EX-99.1 4 c88055_ex99-1.htm

EXHIBIT 99.1

 

Gartner, Inc.

Unaudited Condensed Consolidated Pro Forma Balance Sheet
At December 31, 2016
(Dollars in thousands)

 

              Pro Forma      
   Historical   Historical      Merger      
   Gartner   CEB   Reclassifications  Adjustments    Pro Forma 
Assets                               
Current Assets:                               
Cash and cash equivalents  $474,233   $134,929     $     $     $609,162 
Fees receivable   643,013    284,042            (45,469)4B    881,586 
Deferred commissions   141,410    25,737            (25,737)4C    141,410 
Prepaid expenses and other current assets   84,540    23,292                  107,832 
Total current assets   1,343,196    468,000            (71,206)     1,739,990 
Deferred income taxes, net       3,693      (3,693)4A           
Property, equipment and leasehold improvements, net   121,606    95,217                  216,823 
Goodwill   738,453    565,036            1,985,535 4D    3,289,024 
Intangible assets, net   76,801    184,184            953,633 4E    1,214,618 
Other assets   87,279    96,462      3,693 4A    (22,134)4F    165,300 
Total Assets  $2,367,335   $1,412,592     $     $2,845,828     $6,625,755 
Liabilities and Stockholders’ Equity (Deficit)                               
Current liabilities:                               
Accounts payable and accrued liabilities  $440,771   $90,626     $62,824 4A   $     $594,221 
Accrued incentive compensation       62,824      (62,824)4A           
Deferred revenues   989,478    436,225            (226,352)4G    1,199,351 
Current portion of long-term debt   30,000    7,872            41,378 4H, 4I    79,250 
Total current liabilities   1,460,249    597,547            (184,974)     1,872,822 
Deferred income taxes, net       13,401      (13,401)4A           
Long-term debt   664,391    866,681            1,811,788 4H, 4I    3,342,860 
Other liabilities   181,817    109,893      13,401 4A    328,367 4J, 4K    633,478 
Total Liabilities   2,306,457    1,587,522            1,955,181      5,849,160 
Stockholders’ Equity (Deficit)                               
Common stock   78    457            (457)4L    78 
Additional paid-in capital   863,127    505,918            181,115 4L    1,550,160 
Accumulated other comprehensive loss, net   (49,683)   (139,594)           139,594 4L    (49,683)
Accumulated earnings   1,644,005    318,232            (385,267)4L    1,576,970 
Treasury stock   (2,396,649)   (859,943)           955,662 4L    (2,300,930)
Total Stockholders’ Equity (Deficit)   60,878    (174,930)           890,647      776,595 
Total Liabilities and Stockholders’ Equity (Deficit)  $2,367,335   $1,412,592     $     $2,845,828     $6,625,755 

 

See notes to Unaudited Condensed Consolidated Pro Forma Financial Statements.

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Gartner, Inc.

Unaudited Condensed Consolidated Pro Forma Statement of Operations
For the Year Ended December 31, 2016
(Dollars in thousands, except for per share data)

 

                 Pro Forma       
   Historical   Historical        Merger       
   Gartner   CEB  Reclassifications  Adjustments     Pro Forma 
Total revenues  $2,444,540   $949,794     $     $      $3,394,334 
Costs and expenses:                                
Cost of services and product development   945,648    344,348                   1,289,996 
Member relations and marketing       276,478      (276,478)5A            
Selling, general and administrative   1,089,184    117,702      301,597 5A           1,508,483 
Depreciation   37,172    33,678                   70,850 
Amortization of intangibles   24,797    68,498            159,741  5B    253,036 
Business transformation costs       24,035      (24,035)5A            
Acquisition and integration charges   42,598    7,694            (4,034) 5C    46,258 
Restructuring costs       1,084      (1,084)5A            
Impairment loss       69,441                   69,441 
Total costs and expenses   2,139,399    942,958            155,707       3,238,064 
Operating income   305,141    6,836            (155,707)      156,270 
Debt modification costs       (1,656)     1,656 5A            
Interest income   2,449    759                   3,208 
Interest expense   (27,565)   (29,681)     (1,656)5A    (90,932) 5D    (149,834)
Other income, net   8,406    7,087                   15,493 
Income (loss) before income taxes   288,431    (16,655)           (246,639)      25,137 
Provision for income taxes   94,849    18,003            (85,325) 5E    27,527 
Net income (loss)  $193,582   $(34,658)    $     $(161,314)     $(2,390)
Net income (loss) per share:                                
Basic (in dollars per share)  $2.34                         $(0.03)
Diluted (in dollars per share)  $2.31                         $(0.03)
Weighted average shares outstanding:                                
Basic (in shares)   82,571                  7,438  5F    90,009 
Diluted (in shares)   83,820                  7,438  5F    90,009 

 

See notes to Unaudited Condensed Consolidated Pro Forma Financial Statements.

