What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-09 compared with 2020-08-10 · 58 added, 61 removed, 220 unchanged (35% of the section changed)

6 unchanged sentences

As a result, these statements are subject to various risks and uncertainties.

For a discussion of material risks and uncertainties that the Company faces, see the discussion in our 2019 Annual Report on Form 10-K titled “Risk Factors” and in this Quarterly Report on Form 10-Q under Item 1A.

“Risk Factors.”

BUSINESS OVERVIEW

44 unchanged sentences

In addition, we remain committed to and have intensified our efforts around cash flow discipline, including the identification of significant capital expenditures that can be deferred and working capital management.

We began to see the effects of COVID-19 on client spending towards the end of the first quarter, and we experienced a greater impact on our second quarter results as clients responded to the current economic conditions by reducing or deferring their consultant spending, which will affect the demand or timing of our services.

There are also expected to be impacts of COVID-19 on client spending in the third and fourth quarters of 2020.

We began to see the effects of COVID-19 on client spending towards the end of the first quarter, and we experienced a greater impact on our second and third quarter results as clients responded to the current economic conditions by reducing or deferring their consultant spending, which will affect the demand or timing of our services.

There are also expected to be impacts of COVID-19 on client spending in the fourth quarter of 2020.

Even prior to the COVID-19 pandemic, we have taken steps to strengthen our financial position, which will serve us well during this period of heightened uncertainty.

1 unchanged sentence

We believe these steps will enhance our financial resources as we navigate this uncertain period ahead, including minimizing the risk of debt covenant violations, and maintaining our ability to continue as a going concern.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2020 AND JUNE 30, 2019

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND SEPTEMBER 30, 2019

Revenues are generally derived from fixed fee contracts as well as engagements priced on a time and materials basis, which are recorded based on actual time worked as the services are performed.

In addition, we also earn revenues which are contingent on the attainment of certain contractual milestones.

Revenues related to materials (mainly out‑of‑pocket expenses such as airfare, lodging and meals) required during an engagement generally do not include a profit mark up and

can be charged and reimbursed separately or as part of the overall fee arrangement.

Revenues related to materials (mainly out‑of‑pocket

expenses such as airfare, lodging and meals) required during an engagement generally do not include a profit mark up and can be charged and reimbursed separately or as part of the overall fee arrangement.

Invoices are issued to clients monthly, semimonthly or in accordance with the specific contractual terms of each project.

3 unchanged sentences

Geographical revenue information for the segment is as follows:

Three Months Ended June 30,

Three Months Ended September 30,

Geographic Area

1 unchanged sentence

Total revenues

Revenues decreased $9.9 million, or approximately 15%, for the three months ended in the second quarter.

Revenues decreased $6.5 million, or approximately 10%, for the three months ended in the third quarter.

The decrease in revenues in the Americas and Europe was primarily attributable to a decline in our Advisory service line, primarily related to the COVID-19 pandemic.

1 unchanged sentence

The translation of foreign currency revenues into U.S.

dollars negatively impacted performance in Europe and Asia Pacific compared to the prior year.

dollars positively impacted performance in Europe and Asia Pacific compared to the prior year.

Operating Expenses

The following table presents a breakdown of our operating expenses by category:

Three Months Ended June 30,

Three Months Ended September 30,

Operating Expenses

4 unchanged sentences

Total operating expenses

Total operating expenses decreased $10.2 million, or approximately 16%, for the three months ended in the second quarter with a decrease in direct costs and expenses for advisors, selling, general and administrative (“SG&A”) expenses, and depreciation and amortization.

The decrease in operating expenses were primarily due to lower:

travel and entertainment of $5.9 million, compensation costs of $1.1 million, and contract labor of $0.8 million.

These cost decreases were partially offset by higher bad debt expense of $0.6 million, primarily as a result of the impact of the COVID-19 pandemic on certain of our clients.

Total operating expenses decreased $3.8 million, or approximately 6%, for the three months ended in the third quarter with a decrease in direct costs and expenses for advisors, selling, general and administrative (“SG&A”) expenses, and depreciation and amortization.

The decrease in operating expenses were primarily due to lower travel and entertainment of $4.3 million.

Compensation costs consist of a mix of fixed and variable salaries, annual bonuses, benefits and profit sharing plan contributions.

