Document
false--12-31Q220192019-06-300000749251GARTNER INC0.005770000078000004000000.000525000000025000000016360206716360206790000003810000063870000000.010.01500000050000000000000P4Y7389997773465418



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the quarterly period ended June 30, 2019
 
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File Number 1-14443
Gartner, Inc.
(Exact name of Registrant as specified in its charter)
Delaware
04-3099750
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)
 
 
P.O. Box 10212
06902-7700
56 Top Gallant Road
(Zip Code)
Stamford,
 
Connecticut
 
(Address of principal executive offices)
 
Registrant’s telephone number, including area code: (203) 316-1111
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $.0005 par value per share
IT
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer
 
 
 
 
Smaller reporting company
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☑
As of July 25, 2019, 90,137,210 shares of the registrant’s common shares were outstanding.




Table of Contents


 
Page
 
 
 
 
 


2



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GARTNER, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
(Unaudited; in thousands, except share data)  
 
June 30,
 
December 31,
 
2019
 
2018
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
218,453

 
$
156,368

Fees receivable, net of allowances of $7,800 and $7,700, respectively
1,112,856

 
1,255,118

Deferred commissions
211,655

 
235,016

Prepaid expenses and other current assets
148,140

 
165,237

Total current assets
1,691,104

 
1,811,739

Property, equipment and leasehold improvements, net
291,280

 
267,665

Operating leases - right-of-use assets
637,701

 

Goodwill
2,930,297

 
2,923,136

Intangible assets, net
973,437

 
1,042,565

Other assets
205,822

 
156,369

Total Assets
$
6,729,641

 
$
6,201,474

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
564,672

 
$
710,113

Deferred revenues
1,796,331

 
1,745,244

Current portion of long-term debt
121,148

 
165,578

Total current liabilities
2,482,151

 
2,620,935

Long-term debt, net of deferred financing fees
2,059,131

 
2,116,109

Operating leases - liabilities
768,243

 

Other liabilities
456,314

 
613,673

Total Liabilities
5,765,839

 
5,350,717

Stockholders’ Equity
 

 
 

Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued or outstanding

 

Common stock, $.0005 par value, 250,000,000 shares authorized; 163,602,067 shares issued for both periods
82

 
82

Additional paid-in capital
1,868,878

 
1,823,710

Accumulated other comprehensive loss, net
(73,479
)
 
(39,867
)
Accumulated earnings
1,879,633

 
1,755,432

Treasury stock, at cost, 73,465,418 and 73,899,977 common shares, respectively
(2,711,312
)
 
(2,688,600
)
Total Stockholders’ Equity
963,802

 
850,757

Total Liabilities and Stockholders’ Equity
$
6,729,641

 
$
6,201,474

 

See the accompanying notes to condensed consolidated financial statements.

3



GARTNER, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations
(Unaudited; in thousands, except per share data)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Research
$
826,055

 
$
770,314

 
$
1,651,429

 
$
1,534,238

Conferences
141,174

 
111,253

 
193,106

 
157,340

Consulting
103,653

 
96,458

 
196,791

 
179,354

Other

 
23,311

 

 
93,969

Total revenues
1,070,882

 
1,001,336

 
2,041,326

 
1,964,901

Costs and expenses:
 
 
 
 
 
 
 

Cost of services and product development
387,999

 
367,637

 
734,644

 
724,846

Selling, general and administrative
514,976

 
460,803

 
1,033,746

 
948,548

Depreciation
20,099

 
16,711

 
39,874

 
33,121

Amortization of intangibles
32,164

 
50,127

 
65,847

 
101,773

Acquisition and integration charges (credits)
(358
)
 
19,962

 
2,414

 
79,228

Total costs and expenses
954,880

 
915,240

 
1,876,525

 
1,887,516

Operating income
116,002

 
86,096

 
164,801

 
77,385

Interest expense, net
(24,749
)
 
(37,604
)
 
(49,596
)
 
(72,663
)
Gain (loss) from divested operations

 
25,460

 
(2,075
)
 
25,460

Other (expense) income, net
(247
)
 
1,120

 
(1,071
)
 
2,019

Income before income taxes
91,006

 
75,072

 
112,059

 
32,201

(Benefit) provision for income taxes
(12,400
)
 
28,802

 
(12,142
)
 
5,518

Net income
$
103,406

 
$
46,270

 
$
124,201

 
$
26,683

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 

 
 
Basic
$
1.15

 
$
0.51

 
$
1.38

 
$
0.29

Diluted
$
1.13

 
$
0.50

 
$
1.36

 
$
0.29

Weighted average shares outstanding:
 
 
 
 
 

 
 
Basic
90,112

 
91,048

 
89,997

 
91,026

Diluted
91,188

 
92,156

 
91,146

 
92,252


See the accompanying notes to condensed consolidated financial statements.

4



GARTNER, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited; in thousands)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
103,406

 
$
46,270

 
$
124,201

 
$
26,683

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 

Foreign currency translation adjustments
12,761

 
(60,015
)
 
5,525

 
(39,468
)
Interest rate swaps – net change in deferred gain or loss
(24,715
)
 
3,093

 
(39,220
)
 
13,207

Pension plans – net change in deferred actuarial loss
41

 
55

 
83

 
111

Other comprehensive (loss) income, net of tax
(11,913
)
 
(56,867
)
 
(33,612
)
 
(26,150
)
Comprehensive income (loss)
$
91,493

 
$
(10,597
)
 
$
90,589

 
$
533


See the accompanying notes to condensed consolidated financial statements.

5



GARTNER, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(Unaudited; in thousands)

 
Six Months Ended
 
June 30,
 
2019
 
2018
Operating activities:
 

 
 

Net income
$
124,201

 
$
26,683

Adjustments to reconcile net income to cash provided by operating activities:
 

 
 

Depreciation and amortization
105,721

 
134,894

Stock-based compensation expense
44,939

 
45,300

Deferred taxes
(49,414
)
 
(18,019
)
Loss (gain) from divested operations
2,075

 
(25,460
)
Amortization of lease right-of-use assets
42,556

 

Amortization and write-off of deferred financing fees
3,238

 
10,601

Changes in assets and liabilities, net of divestitures:
 

 
 

     Fees receivable, net
140,841

 
81,222

Deferred commissions
22,974

 
21,818

Prepaid expenses and other current assets
16,734

 
(82,908
)
Other assets
(49,524
)
 
23,862

Deferred revenues
47,923

 
87,316

Accounts payable, accrued, and other liabilities
(189,186
)
 
(128,562
)
Cash provided by operating activities
263,078

 
176,747

Investing activities:
 

 
 

     Additions to property, equipment and leasehold improvements
(59,479
)
 
(40,126
)
Divestitures - cash received (net of cash transferred)

 
406,542

     Other, net
(2,295
)
 

Cash (used in) provided by investing activities
(61,774
)
 
366,416

Financing activities:
 

 
 

     Proceeds from employee stock purchase plan
9,077

 
7,627

     Proceeds from borrowings
5,000

 

     Payments on borrowings
(109,647
)
 
(858,609
)
     Purchases of treasury stock
(46,558
)
 
(96,271
)
Cash (used in) financing activities
(142,128
)
 
(947,253
)
Net increase (decrease) in cash and cash equivalents and restricted cash
59,176

 
(404,090
)
Effects of exchange rates on cash and cash equivalents and restricted cash
614

 
(3,012
)
Cash and cash equivalents and restricted cash, beginning of period
158,663

 
567,058

Cash and cash equivalents and restricted cash, end of period
$
218,453

 
$
159,956


See the accompanying notes to condensed consolidated financial statements.


