Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

iii_Current_Folio_10Q-Taxonomy2016

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2017

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to              

 

Commission File Number 001-33287

 

INFORMATION SERVICES GROUP, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

 

20-5261587

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

Two Stamford Plaza
281 Tresser Boulevard
Stamford, CT 06901
(Address of principal executive offices and zip code)

 

Registrant’s telephone number, including area code: (203) 517-3100

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

 

 

 

 

 

 

Emerging growth company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at October 27, 2017

Common Stock, $0.001 par value

 

43,400,494 shares

 

 

 

 

 

 

 


 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10–Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions. The actual results of ISG may vary materially from those expected or anticipated in these forward-looking statements. The realization of such forward-looking statements may be impacted by certain important unanticipated factors.  Because of these and other factors that may affect ISG’s operating results, past performance should not be considered as an indicator of future performance, and investors should not use historical results to anticipate results or trends in future periods. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers should carefully review the risk factors described in this and other documents that ISG files from time to time with the Securities and Exchange Commission, including subsequent Current Reports on Form 8-K, Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.

1


 

PART I — FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS (UNAUDITED)

 

INFORMATION SERVICES GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) 

(In thousands, except par value)

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2017

    

2016

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,227

 

$

34,485

 

Accounts and unbilled receivables, net of allowance of $615 and $494, respectively

 

 

74,796

 

 

64,662

 

Deferred tax asset

 

 

 —

 

 

1,730

 

Prepaid expense and other current assets

 

 

4,523

 

 

5,374

 

Total current assets

 

 

101,546

 

 

106,251

 

Restricted cash

 

 

92

 

 

497

 

Furniture, fixtures and equipment, net

 

 

4,603

 

 

4,789

 

Goodwill

 

 

85,602

 

 

85,940

 

Intangible assets, net

 

 

28,065

 

 

35,113

 

Other assets

 

 

4,889

 

 

2,532

 

Total assets

 

$

224,797

 

$

235,122

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

8,267

 

$

9,724

 

Current maturities of long-term debt

 

 

14,815

 

 

5,546

 

Deferred revenue

 

 

8,196

 

 

9,112

 

Accrued expenses

 

 

22,527

 

 

27,971

 

Total current liabilities

 

 

53,805

 

 

52,353

 

Long-term debt, net of current maturities

 

 

100,707

 

 

116,485

 

Deferred tax liability

 

 

 —

 

 

396

 

Other liabilities

 

 

6,516

 

 

7,476

 

Total liabilities

 

 

161,028

 

 

176,710

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

Redeemable non-controlling interest

 

 

 —

 

 

1,376

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock, $.001 par value; 10,000 shares authorized; none issued

 

 

 —

 

 

 

Common stock, $.001 par value, 100,000 shares authorized; 44,490 shares issued and 43,340 outstanding at September 30, 2017 and 44,203 shares issued and 42,140 outstanding at December 31, 2016

 

 

44

 

 

44

 

Additional paid-in capital

 

 

228,761

 

 

228,692

 

Treasury stock (1,150 and 2,063 common shares, respectively, at cost)

 

 

(4,022)

 

 

(8,216)

 

Accumulated other comprehensive loss

 

 

(5,850)

 

 

(7,800)

 

Accumulated deficit

 

 

(155,164)

 

 

(155,684)

 

Total stockholders’ equity

 

 

63,769

 

 

57,036

 

Total liabilities, redeemable non-controlling interest and stockholders’ equity

 

$

224,797

 

$

235,122

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

2


 

INFORMATION SERVICES GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

 

2017

    

2016

 

Revenues

 

$

68,349

 

$

51,929

 

$

202,942

 

$

162,212

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct costs and expenses for advisors

 

 

38,214

 

 

30,959

 

 

119,153

 

 

98,433

 

Selling, general and administrative

 

 

23,710

 

 

16,613

 

 

68,815

 

 

52,428

 

Depreciation and amortization

 

 

2,951

 

 

1,741

 

 

9,773

 

 

5,386

 

Operating income

 

 

3,474

 

 

2,616

 

 

5,201

 

 

5,965

 

Interest income

 

 

15

 

 

 —

 

 

94

 

 

24

 

Interest expense

 

 

(1,716)

 

 

(596)

 

 

(5,132)

 

 

(1,590)

 

Foreign currency transaction loss

 

 

(111)

 

 

(38)

 

 

(292)

 

 

(300)

 

Income (loss) before taxes

 

 

1,662

 

 

1,982

 

 

(129)

 

 

4,099

 

Income tax provision (benefit)

 

 

234

 

 

1,226

 

 

(681)

 

 

2,331

 

Net income

 

$

1,428

 

$

756

 

$

552

 

$

1,768

 

Net income attributable to non-controlling interest

 

 

 —

 

 

24

 

 

32

 

 

123

 

Net income attributable to ISG

 

$

1,428

 

$

732

 

$

520

 

$

1,645

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

43,305

 

 

35,707

 

 

42,893

 

 

36,219

 

Diluted

 

 

44,658

 

 

36,873

 

 

43,344

 

 

36,977

 

Earnings per share attributable to ISG:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.03

 

$

0.02

 

$

0.01

 

$

0.05

 

Diluted

 

$

0.03

 

$

0.02

 

$

0.01

 

$

0.05

 

Comprehensive income:

 

 

   

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,428

 

$

756

 

$

552

 

$

1,768

 

Foreign currency translation, net of tax (expense) benefit of $(232), $(22), $(1,161) and $44, respectively.