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NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

 

1. Accounting Policies

 

As part of preparing the unaudited pro forma condensed consolidated financial statements, Gartner conducted an initial review of the accounting policies of CEB to determine if differences in accounting policies require recasting or reclassification of results of operations or reclassification of assets or liabilities to conform to Gartner’s accounting policies and classifications. The reclassifications made in the preparation of the unaudited pro forma condensed consolidated financial statements are presented in Notes 4 and 5.

 

In March 2016, the FASB issued Accounting Standards Update (ASU) 2016-09, “Improvements to Employee Share-Based Payment Accounting” (“ASU No. 2016-09”). While the required effective date for the adoption of this amendment was January 1, 2017, Gartner elected to early adopt ASU No. 2016-09 in the third quarter of 2016, as permitted by the amendment. CEB adopted the standard on January 1, 2017 and as a result CEB’s consolidated statement of operations for the year ended December 31, 2016 does not include the excess tax benefit or deficiency resulting from stock-based compensation. In order to align the accounting policies, a pro forma adjustment was made to reflect CEB’s excess tax deficiency in the unaudited pro forma condensed consolidated financial statements as set forth in ASU 2016-09.

 

In order to align to Gartner’s policy to record the amount of the contract that is billable as a fee receivable at the time the contract is signed, CEB’s fees receivable were reduced by $45.5 million as of December 31, 2016 with a corresponding reduction of CEB’s deferred revenue balance.

 

Upon consummation of the Merger, a more comprehensive review of the accounting policies of CEB will be performed, which may identify other differences among the accounting policies of Gartner and CEB that, when conformed, could have an impact on the unaudited pro forma condensed consolidated financial statements.

 

2. Estimate of Consideration Expected to be Transferred

 

The following is a preliminary estimate of consideration expected to be transferred to effect the acquisition of CEB:

 

   Conversion   Estimated  
   Calculation   Fair Value  
   (in thousands, except per  
   share amounts)  
CEB outstanding stock at December 31, 2016  $32,241,825         
CEB unvested stock awards to vest prior to and related to the Merger   322,401         
Total CEB Shares   32,564,226         
Exchange ratio   0.2284         
Gartner common stock to be issued   7,437,669         
Per share price of Gartner common stock as of March 1, 2017  $104.20         
Estimated fair value of Gartner common stock to be issued       $ 775,005  
Cash to be paid ($54.00 per share multiplied by 32,564,226 CEB shares)         1,758,468  
Cash paid on behalf of CEB to terminate existing CEB credit facility and notes         902,216  
Fair value of CEB replacement options attributable to the precombination period         7,747  
Estimated purchase price consideration       $ 3,443,436  

 

The estimated consideration expected to be transferred reflected in these unaudited pro forma condensed consolidated financial statements does not purport to represent what the actual consideration transferred will be when the Merger is consummated. In accordance with ASC Topic 805, the fair value of equity securities issued as part of the consideration transferred will be

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measured on the closing date of the Merger at the then-current market price. This requirement will likely result in a per share equity component different from the $104.20 closing price of Gartner common stock on March 1, 2017 that is assumed in these unaudited pro forma condensed consolidated financial statements, and that difference may be material. An increase or decrease by as much as 10% in the Gartner common stock price on the closing date of the Merger from the common stock price assumed in these unaudited pro forma condensed consolidated financial statements is reasonably possible based upon the recent history of Gartner’s common stock price. A change in the estimated fair value of Gartner’s share price of 10% would increase or decrease the consideration paid by $77.5 million, with a corresponding increase or decrease in the goodwill recorded in connection with the Merger.