6



GARTNER, INC. AND SUBSIDIARIES

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

Business. Gartner, Inc. (NYSE: IT) is the world’s leading research and advisory company and a member of the S&P 500. We equip business leaders with indispensable insights, advice and tools to achieve their mission–critical priorities today and build the successful organizations of tomorrow. We believe our unmatched combination of expert-led, practitioner-sourced and data-driven research steers clients toward the right decisions on the issues that matter most. We are a trusted advisor and objective resource for more than 15,000 organizations in more than 100 countries — across all major functions, in every industry and enterprise size.

Segments. Gartner delivers its products and services globally through three business segments: Research, Conferences and Consulting. Our revenues by business segment are discussed below under the heading "Revenue Recognition." During 2018, the Company divested all of the non-core businesses that comprised its Other segment and as a result, no operating activity has been recorded in the Other segment in 2019.

Basis of presentation. The accompanying interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”), as defined in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) Topic 270 for interim financial information and with the applicable instructions of the U.S. Securities and Exchange Commission (“SEC”) Rule 10-01 of Regulation S-X on Form 10-Q and should be read in conjunction with the consolidated financial statements and related notes of the Company filed in its Annual Report on Form 10-K for the year ended December 31, 2018.

The fiscal year of Gartner is the twelve-month period from January 1 through December 31. In the opinion of management, all normal recurring accruals and adjustments considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented herein have been included. The results of operations for the three and six months ended June 30, 2019 may not be indicative of the results of operations for the remainder of 2019 or beyond. When used in these notes, the terms “Gartner,” the “Company,” “we,” “us,” or “our” refer to Gartner, Inc. and its consolidated subsidiaries.

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

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

Management continually evaluates and revises its estimates using historical experience and other factors, including the general economic environment and actions it may take in the future. Management adjusts these estimates when facts and circumstances dictate. However, these estimates may involve significant uncertainties and judgments and cannot be determined with precision. In addition, these estimates are based on management’s best judgment at a point in time. As a result, differences between our estimates and actual results could be material and would be reflected in the Company’s consolidated financial statements in future periods.

Revenue recognition. Revenue is recognized in accordance with the requirements of FASB ASC Topic 606, “Revenue from Contracts with Customers” (“ASC Topic 606”). Revenue is only recognized once all of the required criteria for revenue recognition have been met. The accompanying Condensed Consolidated Statements of Operations present revenue net of any sales or value-added taxes that we collect from customers and remit to government authorities. ASC Topic 270 requires certain disclosures in interim financial statements around the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, which are provided below.





7



Disaggregated RevenueOur disaggregated revenue information by reportable segment is presented in the tables below for the periods indicated (in thousands).

By Primary Geographic Market (1), (2):

Three Months Ended June 30, 2019
 
Research
Conferences
Consulting
Total
Primary Geographic Markets:
 
 
 
 
United States and Canada
$
528,461

$
100,596

$
61,499

$
690,556

Europe, Middle East and Africa
193,666

25,827

33,948

253,441

Other International
103,928

14,751

8,206

126,885

Total revenues
$
826,055

$
141,174

$
103,653

$
1,070,882


Three Months Ended June 30, 2018
 
Research
Conferences
Consulting
Other
Total
Primary Geographic Markets:
 
 
 
 
 
United States and Canada
$
493,343

$
85,144

$
55,784

$
15,877

$
650,148

Europe, Middle East and Africa
186,399

14,850

33,590

7,434

242,273

Other International
90,572

11,259

7,084


108,915

Total revenues
$
770,314

$
111,253

$
96,458

$
23,311

$
1,001,336


Six Months Ended June 30, 2019
 
Research
Conferences
Consulting
Total
Primary Geographic Markets:
 
 
 
 
United States and Canada
$
1,055,694

$
129,603

$
116,592

$
1,301,889

Europe, Middle East and Africa
387,621

43,024

63,882

494,527

Other International
208,114

20,479

16,317

244,910

Total revenues
$
1,651,429

$
193,106

$
196,791

$
2,041,326


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

$
109,213

$
100,913

$
50,471

$
1,243,653

Europe, Middle East and Africa
370,946

31,741

63,528

35,724

501,939

Other International
180,236

16,386

14,913

7,774

219,309

Total revenues
$
1,534,238

$
157,340

$
179,354

$
93,969

$
1,964,901

 
(1)
Revenue is reported based on where the sale is fulfilled.
(2)
During 2018, the Company divested all of its non-core businesses that comprised its Other segment and, as a result, the Company is no longer recording any additional operating activity in the Other segment.

The Company’s revenue is 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 approach, it is not practical to precisely separate our revenue by geographic location. Accordingly, revenue information presented in the above tables is based on internal allocations, which involve certain management estimates and judgments.



8



By Timing of Revenue Recognition (1):

Three Months Ended June 30, 2019
 
Research
Conferences
Consulting
Total
Timing of Revenue Recognition:
 
 
 
 
Transferred over time (2)
$
754,267

$

$
79,114

$
833,381

Transferred at a point in time (3)
71,788

141,174

24,539

237,501

Total revenues
$
826,055

$
141,174

$
103,653

$
1,070,882


Three Months Ended June 30, 2018
 
Research
Conferences
Consulting
Other
Total
Timing of Revenue Recognition:
 
 
 
 
 
Transferred over time (2)
$
708,801

$

$
77,073

$
18,921

$
804,795

Transferred at a point in time (3)
61,513

111,253

19,385

4,390

196,541

Total revenues
$
770,314

$
111,253

$
96,458

$
23,311

$
1,001,336


Six Months Ended June 30, 2019
 
Research
Conferences
Consulting
Total
Timing of Revenue Recognition:
 
 
 
 
Transferred over time (2)
$
1,507,065

$

$
158,071

$
1,665,136

Transferred at a point in time (3)
144,364

193,106

38,720

376,190

Total revenues
$
1,651,429

$
193,106

$
196,791

$
2,041,326


Six Months Ended June 30, 2018
 
Research
Conferences
Consulting
Other
Total
Timing of Revenue Recognition:
 
