 62,873,100 | ||||||
| Treasury | ||||||||
| Issued | Stock | |||||||
| hares | Shares | |||||||
| Balance at December 31, 2006 | 156,234,416 | 52,169,591 | ||||||
| Issuances under stock plans | — | (3,353,421 | ) | |||||
| Purchases for treasury | — | 8,386,490 | ||||||
| Balance at December 31, 2007 | 156,234,416 | 57,202,660 | ||||||
| Issuances under stock plans | — | (4,568,658 | ) | |||||
| Purchases for treasury | — | 9,719,573 | ||||||
| Balance at December 31, 2008 | 156,234,416 | 62,353,575 | ||||||
| Issuances under stock plans | — | (2,302,935 | ) | |||||
| Purchases for treasury | — | 306,032 | ||||||
| Balance at December 31, 2009 | 156,234,416 | 60,356,672 | ||||||
| (1) | Includes 2,148,434 shares the Company repurchased directly from ValueAct Capital Master Fund, L.P. (“ValueAct”) in two separate transactions during 2011. The total cost of the shares repurchased directly from ValueAct was $75.2 million. |
Share repurchase programs.program.The Company has a $250.0$500.0 million authorized stockshare repurchase program, of which $78.6$210.2 million remained available for share repurchases as of December 31, 2009.2012. Repurchases aremay be made fromtime-to-time through open market purchases, private transactions, tender offers or other transactions. The amount and aretiming 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 aremay also be made fromtime-to-time in connection with the settlement of the Company’s shared-based compensation awards. Repurchases may be funded from cash flow from operations and borrowings under the Company’s Credit Agreement.
The Company recorded $3.7paid cash of $111.3 million, $198.6$212.0 million, and $169.1$99.8 million, in 2012, 2011, and 2010, respectively, for common stock repurchases. The $212.0 million paid for share repurchases in 2011 includes the cost of Common Stock repurchases. Included in the 2008 total was $26.9 million for shares repurchased directly from Silver Lake Partners and affiliates (collectively, “Silver Lake”).
8 — 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’s stock compensationCompany currently awards include stock-settled stock appreciation rights, restricted stock, service-service-based and performance-based restricted stock units, and common stock equivalents, and stock options.equivalents. At December 31, 2009,2012, the Company had approximately 7.46.4 million shares of Common Stock available for awards of stock-based compensation under its 2003 Long-Term Incentive Plan, which includes 4.0 million additional shares approved by stockholders at the Company’s 2009 Annual Meeting of Stockholders.
Determining the appropriate fair value model and calculating the fair value of stockstock-based compensation awards requires the input of certain highly complex and subjective assumptions, including the expected life of the stockstock-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 amount of employee forfeitures and the likelihood of the achievement of certain performance targets. The assumptions used in calculating the fair value of stockstock-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 expense may need to be adjusted and future stockstock-based compensation expense could be materially different from what has been recorded in the current period.
The Company recognized the following amounts of stock-based compensation expense (in millions)by award type for the years ended December 31:31 (in millions):
| Award type: | 2012 | 2011 | 2010 | |||||||||
| Stock appreciation rights | $ | 6.4 | $ | 4.4 | $ | 4.6 | ||||||
| Common stock equivalents | 0.5 | 0.5 | 0.5 | |||||||||
| Restricted stock units | 29.5 | 28.0 | 27.5 | |||||||||
| Total (1) | $ | 36.4 | $ | 32.9 | $ | 32.6 | ||||||
| 49 |
| Award type: | 2009 | 2008 | 2007 | |||||||||
| Restricted stock | $ | — | $ | 0.4 | $ | 1.8 | ||||||
| Restricted stock units (RSUs) | 21.3 | 14.8 | 13.7 | |||||||||
| Common stock equivalents (CSEs) | 0.4 | 0.4 | 0.5 | |||||||||
| Stock appreciation rights (SARs) | 4.4 | 3.2 | 2.4 | |||||||||
| Options | — | 1.9 | 5.8 | |||||||||
| Total (1) | $ | 26.1 | $ | 20.7 | $ | 24.2 | ||||||
| (1) | Includes |
Stock-based compensation (in millions)expense was recognized by line item in the Consolidated Statements of Operations for the years ended December 31 as follows:
| Amount recorded in: | 2009 | 2008 | 2007 | |||||||||
| Costs of services and product development | $ | 12.6 | $ | 9.6 | $ | 10.8 | ||||||
| Selling, general, and administrative | 13.5 | 11.1 | 13.4 | |||||||||
| Total stock-based compensation expense | $ | 26.1 | $ | 20.7 | $ | 24.2 | ||||||
| Amount recorded in: | 2012 | 2011 | 2010 | |||||||||
| Costs of services and product development | $ | 15.3 | $ | 14.8 | $ | 14.8 | ||||||
| Selling, general, and administrative | 21.1 | 18.1 | 17.8 | |||||||||
| Total | $ | 36.4 | $ | 32.9 | $ | 32.6 | ||||||
As of December 31, 2009,2012, the Company had $41.5$38.5 million of total unrecognized stock-based compensation cost, which is expected to be recognized as stock-based compensation expense over the remaining weighted-average service period of approximately 22.2 years. Currently, the Company issues treasury shares upon the exercise, release or settlement of stock-based compensation awards.
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:
Stock Appreciation Rights
Stock-settled stock appreciation rights (“SARs”) are settled in common shares and are similar to options as they(SARs) permit the holder to participate in the appreciation of the Common Stock. SARs may beare settled in shares of Common Stock by the employee once the applicable vesting criteria have been met. SARs vest ratably over a four-year service period and expire seven years from the grant date. The fair value of SARs awards is recognized as compensation expense on a straight-line basis over four years. SARs have only been awarded to the Company’s executive officers.
When SARs are exercised, the number of shares of Common Stock issued is calculated as follows: (1) the total proceeds from the SARs exercise (calculated as the closing price of the Common Stock on the date of exercise less the exercise price of the SARs, multiplied by the number of SARs exercised) is divided by (2) the closing price of the Common Stock as reported on the New York Stock Exchange on the exercise date. The Company will withholdwithholds a portion of the shares of Common Stock issued upon exercise to satisfy minimum statutory tax withholding requirements. SARs recipients do not have any of thestockholder rights of a Gartner stockholder, including voting rights and the right to receive dividends and distributions, 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. At the present time, SARs are awarded only to the Company’s executive officers.