 

 

601

 

 

100

 

 

1,950

 

 

(9)

 

Comprehensive income:

 

$

2,029

 

$

856

 

$

2,502

 

$

1,759

 

Comprehensive income attributable to non-controlling interest

 

 

 —

 

 

24

 

 

32

 

 

123

 

Comprehensive income attributable to ISG

 

$

2,029

 

$

832

 

$

2,470

 

$

1,636

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


 

INFORMATION SERVICES GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

    

2017

    

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

$

552

 

$

1,768

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation expense

 

 

2,640

 

 

1,337

 

Amortization of intangible assets

 

 

7,133

 

 

4,049

 

Tax expense from stock issuances

 

 

315

 

 

110

 

Amortization of deferred financing costs

 

 

739

 

 

130

 

Loss on sublease

 

 

578

 

 

 —

 

Stock-based compensation

 

 

5,383

 

 

5,180

 

Change in fair value of contingent consideration

 

 

145

 

 

(279)

 

Changes in accounts receivable allowance

 

 

398

 

 

(16)

 

Deferred tax benefit

 

 

(2,338)

 

 

(1,267)

 

Loss on disposal of fixed assets

 

 

23

 

 

 —

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

Accounts receivable

 

 

(10,424)

 

 

2,341

 

Prepaid expense and other assets

 

 

1,628

 

 

(1,516)

 

Accounts payable

 

 

(1,458)

 

 

38

 

Deferred revenue

 

 

(980)

 

 

(1,408)

 

Debt issuance costs

 

 

(38)

 

 

198

 

Accrued expenses

 

 

(1,023)

 

 

829

 

Net cash provided by operating activities

 

 

3,273

 

 

11,494

 

Cash flows from investing activities

 

 

 

 

 

 

 

Acquisitions, net of cash acquired

 

 

(889)

 

 

(1,862)

 

Restricted cash

 

 

405

 

 

56

 

Purchase of furniture, fixtures and equipment

 

 

(2,270)

 

 

(1,904)

 

Net cash used in investing activities

 

 

(2,754)

 

 

(3,710)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from debt

 

 

 —

 

 

13,500

 

Principal payments on borrowings

 

 

(7,151)

 

 

(4,850)

 

Proceeds from issuance of ESPP shares

 

 

494

 

 

444

 

Payment of contingent consideration

 

 

(2,665)

 

 

(2,483)

 

Payment for acquisition of Experton

 

 

(543)

 

 

 —

 

Payments related to tax withholding for stock-based compensation

 

 

(2,174)

 

 

(1,576)

 

Debt issuance costs

 

 

 —

 

 

 9

 

Tax expense from stock issuances

 

 

 —

 

 

(110)

 

Equity securities repurchased

 

 

(2,853)

 

 

(11,441)

 

Net cash used in financing activities

 

 

(14,892)

 

 

(6,507)

 

Effect of exchange rate changes on cash

 

 

2,115

 

 

21

 

Net (decrease) increase in cash and cash equivalents

 

 

(12,258)

 

 

1,298

 

Cash and cash equivalents, beginning of period

 

 

34,485

 

 

17,835

 

Cash and cash equivalents, end of period

 

$

22,227

 

$

19,133

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncash financing activities:

 

 

 

 

 

 

 

Issuance of treasury stock for vested restricted stock awards

 

$

6,437

 

$

4,973

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(tabular amounts in thousands, except per share data)

(unaudited)

 

NOTE 1—DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS

 

Information Services Group, Inc. (the “Company”, or “ISG”) was founded in 2006 with the strategic vision to become a high-growth, leading provider of information-based advisory services.  In 2007, we consummated our initial public offering and completed the acquisition of TPI Advisory Services Americas, Inc. (“TPI”).  In December 2016, we consummated our transformational acquisition of Alsbridge Holdings, Inc. (“Alsbridge”).

 

NOTE 2—BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements as of September 30, 2017 and for the three and nine months ended September 30, 2017 and 2016, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and pursuant to Form 10-Q and Article 10 of Regulation S-X.  In the opinion of management, all adjustments (consisting of normal recurring accruals) have been made that are considered necessary for a fair statement of the financial position of the Company as of September 30, 2017, the results of operations for the three and nine months ended September 30, 2017 and 2016 and the cash flows for the nine months ended September 30, 2017 and 2016.  The condensed consolidated balance sheet as of December 31, 2016 has been derived from the Company’s audited consolidated financial statements.  Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

 

Certain information and disclosures normally included in the notes to annual financial statements prepared in accordance with GAAP have been omitted from these interim financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the financial statements for the fiscal year ended December 31, 2016, which are included in the Company’s 2016 Annual Report on Form 10-K filed with the SEC.