 
 
 
 
Transferred over time (2)
$
1,409,897

$

$
151,083

$
77,867

$
1,638,847

Transferred at a point in time (3)
124,341

157,340

28,271

16,102

326,054

Total revenues
$
1,534,238

$
157,340

$
179,354

$
93,969

$
1,964,901

 
(1)
During 2018, the Company divested all of the non-core businesses that comprised its Other segment and, as a result, no operating activity has been recorded in the Other segment in 2019.
(2)
Research revenues were recognized in connection with performance obligations that were satisfied over time using a time-elapsed output method to measure progress. The corresponding Consulting revenues were recognized over time using labor hours as an input measurement basis. During 2018, Other revenues in this category were recognized using either a time-elapsed output method, performance-based milestone approach or labor hours, depending on the nature of the underlying customer contract.
(3)
The revenues in this category were recognized in connection with performance obligations that were satisfied at the point in time the contractual deliverables were provided to the customer.

Performance Obligations — For customer contracts that are greater than one year in duration, the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of June 30, 2019 was approximately $2.8 billion. The Company expects to recognize $959.4 million, $1,375.7 million and $512.6 million of this revenue (most of which pertains to Research) during the remainder of 2019, the year ending December 31, 2020 and thereafter, respectively. The Company applies an available practical expedient that is permitted under ASC Topic 606 and, accordingly, it does not disclose such performance obligation information for customer contracts that have original durations of one year or less. Our performance obligations for contracts meeting this ASC Topic 606 disclosure exclusion primarily include: (i) stand-ready services under Research subscription contracts; (ii) holding conferences and meetings where attendees and exhibitors can participate; and (iii) providing customized Consulting solutions for clients under fixed fee and time and materials engagements. The remaining duration of these

9



performance obligations is generally less than one year, which aligns with the period that the parties have enforceable rights and obligations under the affected contracts.

Customer Contract Assets and Liabilities — The timing of the recognition of revenue, and the amount and timing of our billings and cash collections, as well as upfront customer payments, result in the recording of both assets and liabilities on our Condensed Consolidated Balance Sheets. The table below provides information regarding certain of the Company’s balance sheet accounts that pertain to its contracts with customers (in thousands):
 
June 30,
 
December 31,
 
2019
 
2018
Assets:
 
 
 
Fees receivable, gross (1)
$
1,120,656

 
$
1,262,818

 
 
 
 
Contract assets recorded in Prepaid expenses and other current assets (2)
$
27,455

 
$
26,119

 
 
 
 
Contract liabilities:
 
 
 
Deferred revenues (current liability) (3)
$
1,796,331

 
$
1,745,244

Non-current deferred revenues recorded in Other liabilities (3)
16,396

 
21,194

Total contract liabilities
$
1,812,727

 
$
1,766,438

 
 
 
 
 
(1)
Fees receivable represent an unconditional right of payment from our customers and include both billed and unbilled amounts.
(2)
Contract assets represent recognized revenue for which we do not have an unconditional right to payment as of the balance sheet date because the project may be subject to a progress billing milestone or some other billing restriction.
(3)
Deferred revenues represent amounts (i) for which the Company has received an upfront customer payment or (ii) that pertain to recognized fees receivable. Both situations occur before the completion of our performance obligation(s).

The Company recognized revenue of $708.3 million and $651.9 million during the three months ended June 30, 2019 and 2018, respectively, and $1,062.0 million and $969.3 million during the six months ended June 30, 2019 and 2018, respectively, that was attributable to deferred revenues that were recorded at the beginning of each such period. Those amounts primarily consisted of (i) Research revenues and, in the 2018 periods, Other revenues that were recognized ratably as control of the goods or services passed to the customer and (ii) Conferences revenue pertaining to conferences and meetings that occurred during the reporting periods. During each of the three and six months ended June 30, 2019 and 2018, the Company did not record any material impairments related to its contract assets. The Company does not typically recognize revenue from performance obligations satisfied in prior periods.

Acquisition and divestiture activities. The Company recognized $(0.4) million and $20.0 million of Acquisition and integration charges (credits) during the three months ended June 30, 2019 and 2018, respectively, and $2.4 million and $79.2 million during the six months ended June 30, 2019 and 2018, respectively. Acquisition and integration charges (credits) reflect additional costs and expenses resulting from our acquisitions and include, among other items, professional fees, severance and stock-based compensation charges. During the three and six months ended June 30, 2018, the charges included $9.8 million and $51.4 million, respectively, of exit costs for certain acquisition-related office space in Arlington, Virginia that the Company did not occupy. The Company recorded no exit costs for facilities during the three and six months ended June 30, 2019.

In the second quarter of 2018, the Company completed the divestiture of two non-core businesses that had been reported as part of its Other segment. Both of these businesses were acquired in the CEB Inc. acquisition in 2017. Revenue from these divested operations was $1.0 million and $55.0 million during the three and six months ended June 30, 2018, respectively, while the gross contribution was zero and $34.1 million, respectively. Also during the second quarter of 2018, the Company sold other miscellaneous assets acquired in the CEB Inc. transaction. The Company recorded $406.5 million in total net cash proceeds from these sales and a net pretax gain of $25.5 million in the second quarter of 2018. During the six months ended June 30, 2019, the Company recorded a pretax Loss from divested operations of $2.1 million, primarily due to the adjustment of certain working capital balances related to its 2018 divestitures.

Cash and cash equivalents and restricted cash. For the six months ended June 30, 2019, the beginning of period cash and cash equivalents and restricted cash balance of $158.7 million in the accompanying Condensed Consolidated Statements of Cash Flows consisted of $156.4 million of cash and cash equivalents and $2.3 million of restricted cash. The restricted cash, which was classified in Prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheets as of December 31, 2018, was paid to a third party in 2019.


10



Adoption of new accounting standards. The Company adopted the accounting standards described below during the six months ended June 30, 2019:

Targeted Improvements to Accounting for Hedging Activities — On January 1, 2019, the Company adopted Accounting Standards Update ("ASU") No. 2017-12, "Derivatives and Hedging" ("ASU No. 2017-12"). ASU No. 2017-12 is intended to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition to that main objective, the standard makes certain targeted improvements to simplify the application of the hedge accounting guidance in current U.S. GAAP. The adoption of the standard had no impact on the Company's consolidated financial statements.

Leases — On January 1, 2019, the Company adopted ASU No. 2016-02, "Leases," as amended ("ASU No. 2016-02" or the “new lease standard”). ASU No. 2016-02 significantly changes the accounting for leases because a right-of-use model is now used whereby a lessee must record a right-of-use asset and a related lease liability on its balance sheet for most of its leases. Under ASU No. 2016-02, leases are classified as either operating or finance arrangements, with such classification affecting the pattern of expense recognition in an entity's income statement. For operating leases, ASU No. 2016-02 requires recognition in an entity’s income statement of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis.

