What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-10 compared with 2020-11-09 · 41 added, 103 removed, 175 unchanged (45% of the section changed)

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III) is a leading global technology research and advisory firm.

A trusted business partner to approximately 700 clients, including more than 75 of the top 100 enterprises in our markets, ISG is committed to helping corporations, public sector organizations, and service and technology providers achieve operational excellence and faster growth.

A trusted business partner to over 700 clients, including more than 75 of the top 100 enterprises in our markets, ISG is committed to helping corporations, public sector organizations, and service and technology providers achieve operational excellence and faster growth.

The firm specializes in digital transformation services, including automation, cloud and data analytics;

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These offerings are characterized by subscriptions (i.e., renewal centric as opposed to project centric revenue streams) or, in some instances, multi-year contracts.

Our digital services now span a volume of offerings and have

become embedded as part of even our traditional transaction services.

Our digital services now span a volume of offerings and have become embedded as part of even our traditional transaction services.

Digital enablement provides capabilities, digital insights and better engagement with clients and partners.

Our results are impacted principally by our full time consultants’ utilization rate, the number of business days in each quarter and the number of our revenue-generating professionals who are available to work.

Our utilization rate can be negatively affected by increased hiring because there is generally a transition period for new professionals that results in a temporary drop in our utilization rate.

Our utilization rate can be negatively affected by increased hiring because there is generally a transition period for new professionals that result in a temporary drop in our utilization rate.

Our utilization rate can also be affected by seasonal variations in the demand for our services from our clients.

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The volume of work performed for any particular client can vary widely from period to period.

CURRENT ENVIRONMENT

On March 11, 2020, the World Health Organization categorized the novel coronavirus (COVID-19) as a pandemic, and COVID-19 has spread throughout the United States and the rest of the world with different geographical locations impacted more than others.

The outbreak of COVID-19 and public and private sector measures to reduce its transmission, such as the imposition of social distancing and orders to work-from-home, stay-at-home and shelter-in-place, have, to some degree, adversely impacted our business and demand for our services.

Businesses have adjusted, reduced or suspended operating activities, which has negatively impacted the markets and some of the clients we serve.

We continue to believe our focus on our strategic strengths, including technology expertise, digital transformation, data management capabilities, and the relevance of our service offerings will continue to serve our Firm well as we navigate a rapidly changing marketplace.

Notwithstanding our market position, the effects of the COVID-19 pandemic will negatively impact our results of operations, cash flows and financial position;

however, the extent of the impact will vary depending on the duration and severity of the economic and operational impacts of COVID-19.

We have taken steps to protect the safety of our employees, with a large majority of our worldwide workforce now working from home, while developing creative ideas to protect the health and well-being of our communities and setting up our people to help them do their best work for our clients while working remotely.

With respect to managing costs, we have multiple initiatives underway to align our expenses with changes in revenue.

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 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.

As discussed in more detail below under “Liquidity and Capital Resources,” on March 10, 2020, we refinanced our credit facility and expanded our borrowing capacity under our revolving credit agreement, and extended the maturity date, lowered the interest rate, and secured less restrictive debt covenants.

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 SEPTEMBER 30, 2020 AND SEPTEMBER 30, 2019

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND MARCH 31, 2020

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.

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Geographical revenue information for the segment is as follows:

Three Months Ended September 30,

Three Months Ended March 31,

Geographic Area

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Total revenues

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.

The increase in revenues in Asia Pacific was primarily attributable to the increase in our Advisory service line.

Revenues increased $2.9 million, or approximately 4%, for the first quarter of 2021.

The increase in revenues in the Americas and Asia Pacific was primarily attributable to an increase in our Advisory service line.

The increase in revenues in Europe was primarily attributable to the increase in our Research service line.

Revenues also declined by $1.5 million due to lower travel and expense reimbursement resulting from pandemic related travel restrictions.

The translation of foreign currency revenues into U.S.

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

Three Months Ended September 30,

Three Months Ended March 31,

Operating Expenses

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Total operating expenses

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.

Total operating expenses decreased $2.9 million, or approximately 4%, for the first quarter of 2021 with a decrease in 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 $5.4 million and partially offset by higher compensation costs of $2.4 million.

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

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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.

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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 third quarter of 2020 and 2019 was $1.6 million and $1.7 million, respectively.

Depreciation and amortization expense in the first quarter of 2021 and 2020 was $1.4 million and $1.5 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.

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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, 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 September 30,

Three Months Ended March 31,

Other income (expense), Net

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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 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:

Nine Months Ended September 30,

Geographic Area

(in thousands)

Total revenues

Revenues decreased $17.5 million, or approximately 9%, in 2020 to date.

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.

The increase in revenues in Asia Pacific was primarily attributable to the increase in our Advisory service lines.

