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| III > SEC Filings for III > Form 10-Q on 6-Aug-2009 | All Recent SEC Filings |
6-Aug-2009
Quarterly Report
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 2009 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 and economic 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 2008 Form 10-K titled "Risk Factors".
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND JUNE 30, 2008
Revenue
Revenues are generally derived from engagements priced on a time materials basis, 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. Revenue in the second quarter of 2009 was $31.5 million as compared to $50.7 million for the second quarter of 2008. The decrease of $19.2 million or 38% in the second quarter of fiscal 2009 was attributable principally to a 33% decrease in Americas revenues to $18.1 million and a 44% decrease in international revenues to $13.5 million. The decrease in revenues is primarily due to lower levels of sourcing activity in the U.S. and Europe as companies grapple with the effects of the global economic downturn as well as unfavorable foreign currency translation impacts on reported U.S. results. In addition, a record level of information technology ("IT") related mega-contracts implemented with the Company's assistance during the first half and second quarter of 2008 in Europe was not repeated in 2009.
Operating Expenses
Direct costs were $17.6 million in the second quarter of 2009 as compared to $28.2 million in the second quarter of 2008. Direct costs consisted primarily of compensation costs for revenue-generating professionals, as well as fees paid to independent subcontractors and client-related reimbursable expenses. Compensation costs consist of a mix of fixed and variable salaries, annual bonuses, benefits and pension plan contributions. Bonus compensation is determined based on achievement against Company financial and individual targets, and is accrued monthly throughout the year based on management estimates of target achievement. Statutory and elective pension plans are offered to employees as appropriate. Direct costs also include employee taxes, health insurance, workers compensation and disability insurance. The decrease of $10.6 million or 38% was principally attributable to lower compensation due to a lower level of advisory staff, reduced provisions for performance based bonus programs, and lower levels of client reimbursable expenses. Foreign currency translation also reduced costs in the second quarter of 2009 compared with the same 2008 period.
A portion of compensation expenses for certain billable employees are allocated between direct costs and selling and general and administrative costs based on relative time spent between billable and non-billable activities.
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 TPI Index, and assembling proposals.
The Company maintains 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 and leadership 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.
Selling and general and administrative ("SG&A") expenses of $10.1 million in the second quarter of 2009 versus $14.3 million in the second quarter of 2008 consist of sales and marketing costs, training and professional development programs, and general and administrative expenses for corporate staff and billable advisors. The $4.2 million or 29% decrease in SG&A expenses during the second quarter of 2009 compared with the same prior year period was principally attributable to reductions in fixed and variable compensation levels, reduction of the vacation accrual and lower spending for outside professional services. Lower SG&A costs were also driven by lower levels of marketing, conferences, training and client development activity offset partially by severance charges totaling $1.6 million related to the Company's 2009 cost productivity programs.
Depreciation and Amortization Expense
Depreciation and amortization expense in the second quarter of 2009 was $2.4 million compared with $2.6 million in the second quarter of 2008. This decrease of $0.2 million was primarily due to the reduction of amortization expense for an intangible asset written off as part of the Company's goodwill and intangible assets impairment testing conducted in 2008.
The Company amortizes its 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 Income (Expense), Net
Other expense, net, for the second quarter of 2009 totaled $1.2 million compared to $1.4 million for the second quarter of 2008. The decrease of $0.2 million was primarily due to lower interest expense related to debt facilities for the period.
Income Tax Expense
The Company's 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 incurred in any given period. The Company's effective tax rate for the three months ended June 30, 2009 was 42.2% compared to 41.2% for the three months ended June 30, 2008. The Company's operations resulted in a pre-tax profit of $0.2 million and a tax expense of $0.1 million at the 42.2% effective tax rate for the quarter ended June 30, 2009.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND JUNE 30, 2008
Revenue
Revenue in the first six months of 2009 was $65.8 million as compared to $96.2 million for the first six months of 2008. The decrease of $30.4 million or 32% in the first six months of 2009 was attributable principally to a 29% decrease in Americas revenues to $38.2 million and a 35% decrease in international revenues to $27.6 million. The decrease in revenues is primarily due to lower levels of sourcing activity, particularly in the U.S. and Europe, attributable to uncertainty and delayed decision making by clients resulting from the prolonged worldwide economic downturn. Declines in IT related sourcing activity in Europe and a slowdown in global business process outsourcing as well as reduced and/or delayed engagements in the automotive sector were primary contributes to this year-over-year decline. International results were also reduced significantly when expressed in U.S dollars as a result of a substantial weakening of the exchange rate for the Euro, British Pound and Australian dollar.
