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IT > SEC Filings for IT > Form 10-K on 26-Feb-2014All Recent SEC Filings

Show all filings for GARTNER INC

Form 10-K for GARTNER INC


Annual Report


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 addition to historical information, this Annual Report on Form 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 in 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 other reports we filed with the SEC.


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 thousands of client organizations across the 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.

Research provides objective insight on critical and timely technology and supply chain initiatives for CIOs, other IT professionals, supply chain leaders, technology companies and the investment community through reports, briefings, proprietary tools, access to our analysts, peer networking services, and membership programs that enable our clients to make better decisions about their IT and supply chain investments.

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.

Events provide IT, supply chain, and business professionals the opportunity to attend various symposia, conferences and exhibitions to learn, contribute and network with their peers. From our flagship event Symposium/ITxpo, to Summits focused on specific technologies and industries, to experimental workshop-style Seminars, our events distill the latest Gartner research into applicable insight and advice.


We believe the following business measurements are important performance
indicators for our business segments:

Research           Contract value represents the value attributable to all of our
                   subscription-related research products that recognize revenue
                   on a ratable basis. Contract value is calculated as the
                   annualized value of all subscription research contracts in
                   effect at a specific point in time, without regard to the
                   duration of the contract.

                   Client retention rate represents a measure of client
                   satisfaction and renewed business relationships at a specific
                   point in time. Client retention is calculated on a percentage
                   basis by dividing our current clients, who were also clients a
                   year ago, by all clients from a year ago.

                   Wallet retention rate represents a measure of the amount of
                   contract value we have retained with clients over a
                   twelve-month period. Wallet retention is calculated on a
                   percentage basis by dividing the contract value of clients,
                   who were clients one year earlier, by the total contract value
                   from a year earlier, excluding the impact of foreign currency
                   exchange. When wallet retention exceeds client retention, it
                   is an indication of retention of higher-spending clients, or
                   increased spending by retained clients, or both.

Consulting         Consulting backlog represents future revenue to be derived
                   from in-process consulting, measurement and strategic advisory
                   services engagements.

                   Utilization rate represents a measure of productivity of our
                   consultants. Utilization rates are calculated for billable
                   headcount on a percentage basis by dividing total hours billed
                   by total hours available to bill.

                   Billing rate represents earned billable revenue divided by
                   total billable hours.

                   Average annualized revenue per billable headcount represents a
                   measure of the revenue generating ability of an average
                   billable consultant and is calculated periodically by
                   multiplying the average billing rate per hour times the
                   utilization percentage times the billable hours available for
                   one year.

Events             Number of events represents the total number of hosted events
                   completed during the period.

                   Number of attendees represents the total number of people who
                   attend events.


We have executed a consistent growth strategy since 2005 to drive double-digit annual revenue and earnings growth. The fundamentals of our strategy include a focus on creating extraordinary research content, delivering innovative and highly differentiated product offerings, building a strong sales capability, providing world class client service with a focus on client engagement and retention, and continuously improving our operational effectiveness.

We had total revenues of $1,784.2 million in 2013, an increase of 10% over 2012 while diluted earnings per share increased by $.20 per share, to $1.93. Excluding the impact of foreign currency, 2013 total revenues increased 11% over 2012.

Research revenues rose 12% year-over-year, to $1,271.0 million in 2013, and the contribution margin increased 1 point, to 69%. At December 31, 2013, Research contract value was $1,423.2 million, an increase of 13% over December 31, 2012 and 12% adjusted for the impact of foreign exchange. Client retention was 82% and wallet retention was 98% at December 31, 2013.

Consulting revenues in 2013 increased 3% compared to 2012, while the gross contribution margin was 34%. Consultant utilization was 64% for 2013 compared to 67% in 2012, and we had 509 billable consultants at December 31, 2013 compared to 503 at year-end 2012. Backlog increased 3% year-over-year, to $106.1 million at December 31, 2013.

Events revenues increased 14% year-over-year, to $198.9 million, while the segment contribution margin was 46%. We held 64 events in 2013 compared to 62 in 2012, with a slight decline in the number of attendees.

For a more detailed discussion of our results, see the Segment Results section below.

Cash flow from our operating activities increased 13% in 2013 compared to 2012, to $315.7 million. We continued to focus on maximizing shareholder value in 2013, and we repurchased 3.4 million of our outstanding common shares during the year. We ended 2013 with almost $424.0 million in cash and cash equivalents, which is a record year-end cash balance. We refinanced our debt in 2013 to take advantage of favorable market conditions, and as of year-end 2013 we had over $541.0 million of borrowing capacity on our revolving credit facility. We believe that we have adequate liquidity to meet our currently anticipated needs.