The Company determines the fair value of SARs on the date of grant using the Black-Scholes-Merton valuation model. The SARs vest ratably over a four-year service period and expire seven years from the grant date. Total compensation expense for SARs was $4.4 million, $3.2 million, and $2.4 million in 2009, 2008, and 2007, respectively.
| 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, 2011 | 2.5 | $ | 20.39 | $ | 7.66 | 4.00 years | ||||||||||
| Granted | 0.4 | 37.81 | 12.99 | 6.11 years | ||||||||||||
| Forfeited | — | — | — | — | ||||||||||||
| Exercised | (0.9 | ) | 18.35 | 6.82 | na | |||||||||||
| Outstanding at December 31, 2012 (1), (2) | 2.0 | $ | 24.59 | $ | 9.04 | 4.10 years | ||||||||||
| Vested and exercisable at December 31, 2012 (2) | 0.8 | $ | 18.74 | $ | 7.14 | 3.12 years | ||||||||||
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Weighted | Average | Remaining | ||||||||||||||
| SARs in | Average | Grant Date | Contractual | |||||||||||||
| millions | Exercise Price | Fair Value | Term | |||||||||||||
| Outstanding at December 31, 2008 | 2.1 | $ | 17.42 | $ | 6.61 | 5.12 years | ||||||||||
| Granted | 1.0 | 11.15 | 4.97 | 6.11 years | ||||||||||||
| Forfeited | (0.2 | ) | 15.08 | 6.11 | na | |||||||||||
| Exercised (1) | — | — | — | — | ||||||||||||
| Outstanding at December 31, 2009 (2) | 2.9 | $ | 15.43 | $ | 6.09 | 4.67 years | ||||||||||
| Vested and exercisable at December 31,2009(2) | 1.1 | $ | 16.65 | $ | 6.51 | 3.67 years | ||||||||||
na = not applicable
| (1) | ||
| At December 31, |
| (2) | At December 31, 2012, SARs outstanding had an intrinsic value of |
The fair value of the Company’s SARs granted was determinedestimated on the date of grant using the Black-Scholes-Merton valuation model with the following weighted-average assumptions for the years ended December 31:
| 2012 | 2011 | 2010 | ||||||||||
| Expected dividend yield (1) | 0 | % | 0 | % | 0 | % | ||||||
| Expected stock price volatility (2) | 40 | % | 38 | % | 40 | % | ||||||
| Risk-free interest rate (3) | 0.8 | % | 2.2 | % | 2.4 | % | ||||||
| Expected life in years (4) | 4.61 | 4.75 | 4.75 | |||||||||
| 50 |
| 2009 | 2008 | 2007 | ||||||||||
| Expected dividend yield (1) | 0 | % | 0 | % | 0 | % | ||||||
| Expected stock price volatility (2) | 50 | % | 36 | % | 33 | % | ||||||
| Risk-free interest rate(3) | 2.3 | % | 2.8 | % | 4.7 | % | ||||||
| Expected life in years(4) | 4.80 | 4.75 | 4.74 | |||||||||
| (1) | The dividend yield assumption is based on both the history and expectation of the Company’s dividend payouts. Historically | |
| (2) | The determination of expected stock price volatility was based on both historical Common Stock prices and the implied volatility from publicly traded options in Common Stock. | |
| (3) | The risk-free interest rate is based on the yield of a U.S. Treasury security with a maturity similar to the expected life of the award. | |
| (4) | The expected life |
Restricted Stock Restricted Stock Units and Common Stock Equivalents
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 rightsright 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 year ended December 31, 2012:
| Restricted Stock Units (RSUs) (in millions) | Per Share Weighted Average Grant Date Fair Value | |||||||
| Outstanding at December 31, 2011 | 3.1 | $ | 21.53 | |||||
| Granted (1) | 0.7 | 37.98 | ||||||
| Vested and released | (1.3 | ) | 19.53 | |||||
| Forfeited | — | — | ||||||
| Outstanding at December 31, 2012 (2), (3) | 2.5 | $ | 27.95 | |||||
| (1) | The 0.7 million RSUs granted in 2012 consisted of 0.3 million performance-based RSUs awarded to executives and 0.4 million service-based RSUs awarded to non-executive employees and certain board members. The 0.3 million performance-based RSUs awarded to executive personnel represented the target amount of the RSU award for the year, which was tied to an increase in the Company’s subscription-based Research contract value (“CV”) for 2012. The final number of performance-based RSUs granted could range from 0% to 200% of the target amount, with the final amount dependent on the actual increase in CV for the year as measured on December 31, 2012. The actual CV increase achieved for 2012 was 104.3% of the targeted amount, which resulted in the grant of 0.3 million performance-based RSUs to executives. |
| (2) | The Company expects that substantially all of the outstanding awards at December 31, 2012 will vest in future periods. |
| (3) | The weighted-average remaining contractual term of the outstanding RSUs is approximately 0.9 years. |
Common Stock Equivalents
Common stock equivalents (CSEs) are convertible into Common Stock and each CSE entitles the holder to one common share. Certain membersMembers of our Board of Directors receive directors’ fees payable in CSEs unless they opt for cash payment.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 athe director terminates unless the director has elected an accelerated release.
| 51 |
| Common Stock Equivalents (CSEs) | Per Share Weighted Average Grant Date Fair Value | |||||||
| Outstanding at December 31, 2011 | 97,268 | $ | 15.93 | |||||
| Granted | 11,373 | 45.30 | ||||||
| Converted to common shares | (8,096 | ) | 45.27 | |||||
| Outstanding at December 31, 2012 | 100,545 | $ | 16.89 | |||||
| Weighted- | Weighted- | Common | Weighted- | |||||||||||||||||||||
| Average | Restricted | Average | Stock | Average | ||||||||||||||||||||
| Restricted | Grant Date | Stock Units | Grant Date | Equivalents | Grant Date | |||||||||||||||||||
| Stock | Fair Value | (RSUs) | Fair Value | (CSEs) | Fair Value | |||||||||||||||||||
| Outstanding at December 31, 2008 | 200,000 | $ | 7.30 | 2,614,847 | $ | 18.40 | 158,511 | na | ||||||||||||||||
| Granted (1),(2) | — | — | 2,251,020 | 11.38 | 26,531 | $ | 15.03 | |||||||||||||||||
| Vested or released (2) | — | — | (884,761 | ) | 17.93 | (49,818 | ) | na | ||||||||||||||||
| Forfeited | — | — | (217,301 | ) | 15.20 | — | na | |||||||||||||||||
| Outstanding at December 31, 2009(3),(4) | 200,000 | $ | 7.30 | 3,763,805 | $ | 14.57 | 135,224 | na | ||||||||||||||||
Stock Options
Historically, the Company granted stock options to employees that allowed them to purchase shares of Common Stock at a certain price. The Company has not made significantany stock option grants since 2005.2006. All outstanding options are fully vested and there is no remaining unamortized cost. The Company received approximately $12.2$8.6 million, $16.6 million, and $20.7 million in cash from stock option exercises in the year ended December 31, 2009.
