forr-10q_20180930.htm

 

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 September 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

COMMISSION FILE NUMBER: 000-21433

 

FORRESTER RESEARCH, INC.

(Exact name of registrant as specified in its charter)

 

 

DELAWARE

 

04-2797789

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

 

 

60 Acorn Park Drive

CAMBRIDGE, MASSACHUSETTS

 

02140

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (617) 613-6000

 

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 of this chapter) 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 checkmark 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 November 2, 2018 18,264,000 shares of the registrant’s common stock were outstanding.

 

 

 


 

FORRESTER RESEARCH, INC.

INDEX TO FORM 10-Q

 

 

  

PAGE

 

PART I. FINANCIAL INFORMATION

  

3

 

ITEM 1. Financial Statements (Unaudited)

  

3

 

Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

  

3

 

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2018 and 2017

  

4

 

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017

  

5

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

  

6

 

Notes to Consolidated Financial Statements

  

7

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

24

 

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

  

34

 

ITEM 4. Controls and Procedures

  

34

 

PART II. OTHER INFORMATION

  

35

 

ITEM 1A. Risk Factors

  

35

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

35

 

ITEM 6. Exhibits

  

36

 

  

 

 

 

 

 

 

2


 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FORRESTER RESEARCH, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data, unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

92,057

 

 

$

79,790

 

Marketable investments (Note 4)

 

 

52,395

 

 

 

54,333

 

Accounts receivable, net

 

 

38,552

 

 

 

70,023

 

Deferred commissions

 

 

10,884

 

 

 

13,731

 

Prepaid expenses and other current assets

 

 

13,292

 

 

 

18,942

 

Total current assets

 

 

207,180

 

 

 

236,819

 

Property and equipment, net

 

 

22,403

 

 

 

25,249

 

Goodwill

 

 

85,126

 

 

 

76,169

 

Intangible assets, net

 

 

5,368

 

 

 

732

 

Other assets

 

 

8,417

 

 

 

6,231

 

Total assets

 

$

328,494

 

 

$

345,200

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

512

 

 

$

217

 

Accrued expenses and other current liabilities

 

 

41,364

 

 

 

49,629

 

Deferred revenue

 

 

128,435

 

 

 

145,207

 

Total current liabilities

 

 

170,311

 

 

 

195,053

 

Non-current liabilities

 

 

11,353

 

 

 

8,958

 

Total liabilities

 

 

181,664

 

 

 

204,011

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity (Note 9):

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value

 

 

 

 

 

 

 

 

Authorized - 500 shares; issued and outstanding - none

 

 

 

 

 

 

Common stock, $0.01 par value

 

 

 

 

 

 

 

 

Authorized - 125,000 shares

 

 

 

 

 

 

 

 

Issued - 22,893 and 22,432 shares as of September 30, 2018 and December 31, 2017, respectively

 

 

 

 

 

 

 

 

Outstanding - 18,262 and 18,041 shares as of September 30, 2018 and December 31, 2017, respectively

 

 

229

 

 

 

224

 

Additional paid-in capital

 

 

196,803

 

 

 

181,910

 

Retained earnings

 

 

126,006

 

 

 

123,010

 

Treasury stock - 4,631 and 4,391 shares as of September 30, 2018 and December 31, 2017, respectively, at cost

 

 

(171,889

)

 

 

(161,943

)

Accumulated other comprehensive loss

 

 

(4,319

)

 

 

(2,012

)

Total stockholders’ equity

 

 

146,830

 

 

 

141,189

 

Total liabilities and stockholders’ equity

 

$

328,494

 

 

$

345,200

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

3


 

FORRESTER RESEARCH, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data, unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research services

 

$

56,332

 

 

$

54,235

 

 

$

166,332

 

 

$

160,553

 

Advisory services and events

 

 

28,558

 

 

 

26,134

 

 

 

92,660

 

 

 

86,743

 

Total revenues

 

 

84,890

 

 

 

80,369

 

 

 

258,992

 

 

 

247,296

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services and fulfillment

 

 

34,361

 

 

 

32,508

 

 

 

107,537

 

 

 

100,814

 

Selling and marketing

 

 

31,051

 

 

 

29,225

 

 

 

96,771

 

 

 

90,355

 