 

Reclassification

 

Certain prior years’ amounts have been reclassified to conform to the current year’s presentation, including reclassification to the Condensed Consolidated Statements of Cash Flows due to the adoption of the share-based payment accounting standard in the first quarter of 2017 as further described below under Note 3—Summary of Significant Accounting Policies: Recently Issued Accounting Pronouncements. This reclassification had no impact on our results of operations, financial position, or changes in shareholders’ equity.

 

NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the periods reported. Actual results may differ from those estimates. The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent in the application of the proportional performance method of accounting affect the amounts of revenues, expenses, unbilled receivables and deferred revenue. Numerous internal and external factors can affect estimates. Estimates are also used for, but not limited to: allowance for doubtful accounts, useful lives of furniture, fixtures and equipment, depreciation expense, contingent consideration, fair value assumptions in analyzing goodwill and intangible asset impairments, income taxes and deferred tax asset valuation, and the valuation of stock based compensation.

 

5


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

Fair Value

 

The carrying value of the Company’s cash and cash equivalents, restricted cash, receivables, accounts payable, other current liabilities, and accrued interest approximated their fair values at September 30, 2017 and December 31, 2016 due to the short-term nature of these instruments.

 

Fair value is the price that would be received upon a sale of an asset or paid upon a transfer of a liability in an orderly transaction between market participants at the measurement date (exit price).  Market participants can use market data or assumptions in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique.  These inputs can be readily observable, market-corroborated, or generally unobservable. The use of unobservable inputs is intended to allow for fair value determinations in situations where there is little, if any, market activity for the asset or liability at the measurement date.  Under the fair-value hierarchy:

 

·

Level 1 measurements include unadjusted quoted market prices for identical assets or liabilities in an active market;

 

·

Level 2 measurements include quoted market prices for identical assets or liabilities in an active market that have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets; and

 

·

Level 3 measurements include those that are unobservable and of a highly subjective measure.

 

The following tables summarize assets and liabilities measured at fair value on a recurring basis at the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basis of Fair Value Measurements

 

 

 

September 30, 2017

 

 

     

Level 1

     

Level 2

     

Level 3

     

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

1,548

 

$

 —

 

$

 —

 

$

1,548

 

Total

 

$

1,548

 

$

 —

 

$

 —

 

$

1,548

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration (1)

 

$

 —

 

$

 —

 

$

3,890

 

$

3,890

 

Total

 

$

 —

 

$

 —

 

$

3,890

 

$

3,890

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basis of Fair Value Measurements

 

 

 

December 31, 2016

 

 

     

Level 1

     

Level 2

     

Level 3

     

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

22

 

$

 —

 

$

 —

 

$

22

 

Total

 

$

22

 

$

 —

 

$

 —

 

$

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration (1)

 

$

 —

 

$

 —

 

$

6,073

 

$

6,073

 

Total

 

$

 —

 

$

 —

 

$

6,073

 

$

6,073

 


(1)

The short-term portion is included in “Accrued expenses.”  The long-term portion is included in “Other liabilities.”

 

6


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

The Company’s contingent consideration liability was $3.9 million and $6.1 million at September 30, 2017 and December 31, 2016, respectively.  The fair value measurement of this contingent consideration is classified within Level 3 of the fair value hierarchy and reflects the Company’s own assumptions in measuring fair values using the income approach. In developing these estimates, the Company considered certain performance projections, historical results, and industry trends.  This amount was estimated through a valuation model that incorporated probability-weighted assumptions related to the achievement of these milestones and the likelihood of the Company making payments.  These cash outflow projections have then been discounted using a rate ranging from 14.5% to 19.8%.

 

The Company’s financial instruments include outstanding borrowings of $118.1 million at September 30, 2017 and $125.3 million at December 31, 2016, 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 $118.0 million and $124.9 million at September 30, 2017 and December 31, 2016, 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 2.00% to 4.83%. 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.

 

The following table represents the change in the contingent consideration liability during the nine months ended September 30, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

     

2017

     

2016

  

Beginning Balance

 

$

6,073

 

$

4,019

 

Payment of contingent consideration

 

 

(3,386)

 

 

(2,483)

 

Acquisitions 

 

 

 —

 

 

4,841

 

Change in fair value of contingent consideration

 

 

145

 

 

(279)

 

Accretion of contingent consideration

 

 

1,030

 

 

568

 

Unrealized gain related to currency translation

 

 

28

 

 

61

 

Ending Balance

 

$

3,890

 

$

6,727

 

 

Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance that outlines a single comprehensive model for entities to use in accounting for revenue. Under the guidance, revenue is recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard is effective for public entities with annual and interim reporting periods beginning after December 15, 2016.  On July 9, 2015, the FASB approved the deferral of the effective date of the new revenue guidance by one year to annual reporting periods beginning after December 15, 2017, with early adoption being permitted for annual periods beginning after December 15, 2016. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective transition method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method).  The guidance also requires significantly expanded disclosures around the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, which we are currently compiling.  We have completed an initial assessment of the impact of the guidance on our existing revenue recognition policies.  We currently anticipate that our historical revenue recognition will not significantly change other than for software and implementation contracts, certain network contingency contracts, and certain managed service implementation contracts.  For software and implementation contracts, revenue recognition on the software component will be accelerated to the point at which software is installed, while revenue on the implementation component will be recognized over the software implementation period as a percentage of hours incurred to date as compared to the total

7


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

expected hours.  On certain network contingency contracts, revenue will be recognized over time due to the existence of provisions for payment for progress incurred to date plus a margin in contracts with termination for convenience clauses.  On the implementation phase of certain managed service contracts, revenue will be recognized over time as a percentage of hours incurred to date as compared to the total expected hours. We will be adopting the standard using the cumulative catch-up transition method of adoption on January 1, 2018.  The Company is in the process of preparing for the enhanced disclosure requirements of the new standard as well as evaluating its impact on our processes and controls.  We will continue to evaluate the impact of our pending adoption of this guidance to our consolidated financial statements and our preliminary assessments are subject to change.

 

In November 2015, the FASB issued an accounting standards update to simplify the presentation of deferred income taxes on the balance sheet. The update requires that all deferred tax assets and liabilities be classified as noncurrent. The current guidance that deferred tax assets and liabilities of a tax-paying component of an entity be offset and presented as a single amount is not impacted by this update. The provisions of the new standard are effective beginning January 1, 2017, for annual and interim periods and early adoption is permitted.  The Company adopted this guidance on a prospective method; therefore, prior periods were not retrospectively adjusted.  As a result of this adoption, $2.6 million of net current deferred tax assets are included in the net noncurrent deferred tax assets as of September 30, 2017.  The adoption of this guidance in the first quarter of 2017 by the Company did not have a material impact on its results of operations.

 

In February 2016, the FASB issued guidance on accounting for leases which requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. The guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases and will be effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The guidance requires the use of a modified retrospective approach. The Company is evaluating the impact of the guidance on its consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued ASU 2016-09, amended guidance related to employee share-based payment accounting. The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled, allows an employer to repurchase more of an employee’s shares than previously allowed for tax withholding purposes without triggering liability accounting, allows a company to make a policy election to account for forfeitures as they occur, and eliminates the requirement that excess tax benefits be realized before companies can recognize them. The new guidance also requires excess tax benefits and tax shortfalls to be presented on the cash flow statement as an operating activity rather than as a financing activity, and clarifies that cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation are to be presented as a financing activity. This guidance is effective prospectively for annual reporting periods, and interim periods therein, beginning after December 15, 2016.

 

We have adopted ASU 2016-09 effective January 1, 2017 on a prospective basis as permitted by the new standard.  As a result of this adoption:

 

·

Tax expenses of $0.3 million were recognized on stock-based compensation expense were reflected as a component of the provision for income taxes for the nine months ended September 30, 2017.

 

·

We elected to adopt the cash flow presentation of the excess tax benefits prospectively where these benefits are classified along with other income tax cash flows as operating cash flows.

 

·

We have elected to continue to estimate the number of stock-based awards expected to vest, rather than electing to account for forfeitures as they occur to determine the amount of compensation cost to be recognized in each period.

 

8


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

·

We presented employee taxes paid as a financing activity on the Condensed Consolidated Statements of Cash Flows retrospectively, as such the comparable period within the Condensed Consolidated Statements of Cash Flows has been recast to reflect the adoption.

 

The adoption of this guidance in the first quarter of 2017 by the Company did not have a material impact on its results of operations.

 

In August 2016, the FASB issued new guidance intended to reduce diversity in practice in how certain cash receipts and payments are classified in the statement of cash flows, including debt prepayment or extinguishment costs, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, and distributions from certain equity method investees. The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The guidance requires application using a retrospective transition method. The Company is evaluating the impact of the guidance on its consolidated financial statements and related disclosures.

 

In November 2016, the FASB issued an accounting standard to require that amounts generally described as restricted cash and restricted cash equivalents be presented with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. If different, a reconciliation of the cash balances reported in the cash flow statement and the balance sheet would need to be provided along with explanatory information. The guidance is effective on January 1, 2018.  We have started an initial assessment of the impact of the guidance, and we do not expect it will have a material impact on our consolidated financial statements.

 

In January 2017, the FASB issued an accounting standard that changes the GAAP definition of a business which can impact the accounting for asset purchases, acquisitions, goodwill impairment, and other assessments.  The guidance is effective on January 1, 2018.  We are currently evaluating the impact of this guidance on the Company's consolidated financial statements.