The following table summarizes the changes in stock options outstanding forduring the year ended December 31, 2009, follows:
| Options in millions | Per Share Weighted- Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value (in millions) | |||||||||||||
| Vested and outstanding at December 31, 2011 | 1.2 | $ | 10.93 | 1.47 years | $ | 27.7 | ||||||||||
| Expired | — | — | na | na | ||||||||||||
| Exercised | (0.9 | ) | 10.59 | na | 25.9 | |||||||||||
| Vested and outstanding at December 31, 2012 | 0.3 | $ | 11.73 | 1.28 years | $ | 11.7 | ||||||||||
| Weighted | ||||||||||||
| Average | ||||||||||||
| Weighted | Remaining | |||||||||||
| Options in | Average | Contractual | ||||||||||
| millions | Exercise Price | Term | ||||||||||
| Outstanding at December 31, 2008 | 6.1 | $ | 10.78 | 3.56 years | ||||||||
| Expired | (0.2 | ) | 17.66 | na | ||||||||
| Exercised (1) | (1.2 | ) | 10.42 | na | ||||||||
| Outstanding at December 31, 2009 (2) | 4.7 | $ | 10.65 | 3.07 years | ||||||||
na=not applicable
Employee Stock Purchase Plan
The Company has an employee stock purchase plan (the “ESPP“ESP Plan”) under which eligible employees are permitted to purchase Common Stock through payroll deductions, which may not exceed 10% of an employee’s compensation (or $23,750 in any calendar year), at a price equal to 95% of the closing price of the Common Stock price as reported by the New York Stock Exchange at the end of each offering period.
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of shares of Common Stock outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in earnings. When the impact of common share equivalents is antidilutive, they are excluded from the calculation.
The following table sets forth the reconciliation of the basic and diluted earnings per share computations (in thousands, except per share amounts):
| 2012 | 2011 | 2010 | ||||||||||
| Numerator: | ||||||||||||
| Net income used for calculating basic and diluted earnings per common share | $ | 165,903 | $ | 136,902 | $ | 96,285 | ||||||
| Denominator:(1) | ||||||||||||
| Weighted average number of common shares used in the calculation of basic earnings per share | 93,444 | 96,019 | 95,747 | |||||||||
| Common share equivalents associated with stock-based compensation plans | 2,398 | 2,827 | 4,087 | |||||||||
| Shares used in the calculation of diluted earnings per share | 95,842 | 98,846 | 99,834 | |||||||||
| Earnings per share: | ||||||||||||
| Basic | $ | 1.78 | $ | 1.43 | $ | 1.01 | ||||||
| Diluted | $ | 1.73 | $ | 1.39 | $ | 0.96 | ||||||
| 2009 | 2008 | 2007 | ||||||||||
Numerator: | ||||||||||||
| Net income used for calculating basic and diluted earnings per common share | $ | 82,964 | $ | 103,871 | $ | 73,553 | ||||||
Denominator:(1) | ||||||||||||
| Weighted average number of common shares used in the calculation of basic earnings per share | 94,658 | 95,246 | 103,613 | |||||||||
| Common share equivalents associated with stock-based compensation plans | 2,891 | 3,782 | 4,715 | |||||||||
| Shares used in the calculation of diluted earnings per share | 97,549 | 99,028 | 108,328 | |||||||||
Earnings per share: | ||||||||||||
| Basic (2) | $ | 0.88 | $ | 1.09 | $ | 0.71 | ||||||
| Diluted (2) | $ | 0.85 | $ | 1.05 | $ | 0.68 | ||||||
| (1) | During |
| 52 |
The following table presents the number of common share equivalents that were not included in the computation of diluted EPS in the table above because the effect would have been antidilutive. During periods with reportednet income, these common share equivalents were antidilutive because their exercise price was greater than the average market value of a share of Common Stock during the period. During periods with reported loss, all common share equivalents would have an antidilutive effect.
| 2009 | 2008 | 2007 | ||||||||||
| Antidilutive common share equivalents as of December 31 (in millions): | 1.7 | 1.3 | 0.6 | |||||||||
| Average market price per share of Common Stock during the year | $ | 15.52 | $ | 20.17 | $ | 23.00 | ||||||
| 2012 | 2011 | 2010 | |||||||||||
| Antidilutive common share equivalents as of December 31 (in millions): | 0.7 | 0.5 | 0.5 | ||||||||||
| Average market price per share of Common Stock during the year | $ | 43.80 | $ | 37.53 | $ | 26.35 | |||||||
10 — INCOME TAXES
Following is a summary of the components of income before income taxes for the years ended December 31 (in thousands):
| 2009 | 2008 | 2007 | ||||||||||
| U.S. | $ | 54,793 | $ | 79,393 | $ | 59,884 | ||||||
| Non-U.S. | 60,733 | 65,348 | 50,613 | |||||||||
| Income before income taxes | $ | 115,526 | $ | 144,741 | $ | 110,497 | ||||||
| 2012 | 2011 | 2010 | ||||||||||
| U.S. | $ | 150,023 | $ | 124,915 | $ | 78,933 | ||||||
| Non-U.S. | 85,573 | 77,269 | 55,152 | |||||||||
| Income before income taxes | $ | 235,596 | $ | 202,184 | $ | 134,085 | ||||||
The expense for income taxes on the above income consists of the following components (in thousands):
| 2009 | 2008 | 2007 | ||||||||||
| Current tax expense (benefit): | ||||||||||||
| U.S. federal | $ | 8,749 | $ | 10,564 | $ | 3,321 | ||||||
| State and local | 3,107 | 3,341 | (2,935 | ) | ||||||||
| Foreign | 14,340 | 15,614 | 14,286 | |||||||||
| Total current | 26,196 | 29,519 | 14,672 | |||||||||
| Deferred tax (benefit) expense: | ||||||||||||
| U.S. federal | 7,477 | (547 | ) | 2,695 | ||||||||
| State and local | 3,168 | 1,848 | 5,487 | |||||||||
| Foreign | 1,281 | (2,798 | ) | (381 | ) | |||||||
| Total deferred | 11,926 | (1,497 | ) | 7,801 | ||||||||
| Total current and deferred | 38,122 | 28,022 | 22,473 | |||||||||
| Benefit (expense) relating to interest rate swap used to increase (decrease) equity | (2,530 | ) | 3,776 | 2,449 | ||||||||
| Benefit from stock transactions with employees used to increase equity | 621 | 15,876 | 15,237 | |||||||||
| Benefit (expense) relating to defined-benefit pension adjustments used to increase (decrease) equity | (296 | ) | (594 | ) | (1,688 | ) | ||||||
| Benefit (expense) of acquired tax assets (liabilities) used to decrease (increase) goodwill | (3,355 | ) | 513 | 1,360 | ||||||||
| Tax expense on continuing operations | 32,562 | 47,593 | 39,831 | |||||||||
| Tax expense on discontinued operations | — | 622 | 777 | |||||||||
| Total tax expense | $ | 32,562 | $ | 48,215 | $ | 40,608 | ||||||
| 2012 | 2011 | 2010 | ||||||||||
| Current tax expense: | ||||||||||||