4 unchanged sentences

Sales and marketing costs consist principally of compensation expense related to business development, proposal preparation and delivery and negotiation of new client contracts.

Costs also include travel expenses relating to the pursuit

of sales opportunities, expenses for hosting periodic client conferences, public relations activities, participation in industry conferences, industry relations, website maintenance and business intelligence activities.

Costs also include travel expenses relating to the pursuit of sales opportunities, expenses for hosting periodic client conferences, public relations activities, participation in industry

conferences, industry relations, website maintenance and business intelligence activities.

The Company maintains a dedicated global marketing function responsible for developing and managing sales campaigns, brand promotion, the ISG Index and assembling proposals.

5 unchanged sentences

Because our billable personnel operate primarily on client premises or work remotely, all occupancy expenses are recorded as general and administrative.

Depreciation and amortization expense in the second quarter of 2020 and 2019 was $1.5 million and $1.7 million, respectively.

Depreciation and amortization expense in the third quarter of 2020 and 2019 was $1.6 million and $1.7 million, respectively.

The decrease of $0.1 million in depreciation and amortization expense was primarily due to prior year intangible assets that are now fully amortized.

6 unchanged sentences

Goodwill related to acquisitions is not amortized, but is subject to annual impairment testing and interim impairment tests, if triggering events are identified.

No interim impairment testing triggering events were identified during the first or second quarter of 2020 or 2019, inclusive of our consideration of the impact of COVID-19 on our business.

No interim impairment testing triggering events were identified during the first, second, or third quarter of 2020 or 2019, inclusive of our consideration of the impact of COVID-19 on our business.

Other Income (Expense), Net

The following table presents a breakdown of other (expense), net:

Three Months Ended June 30,

Three Months Ended September 30,

Other income (expense), Net

(in thousands)

1 unchanged sentence

Interest expense

Foreign currency loss

Total other expense, net

Foreign currency (loss) gain

Total other income (expense), net

The total decrease of $0.9 million was primarily the result of lower interest expense attributable to our lower debt balance and lower interest rates.

1 unchanged sentence

Our quarterly effective tax rate varies from period to period based on the mix of earnings among the various state and foreign tax jurisdictions in which business is conducted and the level of non-deductible expenses projected to be incurred during the current fiscal year.

Our effective tax rate for the quarter ended June 30, 2020 was 77.0% compared to 76.4% for the quarter ended June 30, 2019.

The difference for the quarter ended June 30, 2020 was primarily due to the impact of earnings and losses in certain foreign jurisdictions and the impact of vesting of restricted stock units.

The Company’s effective tax rate for the quarter ended June 30, 2019 was greater than the statutory rate primarily due to the impact of projected earnings in foreign jurisdictions and non-deductible expenses.

There were no significant changes in uncertain tax position reserves or valuation allowances during the quarter ended June 30, 2020.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2020 AND JUNE 30, 2019

Our effective tax rate for the quarter ended September 30, 2020 was 9.9% compared to 57.8% for the quarter ended September 30, 2019.

The difference for the quarter ended September 30, 2020 was primarily due to the impact of earnings and losses in certain foreign jurisdictions, the impact of a tax law in a foreign jurisdiction, and the impact of vesting of restricted stock units.

The Company’s effective tax rate for the quarter ended September 30, 2020 was lower than the statutory rate primarily due to the impact of earnings in foreign jurisdictions, including reduction of foreign unremitted earnings tax accruals related to tax law change in India impacting the company’s hypothetical

dividend withholding tax liability.

There were no significant changes in uncertain tax position reserves or valuation allowances during the quarter ended September 30, 2020.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND SEPTEMBER 30, 2019

Geographical revenue information for the segment is as follows:

Six Months Ended June 30,

Nine Months Ended September 30,

Geographic Area

5 unchanged sentences

The translation of foreign currency revenues into U.S.

dollars negatively impacted performance in Europe and Asia Pacific compared to the prior year.

dollars positively impacted performance in Europe and Asia Pacific compared to the prior year.

Operating Expenses

The following table presents a breakdown of our operating expenses by category:

Six Months Ended June 30,

Nine Months Ended September 30,

Operating Expenses

6 unchanged sentences

The decrease in operating expenses were primarily due to lower:

travel and entertainment of $6.6 million, compensation costs of $1.1 million, conference expense of $0.7 million, marketing expense of $0.6 million, and contract labor of $0.5 million.