General and administrative

 

 

11,192

 

 

 

10,083

 

 

 

32,871

 

 

 

30,672

 

Depreciation

 

 

1,965

 

 

 

1,607

 

 

 

6,056

 

 

 

4,775

 

Amortization of intangible assets

 

 

402

 

 

 

197

 

 

 

770

 

 

 

582

 

Acquisition and integration costs

 

 

977

 

 

 

 

 

 

1,306

 

 

 

 

Total operating expenses

 

 

79,948

 

 

 

73,620

 

 

 

245,311

 

 

 

227,198

 

Income from operations

 

 

4,942

 

 

 

6,749

 

 

 

13,681

 

 

 

20,098

 

Other income, net

 

 

319

 

 

 

146

 

 

 

472

 

 

 

248

 

Losses on investments, net

 

 

(17

)

 

 

(772

)

 

 

(62

)

 

 

(997

)

Income before income taxes

 

 

5,244

 

 

 

6,123

 

 

 

14,091

 

 

 

19,349

 

Income tax expense

 

 

1,294

 

 

 

2,170

 

 

 

4,086

 

 

 

6,302

 

Net income

 

$

3,950

 

 

$

3,953

 

 

$

10,005

 

 

$

13,047

 

Basic income per common share

 

$

0.22

 

 

$

0.22

 

 

$

0.55

 

 

$

0.73

 

Diluted income per common share

 

$

0.21

 

 

$

0.22

 

 

$

0.55

 

 

$

0.72

 

Basic weighted average common shares outstanding

 

 

18,088

 

 

 

17,747

 

 

 

18,030

 

 

 

17,897

 

Diluted weighted average common shares outstanding

 

 

18,433

 

 

 

18,051

 

 

 

18,353

 

 

 

18,212

 

Cash dividends declared per common share

 

$

0.20

 

 

$

0.19

 

 

$

0.60

 

 

$

0.57

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

4


 

FORRESTER RESEARCH, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

$

3,950

 

 

$

3,953

 

 

$

10,005

 

 

$

13,047

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

(602

)

 

 

1,601

 

 

 

(2,293

)

 

 

4,905

 

Net change in market value of investments

 

65

 

 

 

23

 

 

 

12

 

 

 

47

 

Other comprehensive income (loss)

 

(537

)

 

 

1,624

 

 

 

(2,281

)

 

 

4,952

 

Comprehensive income

$

3,413

 

 

$

5,577

 

 

$

7,724

 

 

$

17,999

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

5


 

FORRESTER RESEARCH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

 

 

Nine Months Ended

 

 

September 30,

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

10,005

 

 

$

13,047

 

Adjustments to reconcile net income to net cash provided by operating

   activities:

 

 

 

 

 

 

 

Depreciation

 

6,056

 

 

 

4,775

 

Amortization of intangible assets

 

770

 

 

 

582

 

Net losses from investments

 

62

 

 

 

997

 

Deferred income taxes

 

(1,305

)

 

 

(921

)

Stock-based compensation

 

6,191

 

 

 

6,423

 

Amortization of premium (discount) on investments

 

(17

)

 

 

171

 

Foreign currency losses

 

462

 

 

 

444

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

Accounts receivable

 

31,857

 

 

 

20,140

 

Deferred commissions

 

3,716

 

 

 

2,906

 

Prepaid expenses and other current assets

 

(68

)

 

 

(979

)

Accounts payable

 

19

 

 

 

(1,208

)

Accrued expenses and other liabilities

 

(12,111

)

 

 

(6,041

)

Deferred revenue

 

(8,205

)

 

 

(3,473

)

Net cash provided by operating activities

 

37,432

 

 

 

36,863

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Acquisitions, net of cash acquired

 

(9,250

)

 

 

 

Purchases of property and equipment

 

(3,161

)

 

 

(5,806

)

Purchases of marketable investments

 

(31,831

)

 

 

(27,430

)

Proceeds from sales and maturities of marketable investments

 

33,802

 

 

 

34,458

 

Other investing activity

 

 

 

 

200

 

Net cash provided by (used in) investing activities

 

(10,440

)

 

 

1,422

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Dividends paid on common stock

 

(10,839

)

 

 

(10,205

)

Repurchases of common stock

 