| U.S. federal | $ | 25,290 | $ | 23,327 | $ | 9,078 | ||||||
| State and local | 2,508 | 4,236 | 2,645 | |||||||||
| Foreign | 18,889 | 13,845 | 10,341 | |||||||||
| Total current | 46,687 | 41,408 | 22,064 | |||||||||
| Deferred tax (benefit) expense: | ||||||||||||
| U.S. federal | 8,494 | (5,192 | ) | 4,263 | ||||||||
| State and local | (753 | ) | 1,269 | 72 | ||||||||
| Foreign | (8,080 | ) | (1,434 | ) | (6,013 | ) | ||||||
| Total deferred | (339 | ) | (5,357 | ) | (1,678 | ) | ||||||
| Total current and deferred | 46,348 | 36,051 | 20,386 | |||||||||
| Benefit (expense) relating to interest rate swap used to increase (decrease) equity | 51 | 3,134 | (2,523 | ) | ||||||||
| Benefit from stock transactions with employees used to increase equity | 21,304 | 25,812 | 18,559 | |||||||||
| Benefit (expense) relating to defined-benefit pension adjustments used to increase (decrease) equity | 1,926 | 285 | 375 | |||||||||
| Benefit (expense) of acquired tax assets (liabilities) used to decrease (increase) goodwill | 64 | — | 1,003 | |||||||||
| Total tax expense | $ | 69,693 | $ | 65,282 | $ | 37,800 | ||||||
| December 31, | ||||||||
| 2012 | 2011 | |||||||
| Expense accruals | $ | 49,404 | $ | 40,438 | ||||
| Loss and credit carryforwards | 22,433 | 24,282 | ||||||
| Assets relating to equity compensation | 18,878 | 18,226 | ||||||
| Other assets | 7,613 | 8,949 | ||||||
| Gross deferred tax asset | 98,328 | 91,895 | ||||||
| Depreciation | (8,995 | ) | (9,199 | ) | ||||
| Intangible assets | (23,129 | ) | (17,024 | ) | ||||
| Prepaid expenses | (10,500 | ) | (10,183 | ) | ||||
| Gross deferred tax liability | (42,624 | ) | (36,406 | ) | ||||
| Valuation allowance | (1,943 | ) | (1,869 | ) | ||||
| Net deferred tax asset | $ | 53,761 | $ | 53,620 | ||||
| 53 |
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| Depreciation and software amortization | $ | 3,261 | $ | 6,591 | ||||
| Expense accruals | 28,751 | 32,865 | ||||||
| Loss and credit carryforwards | 35,232 | 37,036 | ||||||
| Other assets | 25,213 | 24,294 | ||||||
| Gross deferred tax asset | 92,457 | 100,786 | ||||||
| Intangible assets | (17,259 | ) | (10,238 | ) | ||||
| Prepaid expenses | (7,098 | ) | (6,533 | ) | ||||
| Other liabilities | (1,190 | ) | (970 | ) | ||||
| Gross deferred tax liability | (25,547 | ) | (17,741 | ) | ||||
| Valuation allowance | (19,692 | ) | (24,924 | ) | ||||
| Net deferred tax asset | $ | 47,218 | $ | 58,121 | ||||
Current net deferred tax assets and current net deferred tax liabilities were $19.0$32.6 million and $1.2$1.3 million as of December 31, 20092012 and $15.7$31.4 million and $2.8$0.6 million as of December 31, 2008,2011, respectively, and are included in Prepaid expenses and other current assets and Accounts payable and accrued liabilities in the Consolidated Balance Sheets. Long-term net deferred tax assets and long-term net deferred tax liabilities were $29.5$22.5 million and $0.1 million as of December 31, 20092012 and $46.4$22.8 million and $1.2 millionzero as of December 31, 2008,2011, respectively, and are included in Other assets and Other liabilities in the Consolidated Balance Sheets.
The net decrease in the valuation allowanceallowances of $5.2 million in 2009 relates primarily to the following items: (a) the release of approximately $1.9 million as of the valuation allowance for changes in both actualDecember 31, 2012 and anticipated utilization$1.9 million as of foreign tax credits and (b) the release of approximately $3.2 million of the valuation allowance on federal and state capital loss carryovers.
As of December 31, 2009,2012, the Company had U.S. federal capital loss carryforwards of $15.5 million, of which $13.4 million expire in 2011 and $2.1 million expire in 2012 and 2013. The Company also had $15.5 million in state and local capital loss carryforwards that expire over a similar period of time.
The differences between the U.S. federal statutory income tax rate and the Company’s effective tax rate on income before income taxes are:
| 2009 | 2008 | 2007 | ||||||||||
| Statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
| State income taxes, net of federal benefit | 3.0 | 2.8 | 2.9 | |||||||||
| Foreign income taxed at different rates | (5.0 | ) | (4.4 | ) | (2.4 | ) | ||||||
| Non-deductible meals and entertainment | 0.5 | 0.7 | 0.8 | |||||||||
| Repatriation of foreign earnings | 4.1 | 7.6 | — | |||||||||
| Record (release) valuation allowance | (4.5 | ) | (9.2 | ) | (1.4 | ) | ||||||
| Foreign tax credits | (1.9 | ) | (1.0 | ) | (1.8 | ) | ||||||
| (Release) increase reserve for tax contingencies | (3.5 | ) | (0.3 | ) | 1.8 | |||||||
| Other items (net) | 0.5 | 1.7 | 1.1 | |||||||||
| Effective tax rate | 28.2 | % | 32.9 | % | 36.0 | % | ||||||
| 2012 | 2011 | 2010 | ||||||||||
| Statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
| State income taxes, net of federal benefit | 1.8 | 3.8 | 3.3 | |||||||||
| Foreign income taxed at different rates | (6.4 | ) | (5.9 | ) | (6.2 | ) | ||||||
| Subpart F/repatriation of foreign earnings | 1.0 | (0.4 | ) | 8.5 | ||||||||
| Record (release) valuation allowance | — | (0.4 | ) | (12.7 | ) | |||||||
| Foreign tax credits | (1.0 | ) | (2.3 | ) | (0.8 | ) | ||||||
| Record (release) reserve for tax contingencies | 0.7 | 3.1 | 2.0 | |||||||||
| Other items, net | (1.5 | ) | (0.6 | ) | (0.9 | ) | ||||||
| Effective tax rate | 29.6 | % | 32.3 | % | 28.2 | % | ||||||
In 2012 state income taxes, net of federal tax positions on January 1, 2007. benefit include approximately $2.6 million of benefit relating to economic development tax credits associated with the renovation of the Company’s Stamford headquarters facility.
As of December 31, 20092012 and December 31 2008,2011, the Company had gross unrecognized tax benefits of $13.8$17.6 million and $16.3$18.3 million, respectively. The reductiondecrease is primarily attributable to the expirationreductions for tax positions of certain statutesprior years and settlements resulting from closure of limitationtax audits, partially offset by additions in the third quarter of 2009.unrecognized tax benefits attributable to 2012. It is reasonably possible that the gross unrecognized tax benefits will be decreased by $0.3$4.5 million within the next 12 months due to anticipated closure of audits and the expiration of certain statutes of limitation. The unrecognized tax benefits relate primarily to anticipated settlements.
