What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-08 compared with 2022-05-10 · 105 added, 35 removed, 175 unchanged (44% of the section changed)

43 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, 2022 AND MARCH 31, 2021

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2022 AND JUNE 30, 2021

Geographical revenue information for the segment is as follows:

Years Ended March 31,

Three Months Ended June 30,

Geographic Area

1 unchanged sentence

Total revenues

Revenues increased $6.0 million, or approximately 9%, for the first quarter of 2022.

The increase in revenue in the Americas was primarily attributable to an increase in our Advisory, Network & Software Advisory Services (NaSa), Research, and GovernX service lines, partially offset by a decrease in our Automation service line.

The increase in revenue in Europe was primarily attributable to an increase in our Advisory and Automation service lines, partially offset by a decrease in our NaSa service line.

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

Revenues increased $0.1 million for the second quarter of 2022.

The decrease in revenue in the Americas was primarily attributable to a decrease in our Automation service line, partially offset by an increase in our Advisory, Research, and GovernX service lines.

The decrease in revenue in Europe was primarily attributable to a decrease in our Advisory and Network & Software Advisory Services (NaSa) service lines, partially offset by an increase in our Automation and Research service lines.

The increase in revenue in Asia Pacific was primarily attributable to an increase in our Advisory and NaSa service lines, partially offset by a decrease in our Research service line.

The translation of foreign currency revenues into U.S.

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

dollars negatively impacted performance in Europe and Asia Pacific compared to the prior year by $3.5 million.

Operating Expenses

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

Years Ended March 31,

Three Months Ended June 30,

Operating Expenses

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Total operating expenses

Total operating expenses increased $3.3 million, or approximately 5%, for the first quarter of 2022.

Total operating expenses decreased $1.2 million, or approximately 2%, for the second quarter of 2022.

The decrease in operating expenses were primarily due to lower;

contract labor of $1.7 million, compensation costs of $1.0 million, and severance, integration and other expense of $0.8 million.

These costs were partially offset by higher:

entertainment expense of $1.0 million, event related expenses of $0.5 million, non-cash stock compensation of $0.5 million, and professional fees of $0.3 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 second quarter of 2022 and 2021 was $1.3 million, respectively.

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:

Three Months Ended June 30,

Other income (expense), net

(in thousands)

Interest income

Interest expense

Foreign currency transaction gain

Total other income (expense), net

The total decrease of $0.1 million, or approximately 13%, was primarily the result of higher foreign currency transaction gains.

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 quarter ended June 30, 2022 was 25.7% compared to 22.5% for the quarter ended June 30, 2021.

The difference for the quarter ended June 30, 2022 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, 2022 was higher than the statutory rate primarily due to the impact of foreign operations.

There were no significant changes in uncertain tax position reserves or valuation allowances during the quarter ended June 30, 2022.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND JUNE 30, 2021

Geographical revenue information for the segment is as follows:

Six Months Ended June 30,

Geographic Area

(in thousands)

Total revenues

Revenues increased $6.1 million, or approximately 4%, for the six months of 2022.

The increase in revenue in the Americas was primarily attributable to an increase in our Research, and GovernX service lines, partially offset by a decrease in our Automation service line.

The increase in revenue in Europe was primarily attributable to an increase in our Automation, Research, and GovernX service lines, partially offset by a decrease in our NaSa and Advisory service lines.

The increase in revenue in Asia Pacific was primarily attributable to an increase in our Advisory and NaSa service lines.

The translation of foreign currency revenues into U.S.

dollars negatively impacted performance in Europe and Asia Pacific compared to the prior year by $5.5 million.

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 $2.1 million, or approximately 2%, for the six months of 2022.

The increase in operating expenses were primarily due to higher:

compensation costs of $3.4 million, travel and entertainment expense of $0.8 million, event related expenses of $0.5 million, RPA license fees of $0.4 million, and bad debt expense of $0.4 million.

These costs were partially offset by the Neuralify earnout adjustment of $1.4 million and lower non-cash stock compensation of $0.6 million.

compensation costs of $2.4 million, travel and entertainment expense of $1.8 million, event related expenses of $0.9 million, and bad debt expense of $0.5 million.

These costs were partially offset by lower;

contract labor of $1.9 million, severance, integration and other expense of $0.9 million, and occupancy expense of $0.3 million.

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

12 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 first quarter of 2022 and 2021 was $1.3 million and $1.4 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.

Depreciation and amortization expense in the six months of 2022 and 2021 was $2.6 million, respectively.

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

7 unchanged sentences

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

Years Ended March 31,

Six Months Ended June 30,

Other income (expense), net

2 unchanged sentences

Interest expense

Foreign currency gain (loss)

Foreign currency transaction gain (loss)

Total other income (expense), net

The total decrease of $0.1 million, or approximately 15%, was primarily the result of lower interest expense attributable to our lower debt balance and lower interest rates.

The total decrease of $0.2 million, or approximately 14%, was primarily the result of higher foreign currency transaction gains.