(9,946

)

 

 

(39,967

)

Proceeds from issuance of common stock under employee equity

   incentive plans

 

11,217

 

 

 

13,866

 

Taxes paid related to net share settlements of stock-based compensation awards

 

(2,509

)

 

 

(2,511

)

Net cash used in financing activities

 

(12,077

)

 

 

(38,817

)

Effect of exchange rate changes on cash and cash equivalents

 

(2,648

)

 

 

3,534

 

Net increase in cash and cash equivalents

 

12,267

 

 

 

3,002

 

Cash and cash equivalents, beginning of period

 

79,790

 

 

 

76,958

 

Cash and cash equivalents, end of period

$

92,057

 

 

$

79,960

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for income taxes

$

3,263

 

 

$

7,662

 

 

Non-cash investing activities for the nine months ended September 30, 2018 include $5.3 million of consideration payable as a result of the acquisition of FeedbackNow. This amount includes $3.0 million of contingent consideration, $1.5 million for an indemnity holdback and $0.8 million for the working capital adjustment. Refer to Note 2 – Acquisitions for further information on these amounts.

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6


 

FORRESTER RESEARCH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1 — Interim Consolidated Financial Statements

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. It is recommended that these financial statements be read in conjunction with the consolidated financial statements and related notes that appear in the Forrester Research, Inc. (“Forrester”) Annual Report on Form 10-K for the year ended December 31, 2017. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the financial position, results of operations, comprehensive income and cash flows as of the dates and for the periods presented have been included. The results of operations for the three and nine months ended September 30, 2018 may not be indicative of the results for the year ending December 31, 2018, or any other period.

 

Out of Period Adjustment

During the quarter ended June 30, 2018, the Company recorded $1.0 million of revenue ($0.7 million after tax) for an out-of-period correction within research services in the Consolidated Statements of Income. The error resulted from an understatement of revenue from the reprint product line of $0.8 million ($0.5 million after tax) during the three months ended March 31, 2018 and $0.2 million ($0.1 million after tax) from the year ended December 31, 2017. The Company has concluded that the error was not material to all prior period financial statements.

Fair Value Measurements

The carrying amounts reflected in the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value due to their short-term maturities. See Note 2 – Acquisitions – for the fair value of a contingent consideration arrangement. See Note 4 – Marketable Investments - for the fair value of the Company’s marketable investments.

 

 

Adoption of New Accounting Pronouncements

 

The Company adopted the guidance in Accounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, on January 1, 2018. The new standard clarifies certain aspects of the statement of cash flows, including contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and distributions received from equity method investees, among others. The adoption of this standard did not have a material impact on the Company’s statements of cash flows.

 

The Company adopted the guidance in ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, on January 1, 2018. The new standard requires restricted cash to be included with cash and cash equivalents when reconciling the beginning and ending amounts on the statement of cash flows. The adoption of this standard did not have an impact on the Company’s statements of cash flows.

 

The Company elected to adopt the guidance in ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, on January 1, 2018. The new standard allows but does not require, a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Act”) enacted on December 22, 2017. The Company elected to make the reclassification adjustment as of the beginning of the period of adoption in the amount of $26,000 using the aggregate portfolio approach. The reclassification amount includes the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts at the date of enactment of the Act related to items remaining in accumulated other comprehensive income.

 

 

7


 

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers, and has since issued several additional amendments thereto (collectively known as ASC 606).  ASC 606 supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. ASC 606 also includes subtopic ASC 340-40, Other Assets and Deferred Costs-Contracts with Customers, which provides guidance on accounting for certain revenue related costs including costs associated with obtaining and fulfilling a contract.

 

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method. Under this method, the reported results for 2018 reflect the application of ASC 606, while the reported results for 2017 were prepared under the guidance of ASC 605, Revenue Recognition, which is referred to herein as the “previous guidance”. The modified retrospective method requires the cumulative effect of applying the new guidance to all contracts with customers that were not completed as of January 1, 2018 to be recorded as an adjustment to retained earnings as of the adoption date. Forrester considered a contract to be complete if all the revenue was recognized in accordance with the previous guidance that was in effect before the adoption date.