The Company records accruedaccrues interest and penalties related to unrecognized tax benefits in its income tax provision. As of December 31, 20092012 and December 31, 2008,2011, the Company had $2.8$4.6 million and $3.6$4.8 million of accrued interest and penalties respectively, related to unrecognized tax benefits. These amounts are in addition to the gross unrecognized tax benefits noted above. The total amount of interest and penalties recognized in the Consolidated Statements of Operations for the years ending December 31, 20092012 and 2008December 31, 2011 was ($0.5)$0.4 million and $1.4$1.5 million, respectively.
The following is a reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, for the years ending December 31 (in thousands):
| 2012 | 2011 | |||||||
| Beginning balance | $ | 18,345 | $ | 15,824 | ||||
| Additions based on tax positions related to the current year | 4,301 | 2,269 | ||||||
| Additions for tax positions of prior years | 105 | 4,375 | ||||||
| Reductions for tax positions of prior years | (3,427 | ) | (746 | ) | ||||
| Reductions for expiration of statutes | (296 | ) | (269 | ) | ||||
| Settlements | (1,372 | ) | (2,661 | ) | ||||
| Change in foreign currency exchange rates | (104 | ) | (447 | ) | ||||
| Ending balance | $ | 17,552 | $ | 18,345 | ||||
| 54 |
| 2009 | 2008 | |||||||
| Beginning balance | $ | 16,347 | $ | 18,051 | ||||
| Additions based on tax positions related to the current year | 953 | 1,253 | ||||||
| Additions for tax positions of prior years | 415 | 1,424 | ||||||
| Reductions for tax positions of prior years | (334 | ) | (1,692 | ) | ||||
| Reductions for expiration of statutes | (3,349 | ) | (2,128 | ) | ||||
| Settlements | (447 | ) | (264 | ) | ||||
| Change in foreign currency exchange rates | 219 | (297 | ) | |||||
| Ending balance | $ | 13,804 | $ | 16,347 | ||||
Included in the Company repatriated approximately $52.0balance of unrecognized tax benefits at December 31, 2012 are potential benefits of $12.6 million that if recognized would reduce the effective tax rate on income from its foreign subsidiaries. The cost of the repatriation was offset with the utilization of foreign tax credits.
The number of years with open statutes of limitation varies depending on the tax jurisdiction. Generally, the Company’s statutes are open for tax years ended December 31, 20062007 and forward, with the exception of India which is open for tax years 2003 and forward. Major taxing jurisdictions include the U.S. (federal and state), the United Kingdom, Italy, Canada, Japan, the Netherlands,India, and Ireland.
During 2012, the Company closed the Internal Revenue Service (“IRS”) audit of its 2007 federal income tax return. The resolution of the audit did not have a material adverse effect on the consolidated financial position, cash flows, or results of operations of the Company.
In 2011 the IRS commenced an audit of the Company’s 2007federal income tax year early in 2009.returns for the 2008 and 2009 tax years. The audit is ongoingIRS has proposed adjustments for both 2008 and 2009 and the IRSCompany expects to settle the audit in early 2013. Although the audit has not proposed any adjustments at this time. Thebeen fully resolved, the Company believes that it has recorded reserves sufficient to cover exposures related to such review. However, the resolution of such matters involves uncertainties and there are no assurances that the ultimate resolutiondisposition will not exceed the amounts recorded. The results of the audit could have a material adverse effect on the Company’sits consolidated financial position, cash flows, or results of operations, or cash flowsoperations.
Earnings of non-U.S. subsidiaries are generally subject to U.S. taxation when repatriated. The Company intends to reinvest these earnings outside the U.S. except in period or periods forinstances where repatriating such earnings would result in minimal additional tax. The Company currently has no plan to remit earnings which will result in a material tax cost. Accordingly, the Company has not recognized additional tax expense that determination is made.
11 — DERIVATIVES AND HEDGING
The Company typically 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, whetherincluding derivatives designated as accounting hedges, or not, to be recorded on the balance sheet at fair value.
The following tables provide information regarding the Company’s outstanding derivatives activitycontracts as of, and for, the twelve monthsyears ended December 31, 2009 follows (in thousands, except for number of outstanding contracts):
December 31, 2012
| Derivative Contract Type | Number of Outstanding Contracts | Contract Notional Amount | Fair Value Asset (Liability)(3) | Balance Sheet Line Item | OCI Unrealized (Loss), Net Of Tax | |||||||||||
| Interest rate swap (1) | 1 | $ | 200,000 | $ | (10,000 | ) | Other liabilities | $ | (6,010 | ) | ||||||
| Foreign currency forwards (2) | 68 | 76,100 | 4 | Other current assets | — | |||||||||||
| Total | 69 | $ | 276,100 | $ | (9,996 | ) | $ | (6,010 | ) | |||||||
December 31, 2011
| Derivative Contract Type | Number of Outstanding Contracts | Contract Notional Amount | Fair Value Asset (Liability)(3) | Balance Sheet Line Item | OCI Unrealized (Loss), Net Of Tax | |||||||||||
| Interest rate swap (1) | 1 | $ | 200,000 | $ | (9,891 | ) | Other liabilities | $ | (5,934 | ) | ||||||
| Interest rate swaps (4) | 2 | 30,750 | (98 | ) | Accrued liabilities | — | ||||||||||
| Foreign currency forwards (2) | 60 | 99,585 | 272 | Other current assets | — | |||||||||||
| Total | 63 | $ | 330,335 | $ | (9,717 | ) | $ | (5,934 | ) | |||||||
| Number of | Contract | Fair Value | Balance | Gain (Loss) | Gain (Loss) | |||||||||||||||||
| Outstanding | Notional | Asset | Sheet | Recognized in | Recorded in | |||||||||||||||||
| Derivative Contract Type | Contracts | Amount | (Liability)(4) | Line Item | Earnings(5) | OCI(6) | ||||||||||||||||
| Interest Rate Swap(1) | 1 | $ | 126,000 | $ | (6,594 | ) | Other Liabilities | $ | 227 | $ | (2,573 | ) | ||||||||||
| Interest Rate Swap(2) | 1 | 112,500 | (2,769 | ) | Other Liabilities | (950 | ) | (1,189 | ) | |||||||||||||
| Foreign Currency Forwards(3) | 19 | 117,296 | 740 | Other Current Assets | 674 | — | ||||||||||||||||
| Total | 21 | $ | 355,796 | $ | (8,623 | ) | $ | (49 | ) | $ | (3,762 | ) | ||||||||||
| (1) | The |
| 55 |
| (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 |
| All of the outstanding contracts at December 31, 2012 matured by the end of February 2013. | ||
| (3) | See Note | |
At December 31, 2009,2012, the Company’s derivative counterparties were 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 related contingent features.