The adoption of ASU No. 2016-02 on January 1, 2019 had a material impact on the Company’s consolidated balance sheet, while the accompanying Condensed Consolidated Statements of Operations and the cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows for the periods ended June 30, 2019 were not materially impacted. Prior to January 1, 2019, the Company recognized lease expense in accordance with then-existing U.S. GAAP under FASB ASC Topic 840, Leases (“prior GAAP”). Although there were significant changes to the Company’s leasing policies and procedures effective January 1, 2019 with the adoption of ASU No. 2016-02, the lease expense recognition patterns under ASU No. 2016-02 and prior GAAP during the periods ended June 30, 2019 and 2018, respectively, were substantively the same. As required by ASU No. 2016-02, the Company's disclosures regarding its leasing activities have been significantly expanded to enable users of our consolidated financial statements to assess the amount, timing and uncertainty of cash flows related to leases. These additional disclosures are included below.

The Company adopted ASU No. 2016-02 on January 1, 2019 using a modified retrospective approach. We elected to use an optional transition method available under ASU No. 2016-02 to record the required cumulative effect adjustments to the opening balance sheet in the period of adoption rather than in the earliest comparative period presented. As such, the Company's historical consolidated financial statements have not been restated.
Under prior GAAP, lease arrangements that met certain criteria were considered operating leases and were not recorded on an entity's balance sheet. Prior to January 1, 2019 and through June 30, 2019, all of the Company’s lease arrangements were accounted for as operating leases. The adoption of ASU No. 2016-02 on January 1, 2019 had a material impact on the Company’s consolidated balance sheet due to the recognition of right-of-use assets of $651.9 million and related lease liabilities of $851.3 million. The Company’s adoption of ASU No. 2016-02 resulted in a net increase of $638.7 million in each of Total Assets and Total Liabilities. The adoption of the new lease standard did not affect Stockholders’ Equity.

In connection with our adoption of ASU No. 2016-02, the Company elected to use certain available practical expedients that were permitted under the new lease standard and made other elections that impact its lease accounting. The Company elected to use these practical expedients in connection with the adoption of ASU No. 2016-02 because, among other things, they simplified the adoption of the new lease standard, streamlined our internal processes and minimized the associated costs. The critical practical expedients and accounting policy elections used by the Company for all classes of leases accounted for under ASU No. 2016-02 were as follows:

Existing contracts were not reassessed to determine if they contained leases.
Existing leases were not reassessed to determine if their classification should be changed.
Initial direct costs for existing leases were not reassessed.
Lease components and nonlease components (e.g., common area maintenance charges, etc.) related to a lease arrangement were accounted for as a single lease component for purposes of the recognition and measurement requirements of ASU No. 2016-02.
The incremental borrowing rate used for the purpose of measuring each of our lease liabilities was derived by reference to the related lease’s remaining minimum payments and remaining lease term on the date of adopting the new lease standard. We used incremental borrowing rates because we were unable to determine the implicit interest rates in our leases.



11



Leasing Activities

The Company’s leasing activities are primarily for facilities under cancelable and non-cancelable lease agreements expiring during 2019 and through 2038. These facilities support our executive and administrative activities, research and consulting, sales, systems support, operations, and other functions. The Company also has leases for office equipment and other assets, which are not significant. Certain of these lease agreements include (i) renewal options to extend the lease term for up to five years and/or (ii) options to terminate the agreement within one year. Additionally, certain of the Company’s lease agreements provide standard recurring escalations of lease payments for, among other things, increases in a lessor’s maintenance costs and taxes. Under some lease agreements, the Company may be entitled to allowances, free rent, lessor-financed tenant improvements and other incentives. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Prior to January 1, 2019, the Company recognized lease expense in accordance with prior GAAP. Because both ASU No. 2016-02 and prior GAAP generally recognize operating lease expense on a straight-line basis over the term of the lease arrangement and the Company only has operating lease arrangements, the lease expense recognition patterns under the two accounting methodologies during the three and six months ended June 30, 2019 and 2018 were substantively the same.

Except for lease arrangements pertaining to facilities, all other operating lease activity is not significant. As such, operating leases for office equipment and other assets (collectively, “other leases”) are: (i) not recognized and measured under the relevant provisions of ASU No. 2016-02; (ii) excluded from the right-of-use assets and related lease liabilities on the accompanying Condensed Consolidated Balance Sheet as of June 30, 2019, as the related amounts are not material; and (iii) excluded from the quantitative disclosures provided below, other than the disclosures under the heading "Lease Disclosures Under Prior GAAP." Other leases are accounted for similar to the guidance for operating leases under prior GAAP, which generally recognizes lease expense on a straight-line basis over the term of the lease arrangement. As a result, the impact of excluding the other leases from the requirements of ASU No. 2016-02 is not significant.

The Company subleases certain office space that it does not intend to occupy. Such sublease arrangements expire during 2019 and through 2032 and primarily relate to facilities in Arlington, Virginia. Certain of the Company’s sublease agreements: (i) include renewal and termination options; (ii) provide for customary escalations of lease payments in the normal course of business; and (iii) grant the subtenant certain allowances, free rent, Gartner-financed tenant improvements and other incentives.

Lease Accounting under ASU No. 2016-02

Under ASU No. 2016-02, a lease is a contract or an agreement, or a part of another arrangement, between two or more parties that, at its inception, creates enforceable rights and obligations that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration.

Right-of-use assets represent a right to use an underlying asset for the lease term and the related lease liability represents an obligation to make lease payments pursuant to the contractual terms of the lease agreement. Right-of-use assets and lease liabilities are initially recognized on the lease commencement date based on the present value of the lease payments over the lease term. For all of our facilities leases, we account for both lease components and nonlease components (e.g., common area maintenance charges, etc.) as a single lease component when determining the present value of our lease payments. Variable lease payments that are not dependent on an index or a rate are excluded from the determination of our right-of-use assets and lease liabilities and such payments are recognized as expense in the period when the related obligation is incurred.

The Company’s lease agreements do not provide implicit interest rates. Instead, the Company uses an incremental borrowing rate determined on the lease commencement date to calculate the present value of future lease payments. The incremental borrowing rate is calculated for each individual lease and represents the rate of interest that the Company would have to pay to borrow on a collateralized basis (in the currency that the lease is denominated) over a similar term an amount equal to the lease payments in a similar economic environment. Right-of-use assets also include any initial direct costs incurred by the Company and lease payments made to a lessor on or before the related lease commencement date, less any lease incentives received directly from the lessor.

