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Interim Consolidated Financial Statements | 9 Months Ended
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Sep. 30, 2018
Accounting Policies [Abstract] |
Interim Consolidated Financial Statements | 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. 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.
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.
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.

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