 

The effect of adopting ASC 606 included a $7.8 million reduction in deferred revenue, primarily related to prepaid performance obligations that are expected to expire in 2018 and 2019 that would have been recognized in 2017 under the new guidance; a decrease of $5.5 million in prepaid expenses and other current assets related to deferred survey costs that would have been expensed as incurred in 2017 under the new guidance and the current tax impact of the cumulative effect; an increase of $0.9 million in deferred commissions related to the capitalization of fringe benefits as incremental costs to obtain customer contracts under the new guidance; and an increase of $0.6 million in other assets for the deferred tax effect of the cumulative effect. Retained earnings increased by $3.8 million as a net result of these adjustments.

 

Refer to Note 6, Revenue and Contract Costs, for additional disclosures and a discussion of the Company's updated policies related to revenue recognition, related balance sheet accounts, and accounting for costs to obtain and fulfill a customer contract.

 

The following tables summarize the effect of adopting ASC 606 on the Company’s financial statements during and as of the three and nine months ended September 30, 2018 (in thousands):

 

Consolidated Balance Sheet

 

 

 

 

 

 

 

 

As of September 30, 2018

 

 

 

 

 

 

Amounts as

 

 

 

 

 

 

if Previous

 

 

 

 

 

 

Guidance in

 

 

As Reported

 

 

Effect

 

Accounts receivable, net

$

38,552

 

 

$

41,837

 

Deferred commissions

 

10,884

 

 

 

10,284

 

Prepaid expenses and other current assets

 

13,292

 

 

 

17,966

 

Total current assets

 

207,180

 

 

 

214,539

 

Other assets

 

8,417

 

 

 

7,855

 

Total assets

 

328,494

 

 

 

335,291

 

 

 

 

 

 

 

 

 

Deferred revenue

$

128,435

 

 

$

138,060

 

Total current liabilities

 

170,311

 

 

 

179,936

 

Total liabilities

 

181,664

 

 

 

191,289

 

Retained earnings

 

126,006

 

 

 

123,178

 

Total stockholders’ equity

 

146,830

 

 

 

144,002

 

Total liabilities and stockholders’ equity

 

328,494

 

 

 

335,291

 

 

Total assets were $6.8 million less than if the previous guidance remained in effect, largely due to the following changes required by the adoption of ASC 606:

 

 

Accounts receivable, net was lower due to the Company excluding invoices issued on cancellable contracts in excess of revenue recognized.

 

Deferred commissions was higher due to the capitalization of fringe benefits costs.

 

Prepaid expenses and other current assets were lower due to expensing survey costs as incurred and the current period tax effect of the adjustments.

 

 

8


 

Deferred revenue was $9.6 million less due to the accelerated recognition of revenue for estimated unexercised rights, which would have been deferred under the previous guidance until the right expired, and the exclusion of invoices issued on cancellable contracts in excess of revenue recognized.

 

Consolidated Statement of Income

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

 

 

 

 

Amounts as

 

 

 

 

 

 

if Previous

 

 

 

 

 

 

Guidance in

 

 

As Reported

 

 

Effect

 

Revenues:

 

 

 

 

 

 

 

Research services

$

56,332

 

 

$

55,719

 

Advisory services and events

 

28,558

 

 

 

28,287

 

Total revenues

 

84,890

 

 

 

84,006

 

Operating expenses:

 

 

 

 

 

 

 

Cost of services and fulfillment

 

34,361

 

 

 

34,838

 

Selling and marketing

 

31,051

 

 

 

30,871

 

Total operating expenses

 

79,948

 

 

 

80,245

 

Income from operations

 

4,942

 

 

 

3,761

 

Income before income taxes

 

5,244

 

 

 

4,063

 

Income tax provision

 

1,294

 

 

 

927

 

Net income

 

3,950

 

 

 

3,136

 

Basic income per common share

$

0.22

 

 

$

0.17

 

Diluted income per common share

$

0.21

 

 

$

0.17

 

 

 

Consolidated Statement of Income

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

Amounts as

 

 

 

 

 

 

if Previous

 

 

 

 

 

 

Guidance in

 

 

As Reported

 

 

Effect

 

Revenues:

 

 

 

 

 

 

 

Research services

$

166,332

 

 

$

167,429

 

Advisory services and events

 

92,660

 

 

 