These cost decreases were partially offset by higher bad debt expenses of $0.4 million, primarily as a result of the impact of the COVID-19 pandemic on certain of our clients.

Depreciation and amortization expense in the second quarter of 2020 and 2019 was $3.1 million and $3.4 million, respectively.

travel and entertainment of $10.9 million, contract labor of $1.7 million, marketing expense of $0.9 million, conference expense of $0.9 million, and non-cash stock compensation of $0.6 million.

Depreciation and amortization expense in 2020 and 2019 were $4.6 million and $5.0 million, respectively.

The decrease of $0.4 million in depreciation and amortization expense was primarily due to prior year intangible assets that are now fully amortized.

1 unchanged sentence

The following table presents a breakdown of other (expense), net:

Six Months Ended June 30,

Nine Months Ended September 30,

Other income (expense), Net

2 unchanged sentences

Interest expense

Foreign currency (loss) gain

Foreign currency gain (loss)

Total other income (expense), net

The total decrease of $1.1 million was primarily the result of lower interest expense of $1.0 million attributable to our lower debt balance and lower interest rates, partially offset by an increase in interest expense associated with the write-off of deferred financing costs, and an increase of $0.1 million of foreign currency gain.

The total decrease of $2.0 million was primarily the result of lower interest expense of $1.9 million attributable to our lower debt balance and lower interest rates, partially offset by an increase in interest expense associated with the write-off of deferred financing costs.

Income Tax Expense

Our effective tax rate for the six months ended June 30, 2020 was 193.6% compared to 2.0% for the six months ended June 30, 2019.

The difference was primarily due to the impact of vesting of restricted stock units for the six months ended June 30, 2020 and due to the impact of earnings and losses in certain foreign jurisdictions and the release of $0.7 million of accruals for uncertain tax positions due to the expiration of statute limitations in a foreign jurisdiction for the six months ended June 30, 2019.

Our effective tax rate for the nine months ended September 30, 2020 was 57.6% compared to 65.5% for the nine months ended September 30, 2019.

The difference was primarily due to the impact of vesting of restricted stock units for the nine months ended September 30, 2020 and due to the impact of earnings and losses in certain foreign jurisdictions, the impact of a tax law in a foreign jurisdiction, and the release of $0.7 million of accruals for uncertain tax positions due to the expiration of statute limitations in a foreign jurisdiction for the nine months ended September 30, 2019.

NON-GAAP FINANCIAL PRESENTATION

4 unchanged sentences

We use non-GAAP financial measures to supplement the financial information presented on a GAAP basis.

We provide adjusted EBITDA (defined as net income, plus interest, taxes, depreciation and amortization, foreign currency transaction gains/losses, non-cash stock compensation, change in contingent consideration, acquisition-related costs, severance, integration and other expense, and financing-related costs), adjusted net income (defined as net income, plus amortization of intangible assets, non-cash stock compensation, foreign currency transaction gains/losses, change in contingent consideration, acquisition-related costs, severance, integration and other expense, financing-related costs, and write-off of deferred financing costs on a tax-adjusted basis) and adjusted net income as earnings per diluted share, excluding the net of tax effect of the items set forth in the table below.

We provide adjusted EBITDA (defined as net income, plus interest, taxes, depreciation and amortization, foreign currency transaction gains/losses, non-cash stock compensation, change in contingent consideration, acquisition-related costs, severance, integration and other expense, tax indemnity receivable, and financing-related costs), adjusted net income (defined as net income, plus amortization of intangible assets, non-cash stock compensation, foreign currency transaction gains/losses, change in contingent consideration, acquisition-related costs, severance, integration and other expense, financing-related costs, and write-off of deferred financing costs on a tax-adjusted basis) and adjusted net income as earnings per diluted share, excluding the net of tax effect of the items set forth in the table below.

These are non-GAAP measures that the Company believes provide useful information to both management and investors by excluding certain expenses and financial implications of foreign currency translations that management believes are not indicative of ISG’s core operations.

These non-GAAP measures are used by the Company to evaluate the Company’s business strategies and management’s performance.