 

3. Estimate of Assets to be Acquired and Liabilities to be Assumed

 

The following is a summary of Gartner management’s preliminary estimate of the fair values of the assets to be acquired and the liabilities to be assumed by Gartner in the Merger, reconciled to the estimate of consideration expected to be transferred:

 

   Pro Forma
   As of
   December 31,
   2016
   (in thousands)
Book value of assets acquired as of December 31, 2016    $(174,930)
Add: CEB Senior Secured Credit Facility and Notes, net     874,553 
Adjusted net book value of assets acquired as of December 31, 2016    $699,623 
Fair value adjustments:       
Increase identifiable intangible assets to fair value    $953,633 
Reduce fees receivable     (45,469)
Eliminate deferred rent assets     (22,134)
Reduce deferred revenues, current     226,352 
Reduce deferred revenues, non-current     1,041 
Increase deferred tax liability     (403,008)
Eliminate lease incentive liabilities     35,522 
Eliminate deferred rent liabilities     38,078 
Eliminate deferred commissions     (25,737)
Goodwill     1,985,535 
Total net assets acquired    $3,443,436 

 

The preliminary valuation of assets acquired and liabilities assumed performed for the purposes of these unaudited pro forma condensed consolidated financial statements was primarily limited to the identification, valuation and adjustment of intangible assets, fees receivable, deferred rent assets, deferred revenues, deferred taxes, lease incentives, deferred rent liabilities and deferred commissions. Gartner believes this was an appropriate approach based on a review of similar market place acquisitions, which appeared to indicate that the most significant and material portion of the purchase price would be allocated to identifiable intangible assets. Gartner will continue to refine its identification and valuation of assets to be acquired and the liabilities to be assumed as further information becomes available.

 

4. Adjustments to Unaudited Pro Forma Condensed Consolidated Balance Sheet:

 

(A) The following reclassifications have been made in the presentation of the CEB historical consolidated financial statements to conform to Gartner’s presentation:

 

·$3.7 million of net deferred income taxes reclassified to other assets
   
·$62.8 million of accrued incentive compensation reclassified to accounts payable and accrued liabilities
   
·$13.4 million of net deferred income taxes reclassified to other liabilities
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(B) Fees Receivable—To reflect the reduction of $45.5 million to align CEB’s accounting policy with Gartner’s policy for unbilled fees receivable, as described in Note 1.

 

(C) Deferred commissions—To record the difference between the historical book value and preliminary estimated fair values of CEB deferred commissions. CEB deferred commissions were fully written down as part of the preliminary valuation of the assets acquired and liabilities assumed by Gartner, see Note 3. No corresponding adjustments have been recorded in the unaudited pro forma condensed consolidated statement of operations as the impact is not expected to be recurring.

 

(D) Goodwill—To eliminate CEB’s historical goodwill and record the preliminary estimate of goodwill for the acquisition of CEB.

 

   Pro Forma
   As of
   December 31,
   2016
   (in thousands)
Estimated transaction goodwill    $2,550,571 
Eliminate CEB’s historical goodwill as of December 31, 2016     (565,036)
Total    $1,985,535 

 

(E) Intangible assets—To record the difference between the historical amounts of CEB net intangible assets and preliminary fair values of CEB intangible assets acquired. These estimated fair values and useful lives are considered preliminary and are subject to change at the closing date of the transaction. Accordingly, the estimates related to deferred taxes are also subject to change. Changes in fair value or estimated useful lives of the acquired intangible assets may be material. Determination of the estimated remaining useful lives of the individual categories of intangible assets was based on the nature of the applicable intangible asset and the expected future cash flows to be derived from the intangible asset. The acquired finite-lived intangible assets are being amortized over the estimated useful life in proportion to the economic benefits consumed using the straight-line method. Reflects adjustments to the following:

 

   Estimated                  
   Average  Estimated  Net Book      
   Useful  Fair Value  Value      
   Lives  December 31,  December 31,  Pro Forma
   (years)  2016  2016  Adjustment (BS)
   (in thousands, except years) 
Trade names  5    $76,949     $     $76,949 
Technology  4     179,769      15,855      163,914 
Customer relationships  6     754,757      123,570      631,187 
Other intangibles  3     126,342      44,759      81,583 
Total       $1,137,817     $184,184     $953,633 

 

(F) Other assets—To record adjustments to write-off assets determined to have no fair value in purchase accounting. CEB deferred rent assets were fully written down as part of the preliminary valuation of the assets and liabilities assumed by Gartner, see Note 3.

 

(G) Deferred revenues—To record the difference between the historical book value and preliminary estimated fair values of CEB deferred revenue. No corresponding adjustments have been recorded in the unaudited pro forma condensed consolidated statement of operations as the impact is not expected to be recurring, see Note 3.