 

In January 2017, the FASB issued an accounting standard that eliminates Step 2 of the goodwill impairment test, which required us to determine the implied fair value of goodwill by allocating the reporting unit's fair value to each of its assets and liabilities as if the reporting unit was acquired in a business acquisition.  Instead, the updated guidance requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit to its carrying value, and recognizing a non-cash impairment charge for the amount by which the carrying value exceeds the reporting unit's fair value with the loss not exceeding the total amount of goodwill allocated to that reporting unit.  The updated guidance is effective beginning January 1, 2020, with early adoption permitted, and will be applied on a prospective basis.  We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

 

NOTE 4—NET INCOME PER COMMON SHARE

 

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would share in the net income of the Company. For the three and nine months ended September 30, 2017, the effect of 34,374 stock appreciation rights (“SARs”) have not been considered in the diluted earnings per share, because the market price of the stock was less than the exercise price during the period in the computation, respectively.   In addition, 2.5 million restricted shares have not been considered in the diluted earnings per share calculation for the nine months ended September 30, 2017, as the effect would be anti-dilutive.  

 

9


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

The following tables set forth the computation of basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

    

2017

    

2016

    

2017

    

2016

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to ISG

 

$

1,428

 

$

732

 

$

520

 

$

1,645

 

 

Weighted average common shares

 

 

43,305

 

 

35,707

 

 

42,893

 

 

36,219

 

 

Earnings per share attributable to ISG

 

$

0.03

 

$

0.02

 

$

0.01

 

$

0.05

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to ISG

 

$

1,428

 

$

732

 

$

520

 

$

1,645

 

 

Interest expense of convertible debt, net of tax

 

 

 2

 

 

 1

 

 

 6

 

 

21

 

 

Net income attributable to ISG, as adjusted

 

$

1,430

 

$

733

 

$

526

 

$

1,666

 

 

Basic weighted average common shares

 

 

43,305

 

 

35,707

 

 

42,893

 

 

36,219

 

 

Potential common shares

 

 

1,353

 

 

1,166

 

 

451

 

 

758

 

 

Diluted weighted average common shares

 

 

44,658

 

 

36,873

 

 

43,344

 

 

36,977

 

 

Diluted earnings per share attributable to ISG

 

$

0.03

 

$

0.02

 

$

0.01

 

$

0.05

 

 

 

 

 

 

NOTE 5—INCOME TAXES

 

The Company’s effective tax rate for the three and nine months ended September 30, 2017 was 14.1% and 527.9% based on pretax income of $1.7 million and pretax loss of $0.1 million, respectively.  The Company’s effective tax rate for the quarter was less than the statutory rate primarily due to the impact of current quarter earnings in jurisdictions where the Company is currently precluded from recording a tax provision and the impact of the partial release of previously unrecognized tax benefits. The effective tax rate was 61.9% and 56.9% for the three and nine months ended September 30, 2016.  The difference was primarily due to the impact of current quarter earnings in jurisdictions where the Company is currently precluded from recording a tax provision for the three months ended September 30, 2017 and the impact of the partial release of previously unrecognized tax benefits.

 

As of September 30, 2017, the Company had total unrecognized tax benefits of approximately $2.8 million all of which would impact the Company’s effective tax rate if recognized.  The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax provision in its condensed consolidated statement of operations.  As of September 30, 2017, the Company’s accrual of interest and penalties amounted to $0.9 million.  The Company recorded no material year-to-date change in accrual of unrecognized tax benefits and associated interest and penalties.

 

NOTE 6—COMMITMENTS AND CONTINGENCIES

 

The Company is subject to contingencies which arise through the ordinary course of business. All material liabilities of which management were aware are properly reflected in the financial statements at September 30, 2017 and December 31, 2016.

 

Saugatuck Contingent Consideration

 

As of September 30, 2017, the Company has recorded a liability of $0.6 million representing the estimated fair value of contingent consideration related to the acquisition of Saugatuck, of which $0.3 million is classified as current and included in accrued expenses on the consolidated balance sheet.  The Company paid $0.5 million in April 2017 related to 2016 performance. 

 

10


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

Experton Contingent Consideration 

 

As of September 30, 2017, the Company has recorded a liability of $0.8 million representing the estimated fair value of contingent consideration related to the acquisition of Experton, of which $0.4 million is classified as current and included in accrued expenses on the consolidated balance sheet. The Company paid $0.1 million in July 2017 related to 2016 performance.

 

TracePoint Contingent Consideration

 

As of September 30, 2017, the Company has recorded a liability of $2.5 million representing the estimated fair value of contingent consideration related to the acquisition of TracePoint, of which $1.4 million is classified as current and included in accrued expenses on the consolidated balance sheet. The Company paid $2.1 million in April 2017 related to 2016 performance.

 

Alsbridge Contingent Consideration

 

As of September 30, 2017, the Company paid the remaining $0.1 million in July 2017 representing the estimated fair value of contingent consideration related to the acquisition of Alsbridge.