Our quarterly and annual revenue, operating income, and cash flow fluctuate as a result of many factors, including: the timing of our Symposium/ITxpo series, which are normally held during the fourth calendar quarter, as well as other events; the timing and amount of new business generated; the mix between 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 which are beyond our control. The potential fluctuations in our operating income could cause period-to-period comparisons of operating results not to be meaningful and could provide an unreliable indication of future operating results and cash flows.


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 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 - 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"). Revenue is only recognized once all required criteria for revenue recognition have been met. Revenue by significant source is accounted for as follows:

Research revenues are derived from subscription contracts for research products and are deferred and recognized ratably over the applicable contract term. Fees from research reprints are recognized when the reprint is shipped.

Consulting revenues are principally generated from fixed fee and time and material engagements. Revenues from fixed fee contracts are recognized on a proportional performance basis. Revenues from time and materials engagements are recognized as work is delivered and/or services are provided. Revenues related to contract optimization contracts are contingent in nature and are only recognized upon satisfaction of all conditions related to their payment.

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

The majority of research contracts are billable upon signing, absent special terms granted on a limited basis from time to time. All research contracts are non-cancelable and non-refundable, except for government contracts that may have cancellation or fiscal

funding clauses. It is our policy to record the entire amount of the contract that is billable as a fee receivable at the time the contract is signed with a corresponding amount as deferred revenue, since the contract represents a legally enforceable claim.

Uncollectible fees receivable - We maintain an allowance for losses which is composed of a bad debt allowance and a sales reserve. Provisions are charged against earnings, either as a reduction in revenues or an increase to expense. The measurement of likely and probable losses and the allowance for losses is based on historical loss experience, aging of outstanding receivables, an assessment of current economic conditions and the financial health of specific clients. This evaluation is inherently judgmental and requires estimates. These valuation reserves are periodically re-evaluated and adjusted as more information about the ultimate collectability of fees receivable becomes available. Circumstances that could cause our valuation reserves to increase include changes in our clients' liquidity and credit quality, other factors negatively impacting our clients' ability to pay their obligations as they come due, and the effectiveness of our collection efforts.

The following table provides our total fees receivable and the related allowance for losses (in thousands):

                            December 31,
                         2013          2012
Total fees receivable $ 497,923     $ 470,368
Allowance for losses     (7,000 )      (6,400 )
Fees receivable, net  $ 490,923     $ 463,968

Goodwill and other intangible assets - The Company evaluates recorded goodwill 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 may also be performed on a periodic basis should events or circumstances indicate potential impairment. If we determine that the fair value of a reporting unit or an intangible asset is less than its related carrying amount, we must recognize an impairment charge against earnings. Among the factors we consider important that could trigger an impairment review are the following:

Significant under-performance relative to historical or projected future operating results;

Significant changes in the manner of our use of acquired assets or the strategy for our overall business;

Significant negative industry or general economic trends;

Significant decline in our stock price for a sustained period; and

Our market capitalization relative to net book value.

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 regarding future trends and events. As a result, both the precision and reliability of the resulting estimates are subject to uncertainty. In 2013, we completed the required annual goodwill impairment test utilizing a qualitative approach. Based on this assessment, the Company believes the fair values of the Company's reporting units continue to substantially exceed their respective carrying amounts. See Note 1 - Business and Significant Accounting Policies in the Notes to the Consolidated Financial Statements for additional discussion.

Accounting for income taxes - We estimate our income taxes in each of the jurisdictions where we operate. This process involves estimating our current tax expense 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 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 asset in the future, an adjustment to the valuation allowance is charged against income in the period such determination is made.

Accounting for stock-based compensation - The Company accounts for stock-based compensation in accordance with FASB ASC Topics 505 and 718, as interpreted by SEC Staff Accounting Bulletins No. 107 ("SAB No. 107") and No. 110 ("SAB No. 110"). The Company recognizes stock-based compensation expense, which is based on the fair value of the award on the date of grant, over the related service period, net of estimated forfeitures (see Note 8 - Stock-Based Compensation in the Notes to the Consolidated Financial Statements for additional information regarding stock-based compensation).

Determining the appropriate fair value model and calculating the fair value of stock compensation awards requires the input of certain complex and subjective assumptions, including the expected life of the stock compensation award 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.