Income Tax Expense

Our effective tax rate for the three months ended March 31, 2022 was 31.9% compared to 22.7% for the quarter ended March 31, 2021.

The difference for the quarter ended March 31, 2022 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, 2022 was higher than the statutory rate primarily due to the impact of foreign operations.

There were no significant changes in uncertain tax position reserves or valuation allowances during the quarter ended March 31, 2022.

Our effective tax rate for the six months ended June 30, 2022 was 28.9% compared to 22.6% for the six months ended June 30, 2021.

The difference for the six months ended June 30, 2022 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, 2022 was higher than the statutory rate primarily due to the impact of foreign operations.

There were no significant changes in uncertain tax position reserves or valuation allowances during the quarter ended June 30, 2022.

NON-GAAP FINANCIAL PRESENTATION

9 unchanged sentences

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 March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

Interest expense (net of interest income)

6 unchanged sentences

Adjusted EBITDA

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

Non-cash stock compensation

6 unchanged sentences

Adjusted net income

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Net income per diluted share

16 unchanged sentences

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

As of March 31, 2022, our cash, cash equivalents and restricted cash were $43.8 million, a net decrease of $3.9 million from December 31, 2021, which was primarily attributable to the following:

As of June 30, 2022, our cash, cash equivalents and restricted cash were $31.6 million, a net decrease of $16.1 million from December 31, 2021, which was primarily attributable to the following:

● net cash provided by operating activities of $4.9 million;

● treasury shares repurchased of $9.6 million;

● cash dividends paid to shareholders of $3.4 million;

● negative effects of exchange rate changes of $2.8 million;

● principal payments on borrowings of $2.2 million;

2 unchanged sentences

Capital Resources

On March 10, 2020, the Company amended and restated its senior secured credit facility to include an $86.0 million term facility and a $54.0 million revolving facility (the “2020 Credit Agreement”).

On March 10, 2020, the Company amended and restated its senior secured credit facility to include a $86.0 million term facility and to increase the revolving commitments per the revolving facility (as amended by that certain First Amendment to Credit Agreement, dated as of June 1, 2022, the “2020 Credit Agreement”) from $30.0 million to $54.0 million.

The material terms under the 2020 Credit Agreement are as follows:

5 unchanged sentences

● The term loan is repayable in nineteen consecutive quarterly installments of $1,075,000 each that commenced on June 30, 2020 and a final payment of the outstanding principal amount of the term loan on the Maturity Date.

● 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.

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

● 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.

1 unchanged sentence

● 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 $73.4 million at March 31, 2022 and $74.5 million at December 31, 2021, which are carried at amortized cost.

The Company’s financial statements include outstanding borrowings of $72.3 million at June 30, 2022 and $74.5 million at December 31, 2021, 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 $72.3 million and $73.6 million at March 31, 2022 and December 31, 2021, respectively.

The fair value of the Company's outstanding borrowings is approximately $70.7 million and $73.6 million at June 30, 2022 and December 31, 2021, 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 2.5% and 2.0% at March 31, 2022 and December 31, 2021, respectively.

The incremental borrowing rate used to discount future cash flows is 3.8% and 2.0% at June 30, 2022 and December 31, 2021, respectively.

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 and interest rates.

As of March 31, 2022 and December 31, 2021, there were no borrowings under the revolver.

As of June 30, 2022 and December 31, 2021, there were no borrowings under the revolver.

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.

The anticipated cash needs of our business could change significantly if we pursue and complete additional business acquisitions, if our business

plans change, if economic conditions change from those currently prevailing or from those now anticipated, or if other unexpected circumstances arise that may have a material effect on the cash flow or profitability of our business, including the potential impacts of the COVID-19 pandemic and the severity of the related economic downturn and length of time of an economic recovery.

The anticipated cash needs of our business could change significantly if we pursue and complete additional business acquisitions, if our business plans change, if economic conditions change from those currently prevailing or from those now anticipated, or if other unexpected circumstances arise that may have a material effect on the cash flow or profitability of our business, including the potential impacts of the COVID-19 pandemic and the severity of the related economic downturn and length of time of an economic recovery.

If we require additional capital resources to grow our business, either internally or through acquisition, or maintain liquidity, we may seek to sell additional equity securities or to secure additional debt financing.

3 unchanged sentences

Dividend Program

In May 2022, the Company announced it increased the quarterly dividend by 33% to $0.04 per share of common stock.

The Company expects to pay a total cash dividend of $0.16 per share over the four quarters ending March 2023.

On May 3, 2022, the Board of Directors approved the second-quarter dividend of $0.04 per share, payable June 17, 2022, to shareholders of record as of June 3, 2022.

In May 2022, the Company announced it will pay a second-quarter dividend of $0.04 per share of common stock.

The Company expects to pay a total cash dividend of $0.16 per share for the four quarters ending March 2023.

On August 2, 2022, the Board of Directors approved the third-quarter dividend of $0.04 per share, payable September 19, 2022, to shareholders of record as of September 6, 2022.

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

16 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