Certain of the Company’s facility lease agreements include options to extend or terminate the lease. When it is reasonably certain that the Company will exercise a renewal or termination option, the present value of the lease payments for the affected lease is adjusted accordingly. Leases with a term of 12 months or less are accounted for in the same manner as long-term lease arrangements, including any related disclosures. Lease expense for operating leases is generally recognized on a straight-line basis over the lease term, unless the related right-of-use asset was previously impaired.

All of our existing sublease arrangements have been classified as operating leases with sublease income recognized on a straight-line basis over the term of the sublease arrangement. To measure the Company’s periodic sublease income, we elected to use an

12



available practical expedient that is permitted under ASU No. 2016-02 to aggregate nonlease components with the related lease components when (i) the timing and pattern of transfer for the nonlease components and the related lease components are the same and (ii) the lease components, if accounted for separately, would be classified as an operating lease. This practical expedient applies to all of our existing sublease arrangements.

When our lease cost for the term of a sublease exceeds our anticipated sublease income for that same period, we treat that circumstance as an indicator that the carrying amount of our right-of-use asset may not be fully recoverable. In those circumstances, we perform an impairment analysis and, if indicated, we record a charge against earnings to reduce the right-of-use asset to the amount deemed to be recoverable in the future. There were no right-of-use asset impairments during the three and six months ended June 30, 2019.

On the accompanying Condensed Consolidated Balance Sheet as of June 30, 2019, right-of-use assets are classified and reported in Operating leases - right-of-use assets, and the related lease liabilities are included in Accounts payable and accrued liabilities (current) and Operating leases - liabilities (long-term). On the accompanying Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2019, the amortization of right-of-use assets is presented separately and the change in operating lease liabilities is included under Accounts payable, accrued, and other liabilities in the reconciliation of net income to cash provided by operating activities.

Lease Disclosures Under ASU No. 2016-02

All of the Company’s leasing and subleasing activity is recognized in Selling, general and administrative expense in the accompanying Condensed Consolidated Statements of Operations. The table below presents the components of the Company’s net lease cost and certain other information related to the Company’s leasing activities as of and for the periods indicated (dollars in thousands):
Description:
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
  Operating lease cost (1)
$
36,046

 
$
71,515

  Variable lease cost (2)
3,640

 
7,615

  Sublease income
(10,289
)
 
(20,562
)
  Total lease cost, net (3)
$
29,397

 
$
58,568

 
 
 
 
  Cash paid for amounts included in the measurement of operating lease liabilities
$
33,127

 
$
65,878

  Cash receipts from sublease arrangements
$
8,303

 
$
16,131

  Right-of-use assets obtained in exchange for new operating lease liabilities
$
27,799

 
$
29,185

 
 
 
 
As of June 30, 2019:
 
 
 
  Weighted average remaining lease term for operating leases (in years)
 
 
10.6

  Weighted average discount rate for operating leases
 
 
6.9
%
 
(1)
Included in the operating lease cost was $10.9 million and $21.7 million of costs for subleasing activities during the three and six months ended June 30, 2019, respectively.
(2)
These amounts are primarily variable lease and nonlease costs that were not fixed at the lease commencement date or are dependent on something other than an index or a rate.
(3)
The Company did not capitalize any operating lease costs during the three and six months ended June 30, 2019.











13



As of June 30, 2019, the (i) maturities of operating lease liabilities under non-cancelable arrangements and (ii) estimated future sublease cash receipts from non-cancelable arrangements were as follows (in thousands):
 
 
Operating
 
Sublease
 
 
Lease
 
Cash
Period ending December 31,
 
Payments
 
Receipts
2019 (remaining six months)
 
$
64,835

 
$
18,345

2020
 
124,838

 
39,742

2021
 
119,150

 
41,475

2022
 
114,681

 
42,109

2023
 
110,293

 
42,953

Thereafter
 
688,634

 
171,154

Total future minimum operating lease payments and estimated sublease cash receipts (1)
 
1,222,431

 
$
355,778

Imputed interest
 
(380,929
)
 
 
Total per the Condensed Consolidated Balance Sheet
 
$
841,502

 
 
 
(1)
Approximately 84% of the operating lease payments pertain to properties in the United States.

The table below indicates where the discounted operating lease payments from the above table are classified in the accompanying Condensed Consolidated Balance Sheet as of June 30, 2019 (in thousands):
Description:
 
 
Accounts payable and accrued liabilities
 
$
73,259

Operating leases - liabilities
 
768,243

Total operating lease liabilities per the Condensed Consolidated Balance Sheet
 
$
841,502



As of June 30, 2019, the Company had additional operating leases for facilities that have not yet commenced. These operating leases, which aggregated $39.1 million of undiscounted lease payments, are scheduled to commence during 2019 with lease terms of up to ten years.

Lease Disclosures Under Prior GAAP

Based on the Company's selected method of adoption for ASU No. 2016-02, the prior GAAP disclosures presented below are required in our Condensed Consolidated Financial Statements.

As of December 31, 2018, future minimum annual cash payments under non-cancelable operating lease agreements for facilities, office equipment and other assets, which expire during 2019 and through 2038, were as follows (in thousands):
Year ending December 31,
 
 
2019
 
$
130,991

2020
 
121,802

2021
 
118,945

2022
 
111,117

2023
 
106,113

Thereafter
 
689,360

Total minimum lease payments (1)
 
$
1,278,328

 
(1) Excludes approximately $372.0 million of sublease income.





14



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

Accounting standards effective in 2020

Implementation Costs in a Cloud Computing Arrangement — In August 2018, the FASB issued ASU No. 2018-15, "Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" ("ASU No. 2018-15"). ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Costs that are capitalized under ASU No. 2018-15 will be expensed over the term of the cloud computing arrangement. ASU No. 2018-15 is effective for Gartner on January 1, 2020, with early adoption permitted. ASU No. 2018-15 may be adopted using either a retroactive or prospective method. The adoption of ASU No. 2018-15 is currently not expected to have a material impact on the Company's consolidated financial statements; however, the new standard will change the classification of certain items on the Company's consolidated balance sheets, statements of operations and statements of cash flows in future periods.

Defined Benefit Plan Disclosures — In August 2018, the FASB issued ASU No. 2018-14, "Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans" ("ASU No. 2018-14"). ASU No. 2018-14, which is part of the FASB's broader disclosure framework project, modifies and supplements the current U.S. GAAP annual disclosure requirements for employers that sponsor defined benefit pension plans. ASU No. 2018-14 is effective for Gartner for the year ending December 31, 2020, with early adoption permitted. ASU No. 2018-14 must be adopted on a retroactive basis and applied to each comparative period presented in an entity's financial statements. The adoption of ASU No. 2018-14 is currently not expected to have a material impact on the Company's financial statement disclosures.