 

Severance Accrual

 

The Company recorded $0.3 million of severance expense during the three months ended September 30, 2017.  The charge was primarily related to contractual termination benefits, and was recorded in selling, general and administrative expenses.  As of September 30, 2017, the remaining balance in accrued severance is $0.2 million and is classified as current and included in accrued expenses on the consolidated balance sheet.    

 

 

NOTE 7—SEGMENT AND GEOGRAPHICAL INFORMATION

 

The Company operates as one reportable segment consisting primarily of fact-based sourcing advisory services. The Company operates principally in the Americas, Europe and Asia Pacific.

 

Geographical revenue information for the segment is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

    

2017

    

2016

    

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

41,524

 

$

29,239

 

$

122,581

 

$

86,832

 

Europe

 

 

19,732

 

 

16,611

 

 

61,443

 

 

56,885

 

Asia Pacific

 

 

7,093

 

 

6,079

 

 

18,918

 

 

18,495

 

 

 

$

68,349

 

$

51,929

 

$

202,942

 

$

162,212

 

 

The segregation of revenues by geographic region is based upon the location of the legal entity performing the services. The Company does not measure or monitor gross profit or operating income by geography for the purposes of making operating decisions or allocating resources.

 

11


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

NOTE 8—FINANCING ARRANGEMENTS AND LONG-TERM DEBT

 

On December 1, 2016, the Company entered into an amended and restated senior secured credit facility (the “2016 Credit Agreement”) comprised of a $110.0 million term facility and a $30.0 million revolving facility, amending and restating its senior secured credit facility originally entered into on May 3, 2013.  The material terms of the 2016 Credit Agreement are as follows:

 

·

Each of the term loan facility and revolving credit facility has a maturity date of December 1, 2021 (the “Maturity Date”).

 

·

The credit facility is secured by all of the equity interests owned by the Company, and its direct and indirect domestic subsidiaries and, subject to agreed exceptions, the Company’s direct and indirect “first-tier” foreign subsidiaries and a perfected first priority security interest in all of the Company’s and its direct and indirect domestic subsidiaries’ tangible and intangible assets.

 

·

The Company’s direct and indirect existing and future wholly-owned domestic subsidiaries serve as guarantors to the Company’s obligations under the senior secured facility.

 

·

At the Company’s option, the credit facility bears interest at a rate per annum equal to either (i) the “Base Rate” (which is the highest of (a) the rate publicly announced from time to time by the administrative agent as its “prime rate”, (b) the Federal Funds Rate plus 0.5% per annum and (c) the Eurodollar Rate, plus 1.0%), plus the applicable margin (as defined below) or (ii) Eurodollar Rate (adjusted for maximum reserves) as determined by the Administrative Agent, plus the applicable margin.  The applicable margin is adjusted quarterly based upon the Company’s quarterly leverage ratio.  Prior to the end of the first full quarter following the closing of the credit facility, the applicable margin shall be a percentage per annum equal to 2.5% for the term loans and the revolving loans maintained as Base Rate loans or 3.5% for the term loans and revolving loans maintained as Eurodollar loans.

 

·

The Term Loan is repayable in four consecutive quarterly installments of $1,375,000 each, commencing March 31, 2017, followed by eight consecutive quarterly installments in the amount of $2,062,500 each, commencing March 31, 2018, followed by seven consecutive quarterly installments of $2,750,000 each, commencing March 31, 2020 and a final payment of the remaining 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.

 

·

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), transaction 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.

12


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

 

On February 10, 2017, as required by the 2016 Credit Agreement, the Company entered into an agreement to cap the interest rate at 4% on the LIBOR component of its borrowings under the term loan facility until December 31, 2019. This interest rate cap was not designated for hedging or speculative purposes. The expense related to this interest rate cap was not material.

 

As of September 30, 2017, the total principal outstanding under the term loan facility and revolving credit facility was $105.9 million and $5.0 million, respectively.

 

Compass Convertible Notes

 

On January 4, 2011, as part of the consideration for the acquisition of Compass, we issued an aggregate of $6.3 million in convertible notes to Compass (the “Compass Notes”).  The Compass Notes mature on January 4, 2018 and interest is payable on the outstanding principal amount, computed daily, at the rate of 3.875% per annum on January 31 of each calendar year and on the seventh anniversary of the date of the Compass Notes. The Compass Notes were subject to transfer restrictions until January 31, 2013. If the price of our common stock on the Nasdaq Global Market exceeds $4 per share for 60 consecutive trading days (the “Trigger Event”), the holder of the Compass Notes may convert all (but not less than all) of the outstanding principal amount of the Compass Notes into shares of our common stock at the rate of 1 share for every $4 in principal amount outstanding.  After the Trigger Event, we may prepay all or any portion of the outstanding principal amount of the Compass Notes by giving the holder 30 days written notice.  On March 21, 2014, the Trigger Event occurred.  As a result, a holder of the Compass Notes may convert all (but not less than all) of the outstanding principal amount of the Compass Notes into shares of our common stock at the rate of 1 share for every $4 in principal amount outstanding.  In addition, ISG may elect to prepay all or any portion of the outstanding principal amount of the Compass Notes by giving a holder 30 days written notice; however, such holder shall be given the opportunity to convert the outstanding principal amount into shares as described above.  No holder of the Compass Notes has the option to require cash payment as a result of the Trigger Event.

