What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-09 compared with 2021-05-10 · 116 added, 32 removed, 184 unchanged (45% of the section changed)

42 unchanged sentences

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

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

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2021 AND JUNE 30, 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.

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Geographical revenue information for the segment is as follows:

Three Months Ended March 31,

Three Months Ended June 30,

Geographic Area

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Total revenues

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.

Revenues increased $13.2 million, or approximately 23%, for the second quarter of 2021.

The increase in revenue in the Americas and Europe was primarily attributable to an increase in our Advisory and Research service lines.

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

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 March 31,

Three Months Ended June 30,

Operating Expenses

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Total operating expenses

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.

Total operating expenses increased $10.9 million, or approximately 20%, for the second quarter of 2021.

The increase in operating expenses were primarily due to higher compensation costs of $7.3 million and contract labor of $3.9 million.

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

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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 first quarter of 2021 and 2020 was $1.4 million and $1.5 million, respectively.

Depreciation and amortization expense in the second quarter of 2021 and 2020 was $1.3 million and $1.5 million, respectively.

The decrease of $0.3 million in depreciation and amortization expense was primarily due to prior year intangible assets that are now fully amortized.

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Other Income (Expense), Net

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

Three Months Ended March 31,

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

Three Months Ended June 30,

Other income (expense), net

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Interest expense

Foreign currency gain (loss)

Total other income (expense), net

The total decrease of $0.3 million, or approximately 36%, was primarily the result of lower interest expense attributable to our lower debt balance and lower interest rates.

Income Tax Expense

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 three months ended June 30, 2021 was 22.5% compared to 77.0% for the quarter ended June 30, 2020.

The difference for the quarter ended June 30, 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 June 30, 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 June 30, 2021.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2021 AND JUNE 30, 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.

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

We operate in one segment, fact‑based sourcing advisory services.

We operate principally in the Americas, Europe, and Asia Pacific.

Our foreign operations are subject to local government regulations and to the uncertainties of the economic and political conditions of those areas, and the revenue for our foreign operations is predominantly invoiced and collected in local currency.

Geographical revenue information for the segment is as follows:

Six Months Ended June 30,

Geographic Area

(in thousands)

Total revenues

Revenues increased $16.1 million, or approximately 13%, for the six months 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 Advisory and Research 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:

Six Months Ended June 30,

Operating Expenses

(in thousands)

Direct costs and expenses for advisors

Selling, general and administrative

Depreciation and amortization

Total operating expenses

Total operating expenses increased $8.0 million, or approximately 7%, for the six months of 2021 with an increase in direct costs and expenses for advisors.

The increase in operating expenses were primarily due to higher:

compensation costs of $9.5 million and contract labor of $5.4 million.

These costs were partially offset by lower:

travel and entertainment expenses of $4.9 million, bad debt expense of $0.8 million, and non-cash stock based compensation of $0.8 million.

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

A portion of compensation expenses for certain billable employees are allocated between direct costs and selling, general and administrative costs based on relative time spent between billable and non-billable activities.

Bonus compensation is determined based on achievement against Company financial and individual targets, and is accrued monthly throughout the year based on management’s estimates of target achievement.

Statutory and elective profit sharing plans are offered to employees as appropriate.

Direct costs also include employee taxes, health insurance, workers compensation and disability insurance.

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.

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

We maintain a comprehensive program for training and professional development.

Related expenses include product training, updates on new service offerings or methodologies and development of project management skills.

Also included in training and professional development are expenses associated with the development, enhancement and maintenance of our proprietary methodologies and tools and the systems that support them.

General and administrative expenses consist principally of executive management compensation, allocations of billable employee compensation related to general management activities, IT infrastructure, and costs for the finance, accounting, information technology and human resource functions.

General and administrative costs also reflect continued investment associated with implementing and operating client and employee management systems.

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 six months of 2021 and 2020 was $2.6 million and $3.1 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.

Our fixed assets consist of furniture, fixtures, equipment (mainly personal computers) and leasehold improvements.

Depreciation expense is generally computed by applying the straight-line method over the estimated useful lives of assets.

We also capitalize certain costs associated with the purchase and development of

internal-use software, system conversions and website development costs.

These costs are amortized over the estimated useful life of the software or system.

We amortize our intangible assets (e.g.

client relationships and databases) over their estimated useful lives.

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

Other Income (Expense), Net

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

Six Months Ended June 30,

Other income (expense), net

(in thousands)

Interest income

Interest expense

Foreign currency (loss) gain

Total other income (expense), net

The total decrease of $0.6 million was primarily the result of lower interest expense attributable to our lower debt balance and lower interest rates.

The total decrease of $0.9 million, or approximately 43%, was primarily the result of lower interest expense attributable to our lower debt balance and lower interest rates.

Income Tax Expense

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.

Our effective tax rate for the six months ended June 30, 2021 was 22.6% compared to 193.6% for the six months ended June 30, 2020.

The difference for the six months ended June 30, 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 six months ended June 30, 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 June 30, 2021.

NON-GAAP FINANCIAL PRESENTATION

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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 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

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

Net income (loss)

Interest expense (net of interest income)

4 unchanged sentences

Financing-related costs

Foreign currency transaction loss (gain)

Foreign currency transaction (gain) loss

Non-cash stock compensation

Adjusted EBITDA

Three Months Ended

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

Net income (loss)

Non-cash stock compensation

5 unchanged sentences

Write-off of deferred financing costs

Foreign currency transaction loss (gain)

Foreign currency transaction (gain) loss

Tax effect (2)

Adjusted net income

Three Months Ended

Net income per diluted share

Three Months Ended June 30,

Six Months Ended June 30,

Net income (loss) per diluted share

Non-cash stock compensation

5 unchanged sentences

Write-off of deferred financing costs

Foreign currency transaction loss (gain)

Foreign currency transaction (gain) loss

Tax effect (2)

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

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:

As of June 30, 2021, our cash, cash equivalents and restricted cash were $43.9 million, a net increase of $0.1 million from December 31, 2020, which was primarily attributable to the following:

● net cash provided by operating activities of $20.9 million;

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● principal payments on borrowings of $2.2 million;

● cash dividends paid to shareholders of $1.5 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.

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 $77.7 million at March 31, 2021 and $78.8 million at December 31, 2020, which are carried at amortized cost.

The Company’s financial statements include outstanding borrowings of $76.6 million at June 30, 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 $76.7 million and $77.7 million at March 31, 2021 and December 31, 2020, respectively.

The fair value of the Company's outstanding borrowings is approximately $75.8 million and $77.7 million at June 30, 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.

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Accordingly, in light of this uncertainty, the Company has developed plans to further reduce operating expenses to the extent more prolonged revenue shortfalls are experienced which would prevent the Company from complying with its financial covenants.

The Company is currently in compliance with its financial covenants.

Dividend Program

In May 2021, the Company announced it will pay a second-quarter dividend of $0.03 per share of common stock.

The Company expects to pay a total cash dividend of $0.12 per share over the four quarters ending March 2022.

On August 5, 2021, the Board of Directors approved the third-quarter dividend of $0.03 per share.

The dividends are accounted for as a decrease to Stockholders’ Equity.

All future dividends will be subject to Board approval.

Off-Balance Sheet Arrangements

10 unchanged sentences

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, 2020.

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

1 unchanged sentence

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