93,051

 

Total revenues

 

258,992

 

 

 

260,480

 

Operating expenses:

 

 

 

 

 

 

 

Cost of services and fulfillment

 

107,537

 

 

 

107,841

 

Selling and marketing

 

96,771

 

 

 

96,502

 

Total operating expenses

 

245,311

 

 

 

245,346

 

Income from operations

 

13,681

 

 

 

15,134

 

Income before income taxes

 

14,091

 

 

 

15,544

 

Income tax provision

 

4,086

 

 

 

4,564

 

Net income

 

10,005

 

 

 

10,980

 

Basic income per common share

$

0.55

 

 

$

0.61

 

Diluted income per common share

$

0.55

 

 

$

0.60

 

 

 

The $0.9 million increase and $1.5 million reduction to total revenues for three and nine months ended September 30, 2018, respectively, is related to ASC 606’s requirement to recognize revenue for estimated future unexercised customer rights rather than recognize unexercised rights when they occur. The Company currently expects this change to primarily affect the timing of revenue within the quarters of 2018 but does not expect it to have a material effect on the Company’s results of operations for the full year of 2018. The net impact, including the tax effect, of accounting for revenue and costs to obtain and fulfill customer contracts under the new guidance increased net income and diluted net income per share for the three months ended September 30, 2018 by $0.8 million and $0.04, respectively. For the nine months ended September 30, 2018, the net impact of the new guidance decreased net income and diluted net income per share by $1.0 million and $0.05, respectively.

 

9


 

 

 

Consolidated Statement of Comprehensive Income

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

 

 

 

 

Amounts as

 

 

 

 

 

 

if Previous

 

 

 

 

 

 

Guidance in

 

 

As Reported

 

 

Effect

 

Net income

$

3,950

 

 

$

3,136

 

Comprehensive income

 

3,413

 

 

 

2,599

 

 

Consolidated Statement of Comprehensive Income

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

Amounts as

 

 

 

 

 

 

if Previous

 

 

 

 

 

 

Guidance in

 

 

As Reported

 

 

Effect

 

Net income

$

10,005

 

 

$

10,980

 

Comprehensive income

 

7,724

 

 

 

8,698

 

 

Consolidated Statement of Cash Flows

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

Amounts as

 

 

 

 

 

 

if Previous

 

 

 

 

 

 

Guidance in

 

 

As Reported

 

 

Effect

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

10,005

 

 

$

10,980

 

Accounts receivable

 

31,857

 

 

 

28,572

 

Deferred commissions

 

3,716

 

 

 

3,447

 

Prepaid expenses and other current assets

 

(68

)

 

 

714

 

Deferred revenue

 

(8,205

)

 

 

(6,408

)

 

The impact to comprehensive income and cash flows from operating activities are driven by the consolidated balance sheet and income statement changes previously discussed.

 

Note 2 — Acquisitions

 

The Company accounts for business combinations in accordance with the acquisition method of accounting as prescribed by ASC 805, Business Combinations. The acquisition method of accounting requires the Company to record the assets and liabilities acquired based on their estimated fair values as of the acquisition date, with any excess of the consideration transferred over the estimated fair value of the net assets acquired, including identifiable intangible assets, to be recorded to goodwill.

 

GlimpzIt

 

On June 22, 2018, Forrester acquired substantially all of the assets of SocialGlimpz Inc. (“GlimpzIt”), an artificial intelligence and machine-learning provider based in San Francisco. The acquisition is part of Forrester's plan to build a real-time customer experience or CX cloud solution, integrating a range of inputs to help companies monitor and improve customer experience. Forrester intends to deploy the GlimpzIt technology to extend the analytics engine in Forrester’s planned real-time CX cloud. The acquisition of GlimpzIt was determined to be an acquisition of a business under the provisions of ASC 805. The total purchase price was approximately $1.3 million, which was paid in cash on the acquisition date, and has been preliminarily allocated as $0.7 million of goodwill and $0.6 million of an intangible asset representing technology, which is being amortized over its estimated useful life of five years. The acquired working capital was insignificant. Forrester may also be required to pay an additional $0.3 million in cash contingent on the achievement of certain employment conditions by key employees, which is being recognized as compensation expense over the related service period of two years. Goodwill has been allocated to the Product segment and is expected to be deductible for income tax purposes. Goodwill is attributable to the acquired workforce as well as future synergies. The results of GlimpzIt operations were not material to our consolidated results of operations, and accordingly, no pro forma financial information has been presented.