 

The adjustment also includes a reduction of $45.5 million to align CEB’s accounting policy to Gartner’s accounting policy for unbilled fees receivable, as described in Note 1.

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(H) Historical CEB debt—To eliminate $874.6 million of principal, net of debt issuance costs, related to CEB’s Senior Secured Credit Facility and the notes that will be extinguished at, or near, the Merger closing date.

 

   Pro Forma
   As of
   December 31,
   2016
   (in thousands)
Elimination of the historical debt of CEB—current    $7,872 
Elimination of the historical debt of CEB—long term     866,681 
Historical CEB debt to be extinguished    $874,553 

 

(I) New issuance of long-term debt—To reflect adjustments to total debt for anticipated borrowings to fund the Merger. Additional debt used to finance the Merger is expected to be as follows:

 

   Pro Forma
   As of
   December 31,
   2016
   (in thousands)
Revolver    $285,819 
Incremental Term Loan A Facility     900,000 
Term Loan B Facility     500,000 
364-day Bridge Facility     300,000 
Notes offered hereby     800,000 
Anticipated debt financing    $2,785,819 
Less: Debt issuance costs     (45,475)
Less: Original issuance discounts     (12,625)
Anticipated debt financing, net     2,727,719 
Current portion of new debt financing     49,250 
Long-term portion of new debt financing    $2,678,469 

 

For the purposes of the unaudited pro forma condensed consolidated financial information, it has been assumed that the 364-day Bridge Credit Facility will be outstanding for all periods and the related pro forma interest has been reflected in the unaudited pro forma condensed consolidated statement of operations. Gartner has not made decisions as regards to the ultimate repayment or refinancing of the 364-day Bridge Credit Facility but it has several options, to include long-term financing, use of operating cash or the repatriation of overseas cash assuming favorable tax legislation.

 

(J) Other liabilities—To record adjustments to write-off liabilities determined to have no fair value in purchase accounting. CEB deferred rent benefit and lease incentive liabilities were fully written down as part of the preliminary valuation of the assets and liabilities assumed by Gartner, see Note 3.

 

(K) Deferred tax liabilities—To record adjustments to deferred income taxes resulting from fair value adjustments for the identifiable intangible assets as well as liabilities assumed and other acquisition accounting adjustments. This estimate was determined based on the estimated excess book basis over the tax basis of the identifiable assets acquired and liabilities assumed at a 35.0% statutory federal income tax rate.

 

The Merger may result in changes to Gartner’s tax rate used to determine its deferred income taxes due to changes in apportionment factors related to state income taxes among other reasons. Any changes in Gartner’s deferred taxes as a result of the Merger will be reflected in income tax expense as of the closing date. An adjustment has not been reflected in the pro forma financial statements since the amount is not recurring and subject to changes based on operating or structural decisions made by management subsequent to the Merger.

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   Pro Forma
   As of
   December 31,
   2016
   (in thousands)
Adjustments to deferred tax liabilities:       
Establish deferred tax liability for the increase in the book-tax basis difference of acquired intangible assets    $333,771 
Decrease deferred tax liability related to the write-off of deferred commissions     (9,008)
Decrease deferred tax liability related to the write-off of deferred rent assets     (7,747)
Increase deferred tax liability related to the write-down of deferred revenues     63,674 
Increase deferred tax liability related to the write-off of deferred rent liability     13,327 
Increase deferred tax liability related to the write-off of lease incentives     12,433 
Decrease deferred tax liability related to the elimination of CEB goodwill in purchase accounting     (3,442)
Pro forma adjustment to deferred tax liabilities    $403,008 

 

(L) Equity—To eliminate CEB historical stockholders’ deficit and to record the issuance of treasury stock by Gartner of 7,437,669 shares at an estimated stock price of $104.20 per share.

 

Under purchase accounting, the fair value of replacement awards attributable to pre-Merger services are included in the consideration transferred increasing the amount of excess goodwill by $7.7 million with a corresponding increase to additional paid in capital.

 

Acquisition-related transaction costs are not included as a component of consideration transferred but are accounted for as expenses in the periods in which the costs are incurred. Total acquisition-related transaction costs (excluding costs related to the additional financing and to the refinancing of existing CEB indebtedness) are estimated to be approximately $67.0 million, which are reflected within the unaudited pro forma condensed consolidated balance sheet as a reduction to accumulated earnings.