Operating Expenses
Direct costs were $32.5 million in the first six months of 2009 compared to $54.1 million in the first six months of 2008. The decrease of $21.6 million or 40% was principally attributable to lower compensation due to a lower level of advisory staff, reduced provisions for performance based bonus programs and lower levels of client reimbursable expenses. Foreign currency translation also reduced costs in the first six months of 2009 compared with the same 2008 period.
SG&A expenses totaled $25.1 million in the first six months of 2009 versus $27.5 million in the first six months of 2008. This decrease of 9% in SG&A expenses during the first six months of 2009 compared with the same prior year period was principally attributable to reductions in fixed and variable compensation levels, reduction of the vacation accrual, and lower spending for outside professional services offset by an increase in training and client development activity, severance charges totaling $1.7 million and bad debt reserves.
Depreciation and Amortization Expense
Depreciation and amortization expense in the first six months of 2009 was $4.8 million compared with $5.2 million in the first six months of 2008. This decrease of $0.4 million was primarily due to the reduction of amortization expense for an intangible asset written off as part of the Company's goodwill and intangible assets impairment testing conducted in 2008.
Other Income (Expense), Net
Other expense, net, for the first six months of 2009 totaled $2.4 million compared to $2.5 million for the first six months of 2008. The decrease of $0.1 million was primarily the result of lower interest expense related to debt facilities partially offset by foreign currency related losses and lower interest income.
Income Tax Expense
The Company's effective tax rate for the six months ended June 30, 2009 was 40.3% versus 41.1% for the six months ended June 30, 2008. This decrease is primarily due to expected decreases in non-deductible expenses in 2009. The Company's operations resulted in a pre-tax profit of $1.1 million and a tax expense of $0.4 million at the 40.3% effective tax rate for the six months ended June 30, 2009.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company's primary sources of liquidity are cash flows from operations, existing cash and cash equivalents and the Company's revolving credit facility. Operating assets and liabilities consist primarily of receivables from billed and unbilled services, accounts payable, accrued expenses, and accrued payroll and related benefits. The volume of billings and timing of collections and payments affect these account balances.
As of June 30, 2009, our cash and cash equivalents were $45.8 million, a net decrease of $15.3 million from December 31, 2008, which was primarily attributable to the following:
† payment of principal amounts related to the Company's term loan debt aggregating $12.2 million
† net cash outflows from operating activities totaled $2.9 million after severance payments and the payout of bonuses earned during 2008. Before the impact of severance and 2008 bonus payments, operating cash inflows totaled $7.6 million; and
† capital expenditures for property, plant and equipment of $0.6 million
Capital Resources
On November 16, 2007, in connection with the Acquisition of TPI, International Consulting Acquisition Corp., (the "Borrower"), a wholly-owned indirect subsidiary of the Company entered into a senior secured credit facility comprised of a $95.0 million term loan facility and a $10.0 million revolving credit facility (collectively referred to as the "2007 Credit Agreement"). On November 16, 2007, the Borrower borrowed $95.0 million under the term loan facility to finance the purchase of TPI. As of June 30, 2009, the total principal outstanding under the term loan facility was $81.8 million. There were no borrowings under the revolving credit facility during the first six months of 2009.
Under the 2007 Credit Agreement, we are required to hedge at least 40% of borrowings outstanding under the term loan facility. In February 2008, the Company purchased a three-year interest rate cap at 7% that hedges the LIBOR component of our borrowings under the term loan facility. The expense related to this interest rate cap was nominal.
On June 29, 2009, ISG made a voluntary principal prepayment of $12.0 million
against its outstanding term loan balance of $93.8 million. In conjunction with
this prepayment, ISG's lenders consented to the following conditions:
(1) agreement to execute the Company's UK tax planning strategy to reduce future
potential cash taxes, (2) exclusion of the impact in the calculation of Earnings
before Interest, Taxes, Depreciation, and Amortization ("EBITDA") of up to $5.0
million of restructuring charges relating to the Borrower's previously announced
2009 restructuring plan through December 31, 2009 and (3) exclusion of the
impact in the calculation of EBITDA of establishing, if necessary, a reserve in
respect of certain accounts receivable and work in progress due from General
Motors Corporation for worked performed on or before June 1, 2009. (Refer to
Item 3, "Quantitative and Qualitative Disclosure About Market Risk"). The
voluntary payment was made from excess cash balances generated through the
Company's normal business operations.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets or any obligation arising out of a material variable interest in an unconsolidated entity.
Recently Issued Accounting Pronouncements
In December 2008, the FASB released FASB Staff Position ("FSP") 132(R)-1,
Employer Disclosures about Postretirement Benefit Plan Assets ("FSP FAS
132(R)-1"). This standard requires enhanced disclosures about postretirement
benefit plan assets, including how investment decisions are made, the major
categories of plan assets, inputs and valuation techniques used to measure the
fair value of plan assets, and significant concentrations of risk within plan
assets. FSP FAS 132(R)-1 is effective for fiscal years ending after December 15,
2009. The Company does not expect the adoption of this Staff Position to have
material impact on our business, results of operations or financial condition.
In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are Not Orderly ("FSP FAS 157-4"). Under FSP FAS 157-4, if an entity determines that there has been a significant decrease in the volume and level of activity for the asset or the liability in relation to the normal market activity for the asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect fair value. In addition, if there is evidence that the transaction for the asset or liability is not orderly, the entity shall place little, if any, weight on that transaction price as an indicator of fair value. FSP FAS 157-4 is effective for periods ending after June 15, 2009. The adoption of FSP FAS 157-4 did not have any material impact on the Company's consolidated financial statements.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments ("FSP FAS 115-2/124-2"). FSP FAS 115-2/124-2 requires entities to separate an other-than-temporary impairment of a debt security into two components when there are credit related losses associated with the impaired debt security for which management asserts that it does not have the intent to sell the security, and it is more likely than not that it will not be required to sell the security before recovery of its cost basis. The amount of the other-than-temporary impairment related to a credit loss is recognized in earnings, and the amount of the other-than-temporary impairment related to other factors is recorded in other comprehensive loss. FSP FAS 115-2/124-2 is effective for periods ending after June 15, 2009. The adoption of these pronouncements did not have any material impact on the Company's consolidated financial statements.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments ("FSP FAS 107-1 and APB 28-1"). FSP FAS 107-1 and APB 28-1 require disclosures about fair value of financial instruments in interim and annual financial statements. FSP FAS 107-1 and APB 28-1 are effective for periods ending after June 15, 2009. The adoption of this pronouncement did not have any material impact on the Company's consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events("SFAS 165"). The statement is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued and requires the disclosure of the date through which a Company has evaluated subsequent events. SFAS 165 is effective for fiscal years and interim periods ended after June 15, 2009. The Company has adopted SFAS 165 effective June 15, 2009 and has evaluated subsequent events through August 6, 2009. The Company did not believe there are any material subsequent events which would require disclosure. The adoption of SFAS No. 165 did not have any material impact on the Company's consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162.The FASB Accounting Standards Codification ("the Codification") will become the source of authoritative U.S. generally accepted accounting principles (U.S. GAAP). The Codification, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. The Codification is not intended to change or alter existing U.S. GAAP.
Critical Accounting Policies and Accounting Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements. We prepare these financial statements in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We base our estimates on historical experience, available information and various other assumptions we believe to be reasonable under the circumstances. On an on-going basis, we evaluate our estimates; 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 as disclosed in our fiscal 2008 Form 10-K, Critical Accounting Policies and Estimates.
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