Consolidated Results

2013 VERSUS 2012

The following table presents the changes in selected line items in our
Consolidated Statements of Operations for the two years ended December 31, 2013
(dollars in thousands):
                                        Twelve Months      Twelve Months
                                            Ended              Ended          Income Increase       Increase
                                         December 31,       December 31,        (Decrease)         (Decrease)
                                             2013               2012                 $                 %
Total revenues                         $    1,784,213     $    1,615,808     $       168,405            10  %
Costs and expenses:
Cost of services & product development        713,484            659,067             (54,417 )          (8 )
Selling, general and administrative           760,458            678,843             (81,615 )         (12 )
Depreciation                                   28,996             25,369              (3,627 )         (14 )
Amortization of intangibles                     5,446              4,402              (1,044 )         (24 )
Acquisition & integration charges                 337              2,420               2,083            86
Operating income                              275,492            245,707              29,785            12
Interest expense, net                          (8,837 )           (8,859 )                22             -
Other expense, net                               (216 )           (1,252 )             1,036            83
Provision for income taxes                    (83,638 )          (69,693 )           (13,945 )         (20 )
Net income                             $      182,801     $      165,903     $        16,898            10  %

TOTAL REVENUES for the twelve months ended December 31, 2013 increased $168.4 million, or 10%, compared to the twelve months ended December 31, 2012. Total revenues increased 11% excluding the unfavorable impact of foreign currency. Revenues increased in all three of our business segments and across all of our geographic regions.

The following table presents total revenues by geographic region for the twelve months ended:

                                    December 31,     December 31,       Increase           Increase
Geographic Region                       2013             2012         (Decrease) $       (Decrease) %
U.S. and Canada                    $  1,049,734     $    947,075     $     102,659           11 %
Europe, Middle East, Africa             508,755          458,675            50,080           11
Other International                     225,724          210,058            15,666            7
Totals                             $  1,784,213     $  1,615,808     $     168,405           10 %

The following table presents our revenues by segment for the twelve months ended:

                                    December 31,     December 31,       Increase           Increase
Segment                                 2013             2012         (Decrease) $       (Decrease) %
Research                           $  1,271,011     $  1,137,147     $     133,864           12 %
Consulting                              314,257          304,893             9,364            3
Events                                  198,945          173,768            25,177           14
Totals                             $  1,784,213     $  1,615,808     $     168,405           10 %

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 8% in 2013 compared to 2012, or $54.4 million, to $713.5 million compared to $659.1 million in 2012. 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 due to an increase in the number of events, a double-digit increase in the number of exhibitors at our events, and the upgrading of facilities in several locations to support anticipated growth in the events business. These additional costs were partially offset by the favorable impact of foreign currency. COS as a percentage of revenues was 40% in the 2013 period compared to 41% in the 2012 period.

SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") expense increased by $81.6 million in 2013, or 12%, to $760.5 million compared to $678.8 million in 2012. The increase was primarily due to higher payroll and related benefits costs, which was partially offset by favorable foreign currency impact. The higher payroll and benefit cost was primarily driven by our investment in additional headcount, and to a lesser extent, higher sales commissions and merit salary increases. The increased headcount includes additional quota-bearing sales associates, which increased to 1,643 at December 31, 2013, a 16% increase over year-end 2012.

DEPRECIATION expense increased 14% in 2013 compared to 2012, primarily due to additional depreciation on leasehold improvements from two renovated buildings on our Stamford headquarters campus being placed into service during 2013.

AMORTIZATION OF INTANGIBLES increased 24% year-over-year due to a full year of amortization in 2013 of the intangible assets recorded from the Ideas International acquisition in mid-2012.

ACQUISITION AND INTEGRATION CHARGES was $0.3 million in 2013 compared to $2.4 million in 2012. These charges related to the acquisition of Ideas International in mid-2012 and include legal, consulting, severance, and other costs.

OPERATING INCOME increased $29.8 million year-over-year, or 12%, to $275.5 million in 2013 from $245.7 million in 2012. The increased operating income was primarily attributable to a substantially higher segment contribution from our Research segment. Operating income as a percentage of revenues was 15% for both periods.

INTEREST EXPENSE, NET was flat year-over-year.

OTHER EXPENSE, NET was $0.2 million in 2013 and $1.3 million in 2012. These expenses primarily consisted of net foreign currency exchange gains and losses.

PROVISION FOR INCOME TAXES was $83.6 million in 2013 compared to $69.7 million in 2012 and the effective tax rate was 31.4% for 2013 compared to 29.6% for 2012. The higher effective tax rate in 2013 was primarily attributable to a change in the annual mix of pre-tax income by jurisdiction as well as the impact of certain state tax credits recognized in 2012.

During 2013, the Company closed the Internal Revenue Service ("IRS") audit of its 2008 and 2009 federal income tax returns. The resolution of the audit did . . .

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