The following table provides information regarding amounts recognized in the Consolidated Statements of Operations for derivative contracts for the years ended December 31 (in thousands):
| Amount recorded in: | 2012 | 2011 | 2010 | |||||||||
| Interest expense (1) | $ | 3.6 | $ | 4.1 | $ | 10.7 | ||||||
| Other (income) expense, net (2) | (0.6 | ) | 1.2 | (2.8 | ) | |||||||
| Total expense | $ | 3.0 | $ | 5.3 | $ | 7.9 | ||||||
| (1) | Consists of interest expense from interest rate swap contracts. |
| (2) | Consists of realized and unrealized gains and losses on foreign currency forward contracts. |
12 — FAIR VALUE DISCLOSURES
The Company’s financial instruments include cash and 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 approximates their fair value.
FASB ASC Topic 820 provides a framework for measuringthe measurement of fair value and a valuation hierarchy based upon the transparency of inputs used in the valuation of an asset or liability.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:
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 measured atrecorded 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.
| 56 |
The Company’s assets and liabilities that are remeasured to fair value are presented in the following table (in thousands):
| Description: | Fair Value December 31, 2012 | Fair Value December 31, 2011 | ||||||
| Assets: | ||||||||
| Deferred compensation plan assets (1) | $ | 27,795 | $ | 25,050 | ||||
| Foreign currency forward contracts (2) | 4 | 272 | ||||||
| $ | 27,799 | $ | 25,322 | |||||
| Liabilities: | ||||||||
| Deferred compensation plan liabilities (1) | $ | 31,260 | $ | 28,100 | ||||
| Interest rate swap contracts (3) | 10,000 | 9,989 | ||||||
| $ | 41,260 | $ | 38,089 | |||||
| Fair Value | Fair Value | |||||||
| December 31, | December 31, | |||||||
| Description: | 2009 | 2008 | ||||||
| Assets: | ||||||||
| Deferred compensation assets(1) | $ | 20,214 | $ | 13,900 | ||||
| Foreign currency forward contracts(2) | 740 | — | ||||||
| $ | 20,954 | $ | 13,900 | |||||
| Liabilities: | ||||||||
| Interest rate swap contracts(3) | $ | 9,363 | $ | 14,700 | ||||
| Foreign currency forward contracts(2) | — | 2,500 | ||||||
| $ | 9,363 | $ | 17,200 | |||||
| (1) | The Company has a | |
| The money market | ||
| (2) | The Company | |
| (3) | The Company |
13 — EMPLOYEE BENEFITS
Savings and investmentDefined contribution plan.The Company has a savings and investment plan (the “401k Plan”) covering substantially all domesticU.S. employees. Company contributions are based upon the level of employee contributions, up to a maximum of 4% of the employee’s eligible
Deferred compensation arrangement.plan.The Company has a supplemental deferred compensation arrangementplan for the benefit of certain highly compensated officers, managers and other key employees, which is structured as a rabbi trust. We classify theThe plan’s investment assets are classified in Other assets on the Consolidated Balance Sheets at current fair value, and thevalue. The value of thethese assets was $20.2$27.8 million and $13.9$25.1 million at December 31, 20092012 and 2008, respectively.2011, respectively (see Note 12 — Fair Value Disclosures for fair value information). The corresponding deferred compensation liability of $23.0$31.3 million and $16.5$28.1 million at December 31, 20092012 and 2008,2011, respectively, is recordedcarried at fair market value, and is adjusted with a corresponding charge or credit to compensation cost to reflect the fair value of the amount owed to the employees andwhich is includedclassified in Other liabilities on the Consolidated Balance Sheets. Total compensation expense (benefit)recognized for the arrangementplan was $0.1$0.4 million $(0.4) million, andin 2012, $0.3 million for 2009, 2008,in 2011, and 2007, respectively.
Defined benefit pension plans.The Company has defined-benefit pension plans in several of its internationalnon-U.S. locations. Benefits earned under these plans are based on years of service and level of employee compensation. The Company accounts for material defined benefit plans in accordance with the requirements of FASB ASC Topics 715 and 960.
The following are the components of net periodicdefined benefit pension expense for the years ended December 31 (in thousands):
| 2012 | 2011 | 2010 | ||||||||||
| Service cost | $ | 1,775 | $ | 1,890 | $ | 1,875 | ||||||
| Interest cost | 980 | 1,010 | 840 | |||||||||
| Expected return on plan assets | (115 | ) | (125 | ) | — | |||||||
| Recognition of actuarial gain | (215 | ) | (135 | ) | (350 | ) | ||||||
| Recognition of termination benefits | 175 | 65 | 65 | |||||||||
| Total defined benefit pension expense (1) | $ | 2,600 | $ | 2,705 | $ | 2,430 | ||||||
| 2009 | 2008 | 2007 | ||||||||||
| Service cost | $ | 1,465 | $ | 1,470 | $ | 1,922 | ||||||
| Interest cost | 742 | 717 | 599 | |||||||||
| Recognition of actuarial (gain) loss | (200 | ) | (74 | ) | 129 | |||||||
| Recognition of termination benefits | 192 | 40 | 24 | |||||||||
| Net periodic pension expense | $ | 2,199 | $ | 2,153 | $ | 2,674 | ||||||
| (1) | Pension expense is classified in SG&A in the Consolidated Statements of Operations. |
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The following are the assumptions used in the computation of net periodic pension expense are as follows:
| 2012 | 2011 | 2010 | ||||||||||
| Weighted-average discount rate(1) | 3.20 | % | 4.40 | % | 3.95 | % | ||||||
| Average compensation increase | 2.70 | % | 2.65 | % | 2.80 | % | ||||||
| 2009 | 2008 | 2007 | ||||||||||
| Weighted-average discount rate | 4.85 | % | 5.09 | % | 5.01 | % | ||||||
| Average compensation increase | 3.27 | % | 3.27 | % | 3.32 | % | ||||||
| (1) | Discount rates are typically determined by utilizing the yields on long-term corporate or government bonds in the relevant country with a duration consistent with the expected term of the underlying pension obligations. |
The following table provides information related to changes in the projected benefit obligation for the years ended December 31 (in thousands):
| 2012 | 2011 | 2010 | ||||||||||
| Projected benefit obligation at beginning of year | $ | 21,160 | $ | 19,730 | $ | 14,358 | ||||||
| Service cost | 1,775 | 1,890 | 1,875 | |||||||||
| Interest cost | 980 | 1,010 | 840 | |||||||||
| Actuarial loss (gain) due to assumption changes(1) | 6,265 | (948 | ) | 1,100 | ||||||||
| Additions | 1,925 | — | 1,961 | |||||||||
| Benefits paid(2) | (680 | ) | (390 | ) | (220 | ) | ||||||
| Foreign currency impact | 180 | (132 | ) | (184 | ) | |||||||
| Projected benefit obligation at end of year(3) | $ | 31,605 | $ | 21,160 | $ | 19,730 | ||||||
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Projected benefit obligation at beginning of year | $ | 13,286 | $ | 13,224 | $ | 13,900 | ||||||
| Service cost | 1,465 | 1,470 | 1,922 | |||||||||
| Interest cost | 742 | 717 | 599 | |||||||||