 

 In 2013 and 2016, we prepaid substantial portions of the outstanding principal amount of the Compass Notes.  As of September 30, 2017, the total principal outstanding under the remaining Compass Notes was $0.2 million.

 

Alsbridge Notes

 

On December 1, 2016, as part of the merger consideration for the acquisition of Alsbridge, we issued an aggregate of $7.0 million in unsecured subordinated promissory notes (the “Alsbridge Notes”). The Alsbridge Notes mature on September 1, 2018 and interest accrues on the principal amount daily at a rate of 2.0% and is payable upon maturity.  At any time, the Company may at its option prepay all or any portion of Alsbridge Notes.  As of September 30, 2017, the total principal outstanding under the Alsbridge Notes was $7.0 million.

 

 

 

 

 

 

13


 

 

 

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis in conjunction with our financial statements and related notes included elsewhere in this report. Except for historical information, the discussion in this report contains certain forward-looking statements that involve risks and uncertainties. We have based these forward-looking statements on our current expectations and assumptions about future events. In some cases, you can identify forward-looking statements by terminology, such as “may,” “should,” “could,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” “forecast” and similar expressions (or the negative of such expressions.) Forward-looking statements include statements concerning 2017 revenue growth rates and capital expenditures. Forward-looking statements are based on our beliefs as well as assumptions based on information currently available to us, including financial and operational information, the volatility of our stock price, and current competitive conditions. 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 2016 Annual Report on Form 10-K titled “Risk Factors.”

 

BUSINESS OVERVIEW

 

Information Services Group, Inc. (“ISG”) (NASDAQ: III) is a leading technology insights, market intelligence and advisory services company serving more than 700 clients around the world to help them achieve operational excellence and faster growth.  ISG specializes in digital transformation services, including automation, cloud and data analytics; sourcing advisory; managed governance and risk services; network carrier services; technology strategy and operations design; change management; market intelligence and technology research and analysis.  ISG supports both private and public sector organizations to transform and optimize their operational environments.  Clients look to ISG for unique insights and innovative solutions for leveraging technology, our deep data source, and more than five decades of experience of global leadership in information and advisory services. Based in Stamford, Connecticut, the Company has approximately 1,300 employees and operates in over 20 countries.

 

Our strategy is to strengthen our existing market position and develop new services and products to support future growth plans. As a result, we are focused on growing our existing service model, expanding geographically, developing new industry sectors, productizing market data assets, expanding our managed services offerings and growing via acquisitions. Although we do not expect any adverse conditions that will impact our ability to execute against our strategy over the next twelve months, the more significant factors that could limit our ability to grow in these areas include global macro-economic conditions and the impact on the overall sourcing market, competition, our ability to retain advisors and reductions in discretionary spending with our top strategic accounts or other significant client events. Other areas that could impact the business would also include natural disasters, legislative and regulatory changes and capital market disruptions.

 

We derive our revenues from fees and reimbursable expenses for professional services. A portion of our revenues are generated under hourly or daily rates billed on a time and expense basis. Clients are typically invoiced on a monthly basis, with revenue recognized as the services are provided. There are also client engagements in which we are paid a fixed amount for our services, often referred to as fixed fee billings. This may be one single amount covering the whole engagement or several amounts for various phases, milestones or functions. We also earn incremental revenues, in addition to hourly or fixed fee billings, which are contingent on the attainment of certain contractual milestones or objectives.  Such revenues may cause unusual variations in quarterly revenues and operating results.  We also derive our revenues from recurring revenue streams.  This includes Managed Services, Research, the U.S. Public Sector, subscription services around Robotic Process Automation (“RPA”) and analytic benchmarking.  All are characterized by subscriptions (i.e., renewal centric as opposed to project centric revenue streams) or multi-year contracts.  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 digital offerings expanded in 2017 to include RPA.

 

14


 

 

 

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 also be affected by seasonal variations in the demand for our services from our clients. The number of business work days is also affected by the number of vacation days taken by our consultants and holidays in each quarter. We typically have fewer business work days available in the fourth quarter of the year, which can impact revenues during that period. Time and expense engagements do not provide us with a high degree of predictability as to performance in future periods. Unexpected changes in the demand for our services can result in significant variations in utilization and revenues and present a challenge to optimal hiring and staffing. The volume of work performed for any particular client can vary widely from period to period.

 

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017 AND SEPTEMBER 30, 2016

 

Revenues

 

Revenues are generally derived from engagements priced on a time and materials basis as well as various fixed fee projects, and are recorded based on actual time worked and are recognized as the services are performed. 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 discretely or as part of the overall fee structure. Invoices are issued to clients at least monthly.