 

10


 

 

FeedbackNow

 

On July 6, 2018, Forrester acquired 100% of the shares of S.NOW SA, a Switzerland-based business that operates as FeedbackNow. FeedbackNow is a maker of physical buttons and monitoring software that companies deploy to measure, analyze, and improve customer experience. The acquisition is part of Forrester's plan to build a real-time CX cloud solution. FeedbackNow provides a high-volume input source for the real-time CX cloud solution. The acquisition of FeedbackNow was determined to be an acquisition of a business under the provisions of ASC 805. The Company paid $8.4 million on the closing date. An additional $1.5 million is payable during a two-year period from the closing date and is subject to typical indemnity provisions from the seller. The Company is also required to pay additional purchase price based on the acquired working capital of $0.8 million and the sellers may earn up to $4.2 million based on the financial performance of FeedbackNow during the two-year period following the closing date.

 

 

Total Consideration Transferred

 

The following table summarizes the fair value of the aggregate consideration paid or payable for FeedbackNow (in thousands):

 

 

 

 

 

Cash paid at close (1)

$

8,425

 

Working capital adjustment (2)

 

798

 

Indemnity holdback (3)

 

1,485

 

Contingent purchase price (4)

 

3,015

 

Total

$

13,723

 

 

 

(1)

The cash paid at close represents the gross contractual amount paid. Net cash paid, which accounts for the cash acquired of $0.5 million, was $8.0 million and is reflected as an investing activity in the Consolidated Statements of Cash Flows.

 

(2)

Amount represents the provisional amount payable to the sellers based upon working capital as defined. This amount is subject to adjustment and the Company expects to pay the working capital adjustment by the end of 2018.

 

(3)

Approximately $0.5 million and $1.0 million of the holdback is expected to be paid during 2019 and 2020, respectively.

 

(4)

The acquisition of FeedbackNow includes a contingent consideration arrangement that requires additional consideration to be paid to the sellers based on the financial performance of FeedbackNow during the two-year period subsequent to the closing date.  Up to $1.7 million and $2.5 million could be payable during 2019 and 2020, respectively, if the financial targets are met. The range of undiscounted amounts that could be payable under this arrangement is zero to $4.2 million. The fair value of the contingent consideration recognized on the acquisition date, which represents purchase price, is $3.0 million. The fair value was estimated by applying a simulation valuation approach. That measure is based on significant Level 3 inputs not observable in the market. Key assumptions include projected financial results and the discount rate used. As of September 30, 2018, the change in the recognized amounts for the contingent consideration was immaterial and there was no change to the range of outcomes.

 

 

Preliminary Allocation of Purchase Price

 

The following table summarizes the preliminary allocation of the purchase price to the fair value of the assets acquired and liabilities assumed for the acquisition of FeedbackNow (in thousands):

 

 

11


 

 

 

 

 

 

Assets:

 

 

 

 

Cash

 

$

463

 

Accounts receivable

 

 

846

 

Prepaids and other current assets

 

 

465

 

Goodwill (1)

 

 

9,087

 

Acquired intangible assets (2)

 

 

4,780

 

Other assets

 

 

75

 

Total assets

 

 

15,716

 

Liabilities:

 

 

 

 

Accounts payable and accrued liabilities

 

 

908

 

Contract liabilities

 

 

260

 

Deferred tax liability

 

 

825

 

Total liabilities

 

 

1,993

 

Net assets acquired

 

$

13,723

 

 

(1) Goodwill represents the expected synergies from combining FeedbackNow with Forrester as well as the value of the acquired workforce.