Fair Value Measurement Disclosures — In August 2018, the FASB issued ASU No. 2018-13, "Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement" ("ASU No. 2018-13"). ASU No. 2018-13, which is part of the FASB's broader disclosure framework project, modifies and supplements the current U.S. GAAP disclosure requirements pertaining to fair value measurements, with an emphasis on Level 3 disclosures of the valuation hierarchy. ASU No. 2018-13 is effective for Gartner on January 1, 2020, with early adoption permitted. The adoption of ASU No. 2018-13 is currently not expected to have a material impact on the Company's financial statement disclosures.

Goodwill Impairment — In January 2017, the FASB issued ASU No. 2017-04, "Intangibles—Goodwill and Other - Simplifying the Test for Goodwill Impairment" ("ASU No. 2017-04"). ASU No. 2017-04 simplifies the determination of the amount of goodwill to be potentially charged off by eliminating Step 2 of the goodwill impairment test under current U.S. GAAP. ASU No. 2017-04 is effective for Gartner on January 1, 2020. The adoption of ASU No. 2017-04 is currently not expected to have a material impact on the Company's consolidated financial statements.

Financial Instrument Credit Losses — In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments—Credit Losses" ("ASU No. 2016-13"). ASU No. 2016-13 amends the current financial instrument impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. ASU No. 2016-13 is effective for Gartner on January 1, 2020, with early adoption permitted. The adoption of ASU No. 2016-13 is currently not expected to have a material impact on the Company's consolidated financial statements.

The FASB continues to work on a number of other accounting standards which, if issued, could materially impact the Company's accounting policies and disclosures in future periods. As these standards have not yet been issued, the effective dates and potential impact are unknown.



15



Note 2 — Computation of Earnings Per Share

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

The following table sets forth the calculation of basic and diluted income per share for the periods indicated (in thousands, except per share data):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Numerator:
 

 
 

 
 

 
 

Net income used for calculating basic and diluted income per common share
$
103,406

 
$
46,270

 
$
124,201

 
$
26,683

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Weighted average common shares used in the calculation of basic income per share
90,112

 
91,048

 
89,997

 
91,026

Common stock equivalents associated with stock-based compensation plans (1)
1,076

 
1,108

 
1,149

 
1,226

Shares used in the calculation of diluted income per share
91,188

 
92,156

 
91,146

 
92,252

 
 
 
 
 
 
 
 
Basic income per share
$
1.15

 
$
0.51

 
$
1.38

 
$
0.29

Diluted income per share
$
1.13

 
$
0.50

 
$
1.36

 
$
0.29

 
(1)
Certain common stock equivalents were not included in the computation of diluted income per share because the effect would have been anti-dilutive. These common share equivalents totaled less than 0.4 million for the three and six months ended June 30, 2018. For the three and six months ended June 30, 2019, approximately 0.3 million and 0.2 million common stock equivalents were excluded from the calculation of diluted income per share because they were anti-dilutive.

Note 3 — Stock-Based Compensation

The Company grants stock-based compensation awards as an incentive for employees and directors to contribute to the Company’s long-term success. The Company currently awards stock-settled stock appreciation rights, service-based and performance-based restricted stock units, and common stock equivalents. As of June 30, 2019, the Company had 4.4 million shares of its common stock, par value $.0005 per share, (the “Common Stock”) available for stock-based compensation awards under its 2014 Long-Term Incentive Plan.

The Company accounts for stock-based compensation awards in accordance with FASB ASC Topics 505 and 718 and SEC Staff Accounting Bulletins No. 107 and No. 110. Stock-based compensation expense for equity awards is based on the fair value of the award on the date of grant. The Company recognizes stock-based compensation expense over the period that the related service is performed, which is generally the same as the vesting period of the underlying award. Currently, the Company issues treasury shares upon the exercise, release or settlement of stock-based compensation awards.

Determining the appropriate fair value model and calculating the fair value of stock-based compensation awards requires the use of certain subjective assumptions, including the expected life of a stock-based compensation award and Common Stock price volatility. In addition, determining the appropriate periodic stock-based compensation expense requires management to estimate the likelihood of the achievement of certain performance targets. The assumptions used in calculating the fair values of stock-based compensation awards and the related periodic expense represent management’s best estimates, which involve inherent uncertainties and the application of judgment. As a result, if circumstances change and the Company deems it necessary in the future to modify the assumptions it made or to use different assumptions, or if the quantity and nature of the Company’s stock-based compensation awards changes, then the amount of expense may need to be adjusted and future stock-based compensation expense could be materially different from what has been recorded in the current period.






16



Stock-Based Compensation Expense

The Company recognized the following stock-based compensation expense by award type and expense category line item during the periods indicated (in millions):
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
Award type
 
2019
 
2018
 
2019
 
2018
Stock appreciation rights
 
$
0.9

 
$
1.3

 
$
4.8

 
$
4.8

Restricted stock units
 
12.0

 
12.9

 
39.7

 
40.1

Common stock equivalents
 
0.2

 
0.2

 
0.4

 
0.4

Total (1)
 
$
13.1

 
$
14.4

 
$
44.9

 
$
45.3


 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
Expense category line item
 
2019
 
2018
 
2019
 
2018
Cost of services and product development
 
$
6.2

 
$
6.7

 
17.5

 
18.1

Selling, general and administrative
 
6.7

 
7.5

 
27.1

 
25.7

Acquisition and integration charges (2)
 
0.2

 
0.2

 
0.3

 
1.5

Total (1)
 
$
13.1

 
$
14.4

 
44.9

 
$
45.3

 
(1) Includes charges of $0.5 million and $2.1 million during the three months ended June 30, 2019 and 2018, respectively, and $21.4 million and $19.9 million during the six months ended June 30, 2019 and 2018, respectively, for awards to retirement-eligible employees. Those awards vest on an accelerated basis.
(2) Includes charges related to an acquisition and the related integration process.

As of June 30, 2019, the Company had $113.9 million of total unrecognized stock-based compensation cost, which is expected to be expensed over the remaining weighted average service period of approximately 2.7 years.

Stock-Based Compensation Awards

The disclosures presented below provide information regarding the Company’s stock-based compensation awards, all of which have been classified as equity awards in accordance with FASB ASC Topic 505.

Stock Appreciation Rights

Stock-settled stock appreciation rights ("SARs") permit the holder to participate in the appreciation of the value of the Common Stock. After the applicable vesting criteria have been satisfied, SARs are settled in shares of Common Stock upon exercise by the employee. SARs vest ratably over a four-year service period and expire seven years from the date of grant. The fair value of a SARs award is recognized as compensation expense on a straight-line basis over four years. SARs have only been awarded to the Company’s executive officers.
 