The translation of foreign currency revenues into U.S.

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:

Nine Months Ended September 30,

Operating Expenses

(in thousands)

Direct costs and expenses for advisors

Selling, general and administrative

Depreciation and amortization

Total operating expenses

Total operating expenses decreased $15.0 million, or approximately 8%, in 2020 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 $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.

Other Income (Expense), Net

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

Nine Months Ended September 30,

Other income (expense), Net

(in thousands)

Interest income

Interest expense

Foreign currency gain (loss)

Total other income (expense), net

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 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.

Our effective tax rate for the quarter ended March 31, 2021 was 22.7% compared to 27.2% for the quarter ended March 31, 2020.

The difference for the quarter ended March 31, 2021 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 March 31, 2021 was lower than the statutory rate primarily due to the impact of vesting of restricted stock units.

There were no significant changes in uncertain tax position reserves or valuation allowances during the quarter ended March 31, 2021.

NON-GAAP FINANCIAL PRESENTATION

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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, 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.

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 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.

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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,

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

(in thousands)

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Severance, integration and other expense

Tax indemnity receivable

Financing-related costs

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Adjusted EBITDA

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended

(in thousands)

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Adjusted net income

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended

Net income per diluted share

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_________________________________

(1) Marginal tax rate of 32% applied.

(1) Consists of expenses from acquisition-related costs and non-cash fair value adjustments on pre-acquisition contract liabilities.

(2) Marginal tax rate of 32%, reflecting U.S.

federal income tax rate of 21% plus 11% attributable to U.S.

states and foreign jurisdictions.

LIQUIDITY AND CAPITAL RESOURCES

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

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:

As of March 31, 2021, our cash, cash equivalents and restricted cash were $48.7 million, a net increase of $4.8 million from December 31, 2020, which was primarily attributable to the following:

● net cash provided by operating activities of $12.1 million;

● treasury shares repurchases of $3.0 million;

● payments related to tax withholding for stock-based compensation of $1.9 million;

● principal payments on borrowings of $1.1 million.

● equity repurchases of $5.1 million;

● Neuralify acquisition of $2.3 million;

● debt financing costs of $0.9 million.

Capital Resources

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● Mandatory repayments of term loans shall be required from (subject to agreed exceptions) (i) 100% of the proceeds from asset sales by the Company and its subsidiaries, (ii) 100% of the net proceeds from issuances of debt and equity by the Company and its subsidiaries and (iii) 100% of the net proceeds from insurance recovery and condemnation events of the Company and its subsidiaries.

(including guarantee obligations), liens, fundamental changes, sales or disposition of property or assets, investments (including loans, advances, guarantees and acquisitions), transactions with affiliates, dividends and other payments in respect of capital stock, optional payments and modifications of other material debt instruments, negative pledges and agreements restricting subsidiary distributions and changes in line of business.

● The senior secured credit facility contains a number of covenants that, among other things, place restrictions on matters customarily restricted in senior secured credit facilities, including restrictions on indebtedness (including guarantee obligations), liens, fundamental changes, sales or disposition of property or assets,

investments (including loans, advances, guarantees and acquisitions), transactions with affiliates, dividends and other payments in respect of capital stock, optional payments and modifications of other material debt instruments, negative pledges and agreements restricting subsidiary distributions and changes in line of business.

In addition, the Company is required to comply with a total leverage ratio and fixed charge coverage ratio.

● 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 $79.9 million at September 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 $77.7 million at March 31, 2021 and $78.8 million at December 31, 2020, 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 $78.8 million and $86.7 million at September 30, 2020 and December 31, 2019, respectively.

The fair value of the Company's outstanding borrowings is approximately $76.7 million and $77.7 million at March 31, 2021 and December 31, 2020, 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 is 2.48%.

The incremental borrowing rate used to discount future cash flows 2.44%.

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 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.

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We may not be able to obtain financing arrangements in amounts or on terms acceptable to us in the future.

The Company has financial covenants underlying its debt which require an adjusted EBITDA to Debt ratio of 3.25.

The Company has financial covenants underlying its debt which require a Debt to adjusted EBITDA ratio of 3.25.

In light of the pandemic, there is uncertainty regarding the marketplace demand for the Company’s services and thus the Company’s future revenue generation.

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generally accepted accounting principles.

As such, we are required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during

the periods presented.

We base our estimates on historical experience, available information and various other assumptions we believe to be reasonable under the circumstances.

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however, actual results may differ from these estimates under different assumptions or conditions.

There have been no material changes or developments in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies and Estimates as disclosed in our Annual Report on Form 10-K, for the year ended December 31, 2019.

There have been no material changes or developments in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we

believe to be Critical Accounting Policies and Estimates as disclosed in our Annual Report on Form 10-K, for the year ended December 31, 2020.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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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