 

We operate as one reportable 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.

 

Geographical revenue information for the segment is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

Geographic Area

    

2017

    

2016

    

Change

    

Change

  

 

    

 

 

(in thousands)

 

 

 

Americas

    

$

41,524

    

$

29,239

    

$

12,285

    

42

%

 

 

Europe

 

 

19,732

 

 

16,611

 

 

3,121

 

19

%

 

 

Asia Pacific

 

 

7,093

 

 

6,079

 

 

1,014

 

17

%

 

 

Total revenues

 

$

68,349

 

$

51,929

 

$

16,420

 

32

%

 

 

 

Revenues increased $16.4 million or approximately 32% in 2017.  The increase in revenues in the Americas and Europe regions was primarily attributable to higher levels of sourcing activity in our Consulting line of service due to the Alsbridge acquisition and increased sourcing revenue in Germany.  The increase in revenues in the Asia Pacific region was primarily attributable to higher levels of sourcing activity in our Consulting line of service.     

 

15


 

 

 

Operating Expenses

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

Operating Expenses

    

2017

    

2016

    

Change

    

Change

  

 

    

 

 

(in thousands)

 

 

 

Direct costs and expenses for advisors

    

$

38,214

    

$

30,959

    

$

7,255

    

23

%

 

 

Selling, general and administrative

 

 

23,710

 

 

16,613

 

 

7,097

 

43

%

 

 

Depreciation and amortization

 

 

2,951

 

 

1,741

 

 

1,210

 

70

%

 

 

Total operating expenses

 

$

64,875

 

$

49,313

 

$

15,562

 

32

%

 

 

 

Total operating expenses increased $15.6 million for the quarter with increases in selling, general and administrative (“SG&A”) expenses, direct expenses and depreciation and amortization.  The increases were due primarily to higher compensation and benefits, bad debts and travel expenses due to the acquisition of Alsbridge.  We also recorded $0.4 million in severance and integration related expenses and $0.5 million related to the reversal of a tax indemnity receivable established with an unrealized tax benefit liability at the time of the acquisition of Alsbridge, which are included in selling, general and administrative expense.  The associated unrealized tax benefit liability was also reversed and recorded as a reduction in the tax provision.  These cost increases were partially offset by decreases in contract labor and occupancy expenses. 

 

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, all occupancy expenses are recorded as general and administrative.

 

Depreciation and amortization expense in the third quarter of 2017 and 2016 was $2.9 million and $1.7 million, respectively.  The increase of $1.2 million in depreciation and amortization expense was primarily due the acquisition of Alsbridge.  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,

16


 

 

 

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.

 

Other (Expense), Net

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

    

2017

    

2016

    

Change

    

Change

 

 

 

 

(in thousands)

 

 

Interest income

    

$

15

    

$

 —

    

$

15

    

N/A

%

 

Interest expense

 

 

(1,716)

 

 

(596)

 

 

(1,120)

 

(188)

%

 

Foreign currency loss

 

 

(111)

 

 

(38)

 

 

(73)

 

(192)

%

 

Total other (expense), net

 

$

(1,812)

 

$

(634)

 

$

(1,178)

 

(186)

%

 

 

The total increase of $1.2 million was primarily the result of higher interest expense due to an increase in interest rates and higher debt balances and an increase of $0.1 million of foreign currency losses.

 

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 September 30, 2017 was 14.1% compared to 61.9% for the three months ended September 30, 2016.  The difference was primarily due to the partial release of liability accrued for previously unrecognized tax benefits and the impact of current quarter earnings in jurisdictions where the Company is currently precluded from booking a tax provision for the three months ended September 30, 2017.

 

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND SEPTEMBER 30, 2016

 

Revenues

 

Geographical revenue information for the segment is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

Geographic Area

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

    

2017

    

2016

    

Change

    

Change

  

    

 

 

(in thousands)

 

 

Americas

    

$

122,581

    

$

86,832

    

$

35,749

    

41

%

 

Europe

 

 

61,443

 

 

56,885

 

 

4,558

 

 8

%

 

Asia Pacific

 

 

18,918

 

 

18,495

 

 

423

 

 2

%

 

Total revenues

 

$

202,942

 

$

162,212

 

$

40,730

 

25

%

 

 

Revenues increased $40.7 million or approximately 25% in 2017.  The increase in revenues in the Americas region was primarily attributable to higher levels of sourcing activity in Consulting, primarily associated with the acquisitions of TracePoint and Alsbridge.  The increase in the Europe region was primarily attributable to a higher level of sourcing activity in our Consulting line of business, primarily associated with the acquisition of Alsbridge and increased sourcing revenue in Germany.  The increase in revenues in the Asia Pacific region was primarily attributable to higher levels of Consulting and Managed Services.     

17


 

 

 

Operating Expenses

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

    

2017

    

2016

    

Change

    

Change