When SARs are exercised, the number of shares of Common Stock issued is calculated as follows: (1) the total proceeds from the exercise of the SARs award (calculated as the closing price of the Common Stock as reported on the New York Stock Exchange on the date of exercise less the exercise price of the SARs award, multiplied by the number of SARs exercised) is divided by (2) the closing price of the Common Stock on the date of exercise. The Company withholds a portion of the shares of the Common Stock issued upon exercise to satisfy statutory tax withholding requirements. SARs recipients do not have any stockholder rights until the shares of Common Stock are issued in respect of the award, which is subject to the prior satisfaction of the vesting and other criteria relating to such grants.







17



The following table summarizes changes in SARs outstanding during the six months ended June 30, 2019:
 
Stock Appreciation Rights ("SARs") (in millions)
 
Per Share
Weighted
Average
Exercise Price
 
Per Share
Weighted
Average
Grant Date
Fair Value
 
Weighted
Average
Remaining
Contractual
Term (Years)
Outstanding at December 31, 2018
1.2

 
$
89.45

 
$
19.88

 
4.33
Granted
0.3

 
143.23

 
32.62

 
6.61
Forfeited
(0.1
)
 
118.31

 
26.52

 
n/a
Exercised
(0.1
)
 
70.54

 
16.64

 
n/a
Outstanding at June 30, 2019 (1) (2)
1.3

 
$
100.54

 
$
22.43

 
4.44
Vested and exercisable at June 30, 2019 (2)
0.7

 
$
83.36

 
$
18.46

 
3.36
 
n/a = not applicable

(1) As of June 30, 2019, 0.6 million of the total SARs outstanding were unvested. The Company expects that substantially all of those unvested awards will vest in future periods.
(2) As of June 30, 2019, the total SARs outstanding had an intrinsic value of $80.9 million. On such date, SARs vested and exercisable had an intrinsic value of $54.8 million.

The fair value of a SARs award is determined on the date of grant using the Black-Scholes-Merton valuation model with the following weighted average assumptions:
 
Six Months Ended
 
June 30,
 
2019
 
2018
Expected dividend yield (1)
%
 
%
Expected stock price volatility (2)
21
%
 
21
%
Risk-free interest rate (3)
2.5
%
 
2.5
%
Expected life in years (4)
4.6

 
4.5

 
(1)
The expected dividend yield assumption was based on both the Company's historical and anticipated dividend payouts. Historically, the Company has not paid cash dividends on its Common Stock.
(2)
The determination of expected stock price volatility was based on both historical Common Stock prices and implied volatility from publicly traded options in the Common Stock.
(3)
The risk-free interest rate was based on the yield of a U.S. Treasury security with a maturity similar to the expected life of the award.
(4)
The expected life represents the Company’s estimate of the weighted average period of time the SARs are expected to be outstanding (that is, the period between the service inception date and the expected exercise date).

Restricted Stock Units

Restricted stock units ("RSUs") give the awardee the right to receive shares of Common Stock when the vesting conditions are met and certain restrictions lapse. Each RSU that vests entitles the awardee to one share of Common Stock. RSU awardees do not have any of the rights of a Gartner stockholder, including voting rights and the right to receive dividends and distributions, until the shares are released. The fair value of a RSU award is determined on the date of grant based on the closing price of the Common Stock as reported on the New York Stock Exchange on that date. Service-based RSUs vest ratably over four years and are expensed on a straight-line basis over the vesting period. Performance-based RSUs are subject to the satisfaction of both performance and service conditions, vest ratably over four years and are expensed on an accelerated basis over the vesting period.







18



The following table summarizes the changes in RSUs outstanding during the six months ended June 30, 2019:
 
Restricted
Stock Units
("RSUs")
(in millions)
 
Per Share
Weighted
Average
Grant Date
Fair Value
Outstanding at December 31, 2018
1.4

 
$
101.75

Granted (1)
0.5

 
139.85

Vested and released
(0.5
)
 
96.65

Forfeited
(0.1
)
 
113.86

Outstanding at June 30, 2019 (2) (3)
1.3

 
$
118.89

 
(1)
The 0.5 million of RSUs granted during the six months ended June 30, 2019 consisted of 0.2 million of performance-based RSUs awarded to executives and 0.3 million of service-based RSUs awarded to non-executive employees and non-management board members. The performance-based awards include RSUs in final settlement of 2018 grants and approximately 0.1 million of RSUs representing the target amount of the grant for the year ending December 31, 2019 that is tied to an increase in Gartner's total contract value for 2019. The number of performance-based RSUs that will ultimately be awarded for 2019 ranges from 0% to 200% of the target amount and will be finalized based on the actual increase in Gartner's total contract value for 2019 as measured on December 31, 2019. If the specified minimum level of achievement is not met, the performance-based RSUs pertaining to 2019 will be forfeited in their entirety and any previously recorded compensation expense will be reversed.
(2)
The Company expects that substantially all of the RSUs outstanding will vest in future periods.
(3)
As of June 30, 2019, the weighted-average remaining contractual term of the RSUs outstanding was approximately 1.6 years.

Common Stock Equivalents

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

The following table summarizes the changes in CSEs outstanding during the six months ended June 30, 2019:
 
Common
Stock
Equivalents
("CSEs")
 
Per Share
Weighted
Average
Grant Date
Fair Value
Outstanding at December 31, 2018
109,780

 
$
24.96

Granted
2,179

 
159.20

Converted to shares of Common Stock upon grant
(1,544
)
 
138.90

Outstanding at June 30, 2019
110,415

 
$
26.02

 


Employee Stock Purchase Plan

The Company has an employee stock purchase plan (the “ESP Plan”) wherein eligible employees are permitted to purchase shares of Common Stock through payroll deductions, which may not exceed 10% of an employee’s compensation, or $23,750 in any calendar year, at a price equal to 95% of the closing price of the Common Stock as reported on the New York Stock Exchange at the end of each offering period. As of June 30, 2019, the Company had 0.6 million shares available for purchase under the ESP Plan. The ESP Plan is considered non-compensatory under FASB ASC Topic 718 and, as a result, the Company does not record stock-based compensation expense for employee share purchases. The Company received $9.1 million and $7.6 million in cash from employee share purchases under the ESP Plan during the six months ended June 30, 2019 and 2018, respectively.


19



Note 4 — Segment Information

Our products and services are delivered through three segments – Research, Conferences and Consulting, as follows:

Research provides trusted, objective insights and advice on the mission-critical priorities of leaders across all functional areas of the enterprise through research and other reports, briefings, proprietary tools, access to our analysts and advisors, peer networking services and membership programs that enable our clients to make better decisions. Our traditional strengths in IT, marketing and supply chain research are supplemented by best practice and talent management research insights across a range of business functions, including human resources, sales, legal and finance.

Conferences provides business professionals across the organization the opportunity to learn, share and network. From our flagship Chief Information Officer conference Gartner IT Symposium, to industry-leading conferences focused on specific business roles and topics, to member-driven sessions, our offerings enable attendees to experience the best of Gartner insight and advice live.