| Actuarial gain | (1,034 | ) | (1,799 | ) | (4,589 | ) | ||||||
| Benefits paid (1) | (562 | ) | (583 | ) | (217 | ) | ||||||
| Foreign currency impact | 461 | 257 | 1,609 | |||||||||
| Projected benefit obligation at end of year (2) | $ | 14,358 | $ | 13,286 | $ | 13,224 | ||||||
| (1) | The 2012 actuarial loss was primarily due to a decline in the weighted-average discount rate. | |
| (2) | The | |
| (3) | Measured as of December 31. |
The following table provides information related toregarding the funded status of the plans and therelated amounts recorded in the Company’s Consolidated Balance Sheets as of December 31 (in thousands):
Funded status of the plans:
| 2012 | 2011 | 2010 | ||||||||||
| Projected benefit obligation | $ | 31,605 | $ | 21,160 | $ | 19,730 | ||||||
| Plan assets at fair value (1) | (8,885 | ) | (2,480 | ) | (2,130 | ) | ||||||
| Funded status – shortfall (2) | $ | 22,720 | $ | 18,680 | $ | 17,600 | ||||||
| Amounts recorded in the Consolidated Balance Sheets for the plans: | ||||||||||||
| Other liabilities — accrued pension obligation (2) | $ | 22,720 | $ | 18,680 | $ | 17,600 | ||||||
| Stockholders’ equity — deferred actuarial (loss) gain (3) | $ | (1,578 | ) | $ | 2,488 | $ | 2,205 | |||||
| December 31, | ||||||||||||
| Funded status of the plans: | 2009 | 2008 | 2007 | |||||||||
| Projected benefit obligation | $ | 14,358 | $ | 13,286 | $ | 13,224 | ||||||
| Plan assets at fair value(1) | — | — | — | |||||||||
| Funded status(2) | $ | 14,358 | $ | 13,286 | $ | 13,224 | ||||||
Amounts recorded in the Consolidated Balance Sheets: | ||||||||||||
| Other assets — reinsurance asset(1) | $ | 10,451 | $ | 9,141 | $ | 8,380 | ||||||
| Other liabilities — accrued pension obligation | $ | 14,358 | $ | 13,286 | $ | 13,224 | ||||||
| Stockholders’ equity — unrecognized actuarial gain(3) | $ | 3,217 | $ | 2,777 | $ | 1,602 | ||||||
| (1) | The plan assets are held by third-party trustees and are invested in a diversified portfolio of equities, high quality government and corporate bonds, and other investments. The assets are primarily valued based on Level 1 and Level 2 inputs under the fair value hierarchy in FASB ASC Topic 820, and the Company considers the overall portfolio of these assets to be of low-to-medium investment risk. For the year-ended December 31, 2012, the Company contributed $6.4 million to these plans, and benefits paid to participants was $0.7 million. While the actual return on plan assets for these plans was effectively zero in 2012, the Company projects a future long-term rate of return on these plan assets of 3.6%, which it believes is reasonable based on the composition of the assets and both current and projected market conditions. | |
| In addition to the plan assets held with third-party trustees, the Company |
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| surrender value approximates fair value and is equivalent to aLevel 2 input under the FASB’s fair value framework in ASC Topic 820. | ||
| (2) | The Funded status — shortfall represents the amount of the projected benefit obligation that the Company | |
| (3) | The deferred actuarial loss as of December 31, | |
14 — SEGMENT INFORMATION
The Company manages its business inthrough three reportable segments: Research, Consulting and Events. Research consists primarily of subscription-based research products, access to research inquiry, as well as peer networking services, and membership programs.
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 servicesCOS and product development and SGASG&A expenses, depreciation, acquisition and integration charges, and amortization of intangibles and Other charges.intangibles. Certain bonus and fringe benefit costs included in consolidated Cost of services and product developmentCOS 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 earns revenue from clients in many countries. Other than the United States, there is no individual country in which revenues from external clients represent 10% or more of the Company’s consolidated revenues. Additionally, no single client accounted for 10% or more of total revenue and the loss of a single client, in management’s opinion, would not have a material adverse effect on revenues.
The following tables present operating information about the Company’s reportable segments for the years ended December 31 (in thousands):
| Research | Consulting | Events | Consolidated | |||||||||||||
2009 | ||||||||||||||||
| Revenues | $ | 752,505 | $ | 286,847 | $ | 100,448 | $ | 1,139,800 | ||||||||
| Gross contribution | 489,862 | 112,099 | 40,945 | 642,906 | ||||||||||||
| Corporate and other expenses | (508,429 | ) | ||||||||||||||
| Operating income | $ | 134,477 | ||||||||||||||
| Research | Consulting | Events | Consolidated | |||||||||||||
2008 | ||||||||||||||||
| Revenues | $ | 781,581 | $ | 347,404 | $ | 150,080 | $ | 1,279,065 | ||||||||
| Gross contribution | 495,440 | 141,395 | 64,954 | 701,789 | ||||||||||||
| Corporate and other expenses | (537,421 | ) | ||||||||||||||
| Operating income | $ | 164,368 | ||||||||||||||
| Research | Consulting | Events | Consolidated | |||||||||||||
| 2012 | ||||||||||||||||
| Revenues | $ | 1,137,147 | $ | 304,893 | $ | 173,768 | $ | 1,615,808 | ||||||||
| Gross contribution | 774,342 | 109,253 | 80,119 | 963,714 | ||||||||||||
| Corporate and other expenses | (718,007 | ) | ||||||||||||||
| Operating income | $ | 245,707 | ||||||||||||||
| Research | Consulting | Events | Consolidated | |||||||||||||
| 2011 | ||||||||||||||||
| Revenues | $ | 1,012,062 | $ | 308,047 | $ | 148,479 | $ | 1,468,588 | ||||||||
| Gross contribution | 682,136 | 114,838 | 66,265 | 863,239 | ||||||||||||
| Corporate and other expenses | (649,177 | ) | ||||||||||||||
| Operating income | $ | 214,062 | ||||||||||||||
| Research | Consulting | Events | Consolidated | |||||||||||||
| 2010 | ||||||||||||||||
| Revenues | $ | 865,000 | $ | 302,117 | $ | 121,337 | $ | 1,288,454 | ||||||||
| Gross contribution | 564,527 | 121,885 | 55,884 | 742,296 | ||||||||||||
| Corporate and other expenses | (593,031 | ) | ||||||||||||||
| Operating income | $ | 149,265 | ||||||||||||||
| Research | Consulting | Events | Consolidated | |||||||||||||
2007 | ||||||||||||||||
| Revenues | $ | 683,380 | $ | 325,030 | $ | 160,065 | $ | 1,168,475 | ||||||||
| Gross contribution | 419,639 | 128,215 | 81,908 | 629,762 | ||||||||||||
| Corporate and other expenses | (500,304 | ) | ||||||||||||||
| Operating income | $ | 129,458 | ||||||||||||||
The Company’s consolidated revenues are generated primarily through direct sales to clients by domestic and international sales forces and a network of independent international sales agents. Most of the Company’s products and services are provided on an integrated worldwide basis, and because of this integrated delivery, it is not practical to precisely separate our revenues by geographic location.
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Accordingly, the separation set forth in the table below is based upon internal allocations, which involve certain management estimates and judgments. Revenues in the table below are reported based on where the sale is fulfilled; “Other International” revenues are those attributable to all areas located outside of the United States and Canada, and EMEA (Europe,Europe, Middle East, Africa). Most of our products and services are provided on an integrated worldwide basis. Because of the integration of products and services delivery, it is not practical to separate precisely our revenues by geographic location. Long-lived assets exclude goodwill and other intangible assets. Accordingly, the separation set forth in the table below is based upon internal allocations, which involve certain management estimates and judgments.
Summarized information by geographic location is as of and for the years ended December 31 follows (in thousands):
| 2012 | 2011 | 2010 | ||||||||||
| Revenues: | ||||||||||||
| United States and Canada | $ | 947,075 | $ | 861,481 | $ | 765,793 | ||||||
| Europe, Middle East and Africa | 458,675 | 437,194 | 380,771 | |||||||||
| Other International | 210,058 | 169,913 | 141,890 | |||||||||
| Total revenues | $ | 1,615,808 | $ | 1,468,588 | $ | 1,288,454 | ||||||
| Long-lived assets:(1) | ||||||||||||
| United States and Canada(2) | $ | 114,557 | $ | 85,194 | $ | 69,163 | ||||||
| Europe, Middle East and Africa | 30,967 | 23,673 | 21,856 | |||||||||
| Other International | 16,956 | 10,754 | 6,175 | |||||||||
| Total long-lived assets | $ | 162,480 | $ | 119,621 | $ | 97,194 | ||||||
| 2009 | 2008 | 2007 | ||||||||||
| Revenues: | ||||||||||||
| United States and Canada | $ | 663,832 | $ | 723,247 | $ | 661,216 | ||||||
| Europe, Middle East and Africa | 360,791 | 430,401 | 403,919 | |||||||||
| Other International | 115,177 | 125,417 | 103,340 | |||||||||
| Total revenues | $ | 1,139,800 | $ | 1,279,065 | $ | 1,168,475 | ||||||
| Long-lived assets: | ||||||||||||
| United States and Canada | $ | 65,896 | $ | 67,753 | $ | 73,859 | ||||||
| Europe, Middle East and Africa | 21,924 | 19,324 | 21,861 | |||||||||
| Other International | 2,404 | 4,325 | 4,029 | |||||||||
| Total long-lived assets | $ | 90,224 | $ | 91,402 | $ | 99,749 | ||||||
| (1) | Excludes goodwill and other intangible assets. |
| (2) | The 2012 balance for the United States and Canada includes approximately $17.0 million of additional costs capitalized in 2012 in connection with the renovation of the Company’s Stamford headquarters facility (see Note 1 — Business and Significant Accounting Policies for additional description). |
15 — VALUATION AND QUALIFYING ACCOUNTS
The Company maintains an allowance for losses which is composed of a bad debt allowance and a revenue reserve. Provisions are charged against earnings either as an increase to expense or a reduction in revenues. The following table provides information regardingsummarizes activity in the Company’s allowance for doubtful accounts and returns and allowances (inthe years ended December 31(in thousands):
| Balance at Beginning of Year | Additions Charged to Expense | Additions Charged Against Revenues | Deductions from Reserve | Balance at End of Year | ||||||||||||||||
| 2012: | ||||||||||||||||||||
| Allowance for doubtful accounts and returns and allowances | $ | 7,260 | $ | 1,930 | $ | 1,860 | $ | (4,650 | ) | $ | 6,400 | |||||||||
| 2011: | ||||||||||||||||||||
| Allowance for doubtful accounts and returns and allowances | $ | 7,200 | $ | 930 | $ | 4,390 | $ | (5,260 | ) | $ | 7,260 | |||||||||
| 2010: | ||||||||||||||||||||
| Allowance for doubtful accounts and returns and allowances | $ | 8,100 | $ | 800 | $ | 2,000 | $ | (3,700 | ) | $ | 7,200 | |||||||||
| Additions | Additions | |||||||||||||||||||
| Balance at | Charged | Charged | Deductions | Balance | ||||||||||||||||
| Beginning | to Costs and | Against Other | from | at End | ||||||||||||||||
| of Year | Expenses | Accounts (1) | Reserve | of Year | ||||||||||||||||
2007: | ||||||||||||||||||||
| Allowance for doubtful accounts and returns and allowances | $ | 8,700 | $ | 691 | $ | 6,608 | $ | (7,549 | ) | $ | 8,450 | |||||||||
2008: | ||||||||||||||||||||
| Allowance for doubtful accounts and returns and allowances | $ | 8,450 | $ | 1,650 | $ | 5,000 | $ | (7,300 | ) | $ | 7,800 | |||||||||
2009: | ||||||||||||||||||||
| Allowance for doubtful accounts and returns and allowances | $ | 7,800 | $ | 2,100 | $ | 6,000 | $ | (7,800 | ) | $ | 8,100 | |||||||||
| Gartner, Inc. | ||||
| Date: February | 22, 2013 | By: | /s/ Eugene A. Hall | |
| Eugene A. | ||||
| Chief Executive Officer | ||||
POWER OF ATTORNEY
Each person whose signature appears below appoints Eugene A. Hall and Christopher J. Lafond and each of them, acting individually, as his or her attorney-in-fact, each with full power of substitution, for him or her in all capacities, to sign all amendments to this Report onForm 10-K, and to file the same, with appropriate exhibits and other related documents, with the Securities and Exchange Commission. Each of the undersigned ratifies and confirms his or her signatures as they may be signed by his or her attorney-in-fact to any amendments to this Report. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
| Name | Title | Date | ||||
| /s/ Eugene A. Hall | Director and Chief Executive Officer | February 22, 2013 | ||||
| Eugene A. Hall | (Principal Executive Officer) | |||||
/s/ | February 22, 2013 | |||||
| Christopher J. Lafond | (Principal | |||||
/s/ | February | |||||
| Michael J. Bingle | ||||||
/s/ | Director | February | ||||
| Richard J. Bressler | ||||||
/s/ | Director | February | ||||
| Raul E. Cesan | ||||||
/s/ Karen E. Dykstra | Director | February | ||||
| Karen E. Dykstra | ||||||
/s/ | Director | February | ||||
| Anne Sutherland Fuchs | ||||||
/s/ | Director | February | ||||
| William O. Grabe | ||||||
/s/ | Director | February | ||||
| Stephen G. Pagliuca | ||||||
/s/ | ||||||
James C. Smith | Director | February | ||||
| James C. Smith | ||||||