(2) All of the acquired intangible assets are finite-lived. The determination of the fair value of the finite-lived intangible assets required management judgment and the consideration of a number of factors. In determining the fair values, management primarily relied on income valuation methodologies, in particular discounted cash flow models. The use of discounted cash flow models required the use of estimates, including projected cash flows related to the particular asset; the useful lives of the particular assets; the selection of royalty and discount rates used in the models; and certain published industry benchmark data. In establishing the estimated useful lives of the acquired intangible assets, the Company relied primarily on the duration of the cash flows utilized in the valuation model. Of the $4.8 million assigned to acquired intangible assets, $3.0 million was assigned to the technology asset class with a useful of 6.5 years, $1.3 million to customer relationships with a useful life of 4.5 years, and $0.5 million to trade names with a useful life of 8.5 years. Amortization of acquired intangible assets was $0.2 million for both the three and nine months ended September 30, 2018.

 

The allocation of the purchase price for FeedbackNow is preliminary with respect to the valuation of acquired intangible assets, contingent purchase price, working capital and goodwill. The Company expects to obtain the remainder of the information to complete the allocation of purchase price by the end of 2018.

 

The Company's financial statements include the operating results of FeedbackNow beginning on July 6, 2018, the date of acquisition. FeedbackNow's operating results and the related goodwill are being reported as part of the Company's Product segment. The goodwill is not deductible for income tax purposes. The acquisition of FeedbackNow added approximately $0.5 million and $1.1 million of revenue and direct expenses, respectively, in the three months ended September 30, 2018. The results of FeedbackNow operations were not material to our consolidated results of operations for prior periods, and accordingly, no prior period pro forma information has been presented.

 

In the nine months ended September 30, 2018, goodwill increased by $9.0 million with $9.8 million of the increase attributable to the acquisitions of GlimpzIt and FeedbackNow and a $0.8 million decrease due to foreign currency fluctuations.

 

The Company recognized $0.1 million and $0.4 million of acquisition costs in the three and nine months ended September 30, 2018, respectively. The costs primarily consisted of legal fees and accounting and tax professional fees.

 

Note 3 — Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Net Unrealized

 

 

Cumulative

 

 

Accumulated

 

 

 

Loss on Marketable

 

 

Translation

 

 

Other Comprehensive

 

 

 

Investments

 

 

Adjustment

 

 

Loss

 

Balance at January 1, 2018

 

$

(115

)

 

$

(1,897

)

 

$

(2,012

)

Reclassification of stranded tax effects from tax reform

 

 

(26

)

 

 

 

 

 

(26

)

Foreign currency translation

 

 

 

 

 

(2,293

)

 

 

(2,293

)

Unrealized gain on investments, net of tax of $4

 

 

12

 

 

 

 

 

 

12

 

Balance at September 30, 2018

 

$

(129

)

 

$

(4,190

)

 

$

(4,319

)

 

12


 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Net Unrealized

 

 

Cumulative

 

 

Accumulated

 

 

 

Loss on Marketable

 

 

Translation

 

 

Other Comprehensive

 

 

 

Investments

 

 

Adjustment

 

 

Loss

 

Balance at January 1, 2017

 

$

(83

)

 

$

(7,490

)

 

$

(7,573

)

Foreign currency translation

 

 

 

 

 

4,905

 

 

 

4,905

 

Unrealized gain on investments, net of tax of $29

 

 

47

 

 

 

 

 

 

47

 

Balance at September 30, 2017

 

$

(36

)

 

$

(2,585

)

 

$

(2,621

)

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Net Unrealized

 

 

Cumulative

 

 

Accumulated

 

 

 

Loss on Marketable

 

 

Translation

 

 

Other Comprehensive

 

 

 

Investments

 

 

Adjustment

 

 

Loss

 

Balance at July 1, 2018

 

$

(194

)

 

$

(3,588

)

 

$

(3,782

)

Foreign currency translation

 

 

 

 

 

(602

)

 

 

(602

)

Unrealized gain on investments, net of tax of $21

 

 

65

 

 

 

 

 

 

65

 

Balance at September 30, 2018

 

$

(129

)

 

$

(4,190

)

 

$

(4,319

)

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Net Unrealized

 

 

Cumulative

 

 

Accumulated

 

 

 

Loss on Marketable

 

 

Translation

 

 

Other Comprehensive

 

 

 

Investments

 

 

Adjustment

 

 

Loss

 

Balance at July 1, 2017

 

$

(59

)

 

$

(4,186

)

 

$

(4,245

)

Foreign currency translation

 

 

 

 

 

1,601

 

 

 

1,601

 

Unrealized gain on investments, net of tax of $14