Consulting provides customized solutions to unique client needs through on-site, day-to-day support, as well as proprietary tools for measuring and improving IT performance with a focus on cost, performance, efficiency and quality.

The Company evaluates segment performance and allocates resources based on gross contribution margin. Gross contribution, as presented in the table below, is defined as operating income or loss excluding certain Cost of services and product development expenses, Selling, general and administrative expenses, Depreciation, Amortization of intangibles, and Acquisition and integration charges. Certain bonus and fringe benefit costs included in consolidated Cost of services and product development are not allocated to segment expense. The accounting policies used by the reportable segments are the same as those used by the Company. There are no intersegment revenues. The Company does not identify or allocate assets, including capital expenditures, by reportable segment. Accordingly, assets are not reported by segment because the information is not available by segment and is not reviewed in the evaluation of segment performance or in making decisions in the allocation of resources.

The following tables present information about the Company’s reportable segments for the periods indicated (in thousands) (1):
Three Months Ended June 30, 2019
Research
 
Conferences
 
Consulting
 
 
Consolidated
Revenues
$
826,055

 
$
141,174

 
$
103,653

 
 
$
1,070,882

Gross contribution
572,297

 
80,570

 
34,236

 
 
687,103

Corporate and other expenses
 

 
 

 
 

 
 
(571,101
)
Operating income
 

 
 

 
 

 
 
$
116,002

Three Months Ended June 30, 2018
Research
 
Conferences
 
Consulting
 
Other
 
Consolidated
Revenues
$
770,314

 
$
111,253

 
$
96,458

 
$
23,311

 
$
1,001,336

Gross contribution
532,910

 
63,461

 
33,693

 
15,104

 
645,168

Corporate and other expenses
 

 
 

 
 

 
 
 
(559,072
)
Operating income
 

 
 

 
 

 
 
 
$
86,096

Six Months Ended June 30, 2019
Research
 
Conferences
 
Consulting
 
 
Consolidated
Revenues
$
1,651,429

 
$
193,106

 
$
196,791

 
 
$
2,041,326

Gross contribution
1,147,465

 
99,446

 
62,954

 
 
1,309,865

Corporate and other expenses
 

 
 

 
 

 
 
(1,145,064
)
Operating income
 

 
 

 
 

 
 
$
164,801

Six Months Ended June 30, 2018
Research
 
Conferences
 
Consulting
 
Other
 
Consolidated
Revenues
$
1,534,238

 
$
157,340

 
$
179,354

 
$
93,969

 
$
1,964,901

Gross contribution
1,064,367

 
79,651

 
57,817

 
58,148

 
1,259,983

Corporate and other expenses
 

 
 

 
 

 
 
 
(1,182,598
)
Operating income
 

 
 

 
 

 
 
 
$
77,385

 
(1) During 2018, the Company divested all of the non-core businesses that comprised its Other segment and as a result, no operating activity has been recorded in the Other segment in 2019.


20



The following table provides a reconciliation of total segment gross contribution to net income for the periods indicated (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Total segment gross contribution
$
687,103

 
$
645,168

 
$
1,309,865

 
$
1,259,983

Costs and expenses:
 
 
 
 
 
 
 
Cost of services and product development - unallocated (1)
4,220

 
11,469

 
3,183

 
19,928

Selling, general and administrative
514,976

 
460,803

 
1,033,746

 
948,548

Depreciation and amortization
52,263

 
66,838

 
105,721

 
134,894

Acquisition and integration charges (credits)
(358
)
 
19,962

 
2,414

 
79,228

Operating income
116,002

 
86,096

 
164,801

 
77,385

Interest expense and other, net
24,996

 
36,484

 
50,667

 
70,644

  Gain (loss) from divested operations

 
25,460

 
(2,075
)
 
25,460

  (Benefit) provision for income taxes
(12,400
)
 
28,802

 
(12,142
)
 
5,518

Net income
$
103,406

 
$
46,270

 
$
124,201

 
$
26,683

 
(1)
The unallocated amounts consist of certain bonus and related fringe costs recorded in consolidated Cost of services and product development expense that are not allocated to segment expense. The Company's policy is to only allocate bonus and related fringe charges to segments for up to 100% of the segment employee's target bonus. Amounts above 100% are absorbed by corporate.

Note 5 — Goodwill and Intangible Assets

Goodwill

Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair values of the tangible and identifiable intangible net assets acquired. Evaluations of the recoverability of goodwill are performed in accordance with FASB ASC Topic 350, which requires an annual assessment of potential goodwill impairment at the reporting unit level and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. The annual assessment of the recoverability of recorded goodwill can be based on either a qualitative or quantitative assessment or a combination of the two approaches. Both methods utilize estimates which, in turn, require judgments and assumptions regarding future trends and events. As a result, both the precision and reliability of the resulting estimates are subject to uncertainty. If our annual goodwill impairment evaluation determines that the fair value of a reporting unit is less than its related carrying amount, we may recognize an impairment charge. In connection with our most recent annual impairment test of goodwill during the quarter ended September 30, 2018, which indicated no impairment of recorded goodwill, the Company utilized the quantitative approach in assessing the fair values of its reporting units relative to their respective carrying values. Subsequent to completing our 2018 annual impairment test, no events or changes in circumstances were noted that required an interim goodwill impairment test.

The following table presents changes to the carrying amount of goodwill by segment during the six months ended June 30, 2019 (in thousands):
 
Research
 
Conferences
 
Consulting
 
 
Total
Balance at December 31, 2018 (1)
$
2,638,418

 
$
187,654

 
$
97,064

 
 
$
2,923,136

Foreign currency translation impact
7,194

 
16

 
(49
)
 
 
7,161

Balance at June 30, 2019
$
2,645,612

 
$
187,670

 
$
97,015

 
 
$
2,930,297

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


21



Finite-Lived Intangible Assets

The following tables present reconciliations of the carrying amounts of the Company's finite-lived intangible assets as of the dates indicated (in thousands):
June 30, 2019
 
Customer
Relationships
 
Software
 
Content
 
Other
 
Total
Gross cost at December 31, 2018
 
$
1,131,656

 
$
110,701

 
$
98,842

 
$
51,662

 
$
1,392,861

Intangible assets fully amortized
 

 

 
(85,900
)
 
(18,074
)
 
(103,974
)
Foreign currency translation impact
 
(3,573
)
 
(113
)
 
(1
)
 
35

 
(3,652
)
Gross cost
 
1,128,083

 
110,588

 
12,941

 
33,623

 
1,285,235

Accumulated amortization (1)
 
(232,450
)
 
(50,090
)
 
(8,922
)
 
(20,336
)
 
(311,798
)
Balance at June 30, 2019
 
$