 

5. Adjustments to Unaudited Pro Forma Condensed Consolidated Statement of Operations:

 

(A) The following reclassifications have been made in the presentation of the CEB historical consolidated financial statements to conform to Gartner’s presentation:

 

·$276.5 million of member relations and marketing expense reclassified to selling, general and administrative expense for the year ended December 31, 2016.
   
·$24.0 million of business transformation costs reclassified to selling, general and administrative expense for the year ended December 31, 2016.
   
·$1.1 million of restructuring costs reclassified to selling, general and administrative expense for the year ended December 31, 2016.
   
·$1.7 million of debt modification costs reclassified to interest expense for the year ended December 31, 2016.

 

(B) Finite-lived intangible asset amortization—To eliminate historical amortization expense related to CEB’s existing finite-lived intangible assets and to reflect amortization of acquired intangible assets to be acquired as a result of the Merger based on the preliminary estimated fair values and useful lives. The amounts allocated to intangibles, and the estimated useful lives, are preliminary estimates performed for the preparation of the pro forma financial information and are subject to the final valuations that will be completed after consummation of the Merger. These differences, if any, could have a material impact on the accompanying unaudited pro forma

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condensed consolidated statement of operations. For estimated intangible asset values and the estimated associated useful lives, see footnote (E) in Note 4.

 

   Pro Forma
   Year Ended
   December 31,
   2016
   (in thousands)
Eliminate CEB historical amortization    $(68,498)
Pro forma amortization     228,239 
Pro forma amortization adjustment    $159,741 

 

(C) Acquisition and integration charges—To eliminate costs related directly to the transaction of approximately $4.0 million, including estimated investment banking, legal and accounting fees, and other external costs directly related to the Merger. These costs have been recorded in the historical statements of operations and are eliminated for the pro forma statement of operations as they are non-recurring.

 

(D) Interest expense—To eliminate historical interest expense related to the CEB term loan that will be extinguished at, or near, the date of the Merger and to reflect the new interest expense and amortization of deferred financing fees associated with the anticipated debt financing to partially finance the acquisition.

 

   Pro Forma
   Year Ended
   December 31,
   2016
   (in thousands)
Eliminate CEB historical interest expense    $(29,681)
Pro forma interest expense and amortization of deferred financing fees adjustment     120,613 
Pro forma interest expense adjustment    $90,932 

 

A sensitivity analysis on incremental interest expense related to the debt assumed for purposes of financing the transaction for the year ended December 31, 2016 has been performed to assess the effects that a change of 0.125% of the hypothetical assumed interest rate would have on the debt financing. The weighted average interest for the incremental debt assumed for purposes of financing the transaction is 3.74%.

 

The following table shows the impact to pro forma interest expense from a 0.125% increase or decrease in the assumed interest rate change:

 

   Pro Forma
   Year Ended
   December 31,
   2016
   (in thousands)
Change in incremental interest expense assuming       
Increase of 0.125%    $3,357 
Decrease of 0.125%    $(3,357)

 

(E) Income tax expense—This represents the tax effect of adjustments to income before income taxes at the statutory U.S. federal income tax rate of 35.0%. However, the effective tax rate of the combined company could be significantly different (either higher or lower) depending on post-acquisition activities. This adjustment also includes a $1.0 million adjustment for the accounting policy alignment to reflect as if CEB had early adopted ASU 2016-09 for the year ended December 31, 2016, see Note 1.

 

(F) The unaudited pro forma condensed consolidated basic and diluted income per share calculations are based on the combined basic and diluted weighted-average shares, after giving effect to the exchange ratio. The historical basic and diluted weighted average shares of CEB are

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assumed to be replaced by the shares expected to be issued by Gartner to affect the merger as follows:

 

   Pro Forma
   Year Ended
   December 31,
   2016
   (in thousands, except
   per share data)
Historical Gartner weighted average shares outstanding (basic)    $82,571 
Gartner shares issued as consideration     7,438 
Pro forma weighted average shares outstanding (basic)     90,009 
Pro forma net loss    $(2,390)
Pro forma weighted average shares outstanding (basic)     90,009 
Pro forma net loss per share (basic & diluted)    $(0.03)

 

Diluted pro forma net loss per share is the same as basic pro forma net loss per share for the year ended December 31, 2016 because the effects of potentially dilutive items were anti-dilutive given the pro forma net loss. Approximately 1.2 million shares have been excluded from the calculation of diluted net loss per share attributable to common stockholders because they are anti-dilutive.

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