These non-GAAP financial measures exclude non-cash and certain other special charges that many investors

believe may obscure the user’s overall understanding of the Company’s current financial performance and the Company’s prospects for the future.

We believe that these non-GAAP measures provide useful information to investors because they improve the comparability of the financial results between periods and provide for greater transparency of key measures used to evaluate the Company’s performance.

Three Months Ended June 30,

Six Months Ended June 30,

These non-GAAP financial measures exclude non-cash and certain other special charges that many investors believe may obscure the user’s overall understanding of the Company’s current financial performance and the Company’s prospects for the future.

We believe that these non-GAAP measures provide useful information to investors

because they improve the comparability of the financial results between periods and provide for greater transparency of key measures used to evaluate the Company’s performance.

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

Net income (loss)

Interest expense (net of interest income)

3 unchanged sentences

Severance, integration and other expense

Tax indemnity receivable

Financing-related costs

Foreign currency transaction (gain) loss

Foreign currency transaction loss (gain)

Non-cash stock compensation

Adjusted EBITDA

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

Net income (loss)

Non-cash stock compensation

5 unchanged sentences

Write-off of deferred financing costs

Foreign currency transaction (gain) loss

Foreign currency transaction loss (gain)

Tax effect (1)

Adjusted net income

Three Months Ended June 30,

Six Months Ended June 30,

Net income (loss) per diluted share

Three Months Ended September 30,

Nine Months Ended September 30,

Net income per diluted share

Non-cash stock compensation

5 unchanged sentences

Write-off of deferred financing costs

Foreign currency transaction (gain) loss

Foreign currency transaction loss (gain)

Tax effect (1)

6 unchanged sentences

The volume of billings and timing of collections and payments affect these account balances.

As of June 30, 2020, our cash, cash equivalents and restricted cash were $31.6 million, a net increase of $13.4 million from December 31, 2019, which was primarily attributable to the following:

As of September 30, 2020, our cash, cash equivalents and restricted cash were $38.2 million, a net increase of $20.0 million from December 31, 2019, which was primarily attributable to the following:

● net cash provided by operating activities of $37.3 million;

1 unchanged sentence

● equity repurchases of $5.1 million;

● Neuralify acquisition of $2.3 million;

● debt financing costs of $0.9 million.

● negative effects of exchange rate changes of $0.1 million.

Capital Resources

12 unchanged sentences

● The senior secured credit facility contains customary events of default, including cross-default to other material agreements, judgment default and change of control.

The Company’s financial statements include outstanding borrowings of $80.9 million at June 30, 2020 and $86.9 million at December 31, 2019, which are carried at amortized cost.

The Company’s financial statements include outstanding borrowings of $79.9 million at September 30, 2020 and $86.9 million at December 31, 2019, which are carried at amortized cost.

The fair value of debt is classified within Level 3 of the fair value hierarchy.

The fair value of the Company's outstanding borrowings is approximately $79.9 million and $86.7 million at June 30, 2020 and December 31, 2019, respectively.

The fair value of the Company's outstanding borrowings is approximately $78.8 million and $86.7 million at September 30, 2020 and December 31, 2019, respectively.

The fair values of debt have been estimated using a discounted cash flow analysis based on the Company's incremental borrowing rate for similar borrowing arrangements.

The incremental borrowing rate used to discount future cash flows ranged from 2.41% to 2.55%.

The incremental borrowing rate used to discount future cash flows is 2.48%.

The Company also considered recent transactions of peer group companies for similar instruments with comparable terms and maturities as well as an analysis of current market conditions.

As of June 30, 2020, the total principal outstanding under the term loan facility and revolving credit facility was $80.9 million and $0.0 million, respectively.

The effective interest rate for the term loan facility and revolving credit facility as of June 30, 2020 was 2.55% and 2.41%, respectively.

As of September 30, 2020, the total principal outstanding under the term loan facility and revolving credit facility was $79.9 million and $0.0 million, respectively.

The effective interest rate for the term loan facility and revolving credit facility as of September 30, 2020 was 2.48% and 2.40%, respectively.

We anticipate that our current cash and the ongoing cash flows from our operations will be adequate to meet our working capital, capital expenditure, and debt financing needs for at least the next twelve months.

23 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis