Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: March 31, 2011
OR
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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: 0-25092
INSIGHT ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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86-0766246 |
(State or other jurisdiction of
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(I.R.S. Employer Identification Number) |
incorporation or organization) |
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6820 South Harl Avenue, Tempe, Arizona 85283
(Address of principal executive offices) (Zip Code)
(480) 902-1001
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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 þ No o
Indicate by a checkmark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Date 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 o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of shares outstanding of the issuers common stock as of April 29, 2011 was 46,715,171.
INSIGHT ENTERPRISES, INC.
QUARTERLY REPORT ON FORM 10-Q
Three Months Ended March 31, 2011
TABLE OF CONTENTS
INSIGHT ENTERPRISES, INC.
FORWARD-LOOKING INFORMATION
Certain statements in this Quarterly Report on Form 10-Q, including statements in
Managements Discussion and Analysis of Financial Condition and Results of Operations in Part I,
Item 2 of this report, are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements may include: projections of
matters that affect net sales, gross profit, operating expenses, earnings from continuing
operations, non-operating income and expenses, net earnings or cash flows, working capital needs
and uses, cash needs and the sufficiency of our capital resources and the payment of accrued
expenses and liabilities; details of our business strategy and our strategic initiatives;
projections of capital expenditures; our intentions not to pay dividends; the availability of
financing and our needs or plans relating thereto; plans relating to our products and services; the
effect of new accounting principles or changes in accounting policies; the effect of
indemnification obligations and other off-balance sheet arrangements; projections about the outcome
of ongoing tax audits; statements related to accounting estimates, including estimated stock-based
compensation award forfeitures and the realization of deferred tax assets; the timing of
amortization of stock-based compensation expense and accrued severance and restructuring costs;
projections of compliance with debt covenants; our intentions to reinvest undistributed earnings of
foreign subsidiaries; our positions and strategies with respect to ongoing and threatened
litigation, including those matters identified in Legal Proceedings in Part II, Item 1 of this
report; statements of belief; and statements of assumptions underlying any of the foregoing.
Forward-looking statements are identified by such words as believe, anticipate, expect,
estimate, intend, plan, project, will, may and variations of such words and similar
expressions, and are inherently subject to risks and uncertainties, some of which cannot be
predicted or quantified. Future events and actual results could differ materially from those set
forth in, contemplated by, or underlying the forward-looking statements. There can be no
assurances that the results discussed in the forward-looking statements will be achieved, and
actual results could differ materially from those suggested by the forward-looking statements.
Some of the important factors that could cause our actual results to differ materially from those
projected in any forward-looking statements include, but are not limited to, the following:
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our reliance on partners for product availability and competitive products to sell as
well as our competition with our partners; |
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our reliance on partners for marketing funds and purchasing incentives; |
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disruptions in our information technology systems and voice and data networks, including
risks and costs associated with the integration and upgrade of our IT systems; |
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general economic conditions, including concerns regarding our ability to collect our
accounts receivable and client credit constraints; |
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actions of our competitors, including manufacturers and publishers of products we sell; |
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changes in the IT industry and/or rapid changes in product standards; |
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failure to comply with the terms and conditions of our commercial and public sector
contracts; |
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stockholder litigation and regulatory proceedings related to the restatement of our
consolidated financial statements; |
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the availability of future financing and our ability to access and/or refinance our
credit facilities; |
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the security of our electronic and other confidential information; |
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the variability of our net sales and gross profit; |
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the risks associated with our international operations; |
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exposure to changes in, interpretations of, or enforcement trends related to tax rules
and regulations; |
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our dependence on key personnel; and |
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intellectual property infringement claims and challenges to our registered trademarks
and trade names. |
Additionally, there may be other risks that are otherwise described from time to time in the
reports that we file with the Securities and Exchange Commission. Any forward-looking statements
in this report should be considered in light of various important factors, including the risks and
uncertainties listed above, as well as others. We assume no obligation to update, and do not
intend to update, any forward-looking statements. We do not endorse any projections regarding
future performance that may be made by third parties.
PART I FINANCIAL INFORMATION
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Item 1. |
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Financial Statements. |
INSIGHT ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
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March 31, |
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December 31, |
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2011 |
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2010 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
140,587 |
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$ |
123,763 |
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Accounts receivable, net of allowances for doubtful accounts of $18,265 and $17,540, respectively |
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1,009,732 |
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1,135,951 |
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Inventories |
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123,819 |
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106,734 |
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Inventories not available for sale |
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61,403 |
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50,677 |
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Deferred income taxes |
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22,424 |
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23,283 |
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Other current assets |
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31,706 |
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49,289 |
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Total current assets |
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1,389,671 |
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1,489,697 |
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Property and equipment, net of accumulated depreciation of $191,381 and $183,809, respectively |
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139,935 |
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141,399 |
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Goodwill |
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16,474 |
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16,474 |
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Intangible assets, net of accumulated amortization of $57,087 and
$50,755, respectively |
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67,182 |
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69,081 |
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Deferred income taxes |
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72,399 |
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73,796 |
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Other assets |
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15,278 |
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12,836 |
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$ |
1,700,939 |
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$ |
1,803,283 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
829,046 |
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$ |
881,688 |
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Accrued expenses and other current liabilities |
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156,955 |
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187,457 |
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Current portion of long-term debt |
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1,002 |
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997 |
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Deferred revenue |
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47,770 |
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67,373 |
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Total current liabilities |
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1,034,773 |
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1,137,515 |
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Long-term debt |
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71,366 |
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91,619 |
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Deferred income taxes |
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5,032 |
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5,011 |
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Other liabilities |
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22,960 |
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24,167 |
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1,134,131 |
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1,258,312 |
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Commitments and contingencies |
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Stockholders equity: |
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Preferred stock, $0.01 par value, 3,000 shares authorized;
no shares issued |
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Common stock, $0.01 par value, 100,000 shares authorized;
46,712 shares at March 31, 2011 and 46,325 shares at
December 31, 2010 issued and outstanding |
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467 |
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463 |
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Additional paid-in capital |
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378,020 |
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377,277 |
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Retained earnings |
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162,416 |
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149,349 |
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Accumulated other comprehensive income foreign currency
translation adjustments |
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25,905 |
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17,882 |
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Total stockholders equity |
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566,808 |
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544,971 |
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$ |
1,700,939 |
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$ |
1,803,283 |
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See accompanying notes to consolidated financial statements.
1
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
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Three Months Ended |
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March 31, |
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2011 |
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2010 |
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Net sales |
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$ |
1,219,896 |
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$ |
1,034,621 |
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Costs of goods sold |
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1,057,416 |
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889,576 |
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Gross profit |
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162,480 |
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145,045 |
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Operating expenses: |
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Selling and administrative expenses |
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139,101 |
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127,711 |
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Severance and restructuring expenses |
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524 |
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71 |
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Earnings from operations |
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22,855 |
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17,263 |
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Non-operating (income) expense: |
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Interest income |
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(358 |
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(127 |
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Interest expense |
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1,812 |
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2,367 |
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Net foreign currency exchange (gain) loss |
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(478 |
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209 |
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Other expense, net |
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406 |
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346 |
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Earnings before income taxes |
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21,473 |
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14,468 |
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Income tax expense |
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8,406 |
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5,303 |
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Net earnings |
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$ |
13,067 |
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$ |
9,165 |
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Net earnings per share: |
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Basic |
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$ |
0.28 |
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$ |
0.20 |
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Diluted |
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$ |
0.28 |
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$ |
0.20 |
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Shares used in per share calculations: |
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Basic |
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46,508 |
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46,073 |
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Diluted |
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47,182 |
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46,643 |
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See accompanying notes to consolidated financial statements.
2
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Three Months Ended March 31, |
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2011 |
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2010 |
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Cash flows from operating activities: |
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Net earnings |
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$ |
13,067 |
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$ |
9,165 |
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Adjustments to reconcile net earnings to net cash provided by
operating activities: |
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Depreciation and amortization |
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9,618 |
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9,743 |
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Provision for losses on accounts receivable |
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973 |
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1,365 |
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Write-downs of inventories |
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2,274 |
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1,276 |
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Write-off of computer software development costs |
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1,390 |
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Non-cash stock-based compensation |
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1,895 |
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1,214 |
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Excess tax benefit from employee gains on stock-based compensation |
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(1,566 |
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(844 |
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Deferred income taxes |
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1,822 |
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2,435 |
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Changes in assets and liabilities: |
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Decrease in accounts receivable |
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144,054 |
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150,052 |
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(Increase) decrease in inventories |
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(29,607 |
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1,500 |
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Decrease (increase) in other current assets |
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17,995 |
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(57,251 |
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Increase in other assets |
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(2,239 |
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(3,473 |
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(Decrease) increase in accounts payable |
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(21,901 |
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26,004 |
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Decrease in deferred revenue |
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(20,501 |
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(1,353 |
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Decrease in accrued expenses and other liabilities |
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(33,648 |
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(29,796 |
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Net cash provided by operating activities |
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83,626 |
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110,037 |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(5,044 |
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(2,794 |
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Net cash used in investing activities |
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(5,044 |
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(2,794 |
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Cash flows from financing activities: |
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Borrowings on senior revolving credit facility |
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283,000 |
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206,500 |
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Repayments on senior revolving credit facility |
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(303,000 |
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(273,500 |
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Borrowings on accounts receivable securitization financing facility |
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25,000 |
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Repayments on accounts receivable securitization financing facility |
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(25,000 |
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Payments on capital lease obligation |
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(248 |
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(217 |
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Net repayments under inventory financing facility |
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(46,906 |
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(19,836 |
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Proceeds from sales of common stock under employee stock plans |
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16 |
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Excess tax benefit from employee gains on stock-based compensation |
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1,566 |
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844 |
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Payment of
payroll taxes on stock-based compensation through shares withheld |
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(2,448 |
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(1,151 |
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Net cash used in financing activities |
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(68,020 |
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(87,360 |
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Foreign currency exchange effect on cash flows |
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6,262 |
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(2,625 |
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Increase in cash and cash equivalents |
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16,824 |
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17,258 |
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Cash and cash equivalents at beginning of period |
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123,763 |
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68,066 |
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Cash and cash equivalents at end of period |
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$ |
140,587 |
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$ |
85,324 |
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See accompanying notes to consolidated financial statements.
3
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation and Recently Issued Accounting Pronouncements
We are a leading provider of information technology (IT) hardware, software and services to
small, medium and large businesses and public sector institutions in North America, Europe, the
Middle East, Africa and Asia-Pacific. The Company is organized in the following three operating
segments, which are primarily defined by their related geographies:
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Operating Segment |
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Geography |
North America
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United States and Canada |
EMEA
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Europe, Middle East and Africa |
APAC
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Asia-Pacific |
Currently, our offerings in North America and the United Kingdom include IT hardware, software
and services. Our offerings in the remainder of our EMEA segment and in APAC are almost entirely
software and software-related services.
In the opinion of management, the accompanying unaudited consolidated financial statements
contain all adjustments necessary to present fairly our financial position as of March 31, 2011,
our results of operations and cash flows for the three months ended March 31, 2011 and 2010. The
consolidated balance sheet as of December 31, 2010 was derived from the audited consolidated
balance sheet at such date. The accompanying unaudited consolidated financial statements and notes
have been prepared in accordance with the rules and regulations promulgated by the Securities and
Exchange Commission (SEC) and consequently do not include all of the disclosures normally
required by United States generally accepted accounting principles (GAAP).
The results of operations for such interim periods are not necessarily indicative of results
for the full year, due in part to the seasonal nature of the business. These unaudited
consolidated financial statements should be read in conjunction with the audited consolidated
financial statements, including the related notes thereto, in our Annual Report on Form 10-K for
the year ended December 31, 2010.
The preparation of consolidated financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements. Additionally, these estimates and assumptions affect the reported amounts of
net sales and expenses during the reported period. Actual results could differ from those
estimates. On an ongoing basis, we evaluate our estimates, including those related to sales
recognition, anticipated achievement levels under partner funding programs, assumptions related to
stock-based compensation valuation, allowances for doubtful accounts, litigation-related
obligations, valuation allowances for deferred tax assets and impairment of long-lived assets,
including purchased intangibles and goodwill, if indicators of potential impairment exist.
The consolidated financial statements include the accounts of Insight Enterprises, Inc. and
its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in
consolidation. References to the Company, we, us, our and other similar words refer to
Insight Enterprises, Inc. and its consolidated subsidiaries, unless the context suggests otherwise.
Recently Issued Accounting Pronouncements
There have been no material changes or additions to the recently issued accounting
pronouncements as previously reported in Note 1 to our Consolidated Financial Statements in Part
II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2010 which affect or
may affect our financial statements.
4
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
2. Net Earnings Per Share (EPS)
Basic EPS is computed by dividing net earnings available to common stockholders by the
weighted average number of common shares outstanding during each period. Diluted EPS is computed
on the basis of the weighted average number of shares of common stock plus the effect of dilutive
potential common shares outstanding during the period using the treasury stock method. Dilutive
potential common shares include outstanding stock options and restricted stock units. A
reconciliation of the denominators of the basic and diluted EPS calculations follows (in thousands,
except per share data):
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Three Months Ended |
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March 31, |
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2011 |
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2010 |
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Numerator: |
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Net earnings |
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$ |
13,067 |
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$ |
9,165 |
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Denominator: |
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Weighted average shares used to compute basic EPS |
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46,508 |
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46,073 |
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Dilutive potential common shares due to dilutive
options and restricted stock units, net of tax effect |
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674 |
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570 |
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Weighted average shares used to compute diluted EPS |
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47,182 |
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46,643 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.28 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.28 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
During the three months ended March 31, 2011 and 2010, 224,000 and 543,000, respectively,
weighted average outstanding stock options were not included in the diluted EPS calculation because
the exercise prices of these options were greater than the average market price of our common stock
during the period.
3. Debt, Capital Lease Obligation and Inventory Financing Facility
Debt
Our long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Senior revolving credit facility |
|
$ |
70,000 |
|
|
$ |
90,000 |
|
Accounts receivable securitization financing facility |
|
|
|
|
|
|
|
|
Capital lease obligation |
|
|
2,368 |
|
|
|
2,616 |
|
|
|
|
|
|
|
|
Total |
|
|
72,368 |
|
|
|
92,616 |
|
Less: current portion of obligation under capital lease |
|
|
(1,002 |
) |
|
|
(997 |
) |
Less: current portion of revolving credit facilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
71,366 |
|
|
$ |
91,619 |
|
|
|
|
|
|
|
|
Our senior revolving credit facility has a maximum borrowing capacity of $300,000,000 and
matures April 1, 2013.
Our accounts receivable securitization financing facility (the ABS facility) has a maximum
borrowing capacity of $150,000,000 and matures on April 1, 2013. While the ABS facility has a
stated maximum amount, the actual availability under the ABS facility is limited by the quantity
and quality of the underlying accounts receivable. As of March 31, 2011, availability under the
ABS facility was $150,000,000.
5
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Our consolidated debt balance that can be outstanding at the end of any fiscal quarter
under our senior revolving credit facility and our ABS facility is limited by certain financial
covenants, particularly a maximum leverage ratio. The maximum leverage ratio is calculated as
aggregate debt outstanding divided by the sum of the Companys trailing twelve month net earnings
(loss) plus (i) interest expense, less non-cash imputed interest on our inventory financing
facility, (ii) income tax expense (benefit), (iii) depreciation and amortization and (iv) non-cash
stock-based compensation (referred to herein as adjusted earnings). The maximum leverage ratio
permitted under the agreements is 2.50 times trailing twelve-month adjusted earnings. A
significant drop in the Companys adjusted earnings would limit the amount of indebtedness that
could be outstanding at the end of any fiscal quarter to a level that would be below the Companys
consolidated maximum debt capacity. As a result of this limitation, of the $450,000,000 of
aggregate maximum debt capacity available under our senior revolving credit facility and our ABS
facility, the Companys debt balance that could have been outstanding as of March 31, 2011 was
limited to $431,355,000 based on 2.50 times the Companys trailing twelve-month adjusted earnings.
Our financing facilities contain various covenants, including the requirement that we comply
with maximum leverage, minimum fixed charge and minimum asset coverage ratio requirements and meet
weekly, monthly, quarterly and annual reporting requirements. If we fail to comply with these
covenants, the lenders would be able to demand payment within a specified period of time. At March
31, 2011, we were in compliance with all such covenants.
Capital Lease Obligation
The present value of minimum lease payments under our capital lease, and the current portion
thereof, are included in our debt balances as summarized in the table above. The value of the IT
equipment held under the capital lease of $3,867,000 is included in property and equipment, with
accumulated amortization on the capital lease assets of $1,534,000 and $1,283,000 as of March 31,
2011 and December 31, 2010, respectively.
Inventory Financing Facility
As of March 31, 2011 and December 31, 2010, $88,206,000 and $135,112,000, respectively, was
included in accounts payable within the consolidated balance sheet related to our inventory
financing facility.
4. Income Taxes
Our effective tax rate for the three months ended March 31, 2011 was 39.1%. For the three
months ended March 31, 2011, our effective tax rate was higher than the United States federal
statutory rate of 35.0% due primarily to state income taxes, net of federal benefit and other
non-deductible expenses, partially offset by lower taxes on earnings in foreign jurisdictions.
Our effective tax rate for the three months ended March 31, 2010 was 36.7%. For the three
months ended March 31, 2010, our effective tax rate was higher than the United States federal
statutory rate of 35.0% due primarily to state income taxes, net of federal benefit and other
non-deductible expenses, partially offset by lower taxes on earnings in foreign jurisdictions.
As of March 31, 2011 and December 31, 2010, we had approximately $6,254,000 and $6,013,000,
respectively, of unrecognized tax benefits. Of these amounts, approximately $512,000 and $425,000
relate to accrued interest as of March 31, 2011 and December 31, 2010, respectively.
Several of our subsidiaries are currently under audit for the 2002 through 2009 tax years. It
is reasonably possible that the examination phase of these audits may conclude in the next 12
months and that the related unrecognized tax benefits for uncertain tax positions may change,
potentially having a material effect on our effective tax rate. However, based on the status of
the various examinations in multiple jurisdictions, an estimate of the range of reasonably possible
outcomes cannot be made at this time.
6
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
5. Severance and Restructuring Activities
Severance Costs Expensed for 2011 Resource Actions
During the three months ended March 31, 2011, North America and EMEA recorded severance
expense totaling $321,000 and $239,000, respectively, related to 2011 resource actions. The
charges were associated with the severance for the elimination of certain positions based on a
re-alignment of roles and responsibilities. Cash payments totaling $144,000 were made in North
America associated with these resource actions during the three months ended March 31, 2011. The
remaining outstanding obligations are expected to be paid during the year ending December 31, 2011
and are therefore included in accrued expenses and other current liabilities.
Severance Costs Expensed for 2010 Resource Actions
During the year ended December 31, 2010, North America and EMEA recorded severance expense
totaling $2,003,000 and $1,476,000, respectively, relating to 2010 resource actions. The North
America charge was part of the roll-out of our new sales engagement model and plans to add new
leadership in key areas, and the EMEA charge was associated with the severance for the elimination
of certain positions based on a re-alignment of roles and responsibilities. The following table
details the 2011 activity and the outstanding obligation related to the 2010 resource actions as of
March 31, 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
EMEA |
|
|
Consolidated |
|
Balance at December 31, 2010 |
|
$ |
1,166 |
|
|
$ |
575 |
|
|
$ |
1,741 |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
23 |
|
|
|
23 |
|
Adjustments |
|
|
|
|
|
|
(36 |
) |
|
|
(36 |
) |
Cash payments |
|
|
(270 |
) |
|
|
(112 |
) |
|
|
(382 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2011 |
|
$ |
896 |
|
|
$ |
450 |
|
|
$ |
1,346 |
|
|
|
|
|
|
|
|
|
|
|
In EMEA, adjustments totaling $36,000 were recorded as a reduction to severance and
restructuring expense during the three months ended March 31, 2011 and a reduction of the related
severance accrual due to changes in estimates as cash payments were made. All remaining
outstanding obligations are expected to be paid during 2011 and are therefore included in accrued
expenses and other current liabilities.
Prior Resource Actions
In prior years, as a result of ongoing restructuring efforts to reduce operating expenses,
certain severance costs were recorded in each of our operating segments. The only remaining
outstanding obligations related to these prior resource actions as of December 31, 2010 were in our
EMEA segment. As of March 31, 2011 and December 31, 2010, the total liability remaining for unpaid
severance costs associated with resource actions prior to 2010 in our EMEA segment was
approximately $1,164,000 and $1,113,000, respectively. The increase in this total liability during
the three months ended March 31, 2011 was attributable to foreign currency translation adjustments.
All remaining outstanding obligations are expected to be paid during 2011 and are therefore
included in accrued expenses and other current liabilities.
7
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
6. Stock-Based Compensation
We recorded the following pre-tax amounts for stock-based compensation, by operating segment,
in our consolidated financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
North America |
|
$ |
1,422 |
|
|
$ |
942 |
|
EMEA |
|
|
424 |
|
|
|
238 |
|
APAC |
|
|
49 |
|
|
|
34 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,895 |
|
|
$ |
1,214 |
|
|
|
|
|
|
|
|
Stock Options
The following table summarizes our stock option activity during the three months ended March
31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
|
Average |
|
|
|
|
|
|
|
Weighted |
|
|
Intrinsic Value |
|
|
Remaining |
|
|
|
Number |
|
|
Average |
|
|
(in-the-money |
|
|
Contractual |
|
|
|
Outstanding |
|
|
Exercise Price |
|
|
options) |
|
|
Life (in years) |
|
Outstanding at January 1, 2011 |
|
|
243,452 |
|
|
$ |
17.99 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,100 |
) |
|
|
14.13 |
|
|
$ |
4,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(15,604 |
) |
|
|
17.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2011 |
|
|
226,748 |
|
|
|
18.06 |
|
|
$ |
12,164 |
|
|
|
1.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2011 |
|
|
226,748 |
|
|
|
18.06 |
|
|
$ |
12,164 |
|
|
|
1.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest |
|
|
226,748 |
|
|
|
18.06 |
|
|
$ |
12,164 |
|
|
|
1.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the preceding table represents the total pre-tax
intrinsic value, based on our closing stock price of $17.03 as of March 31, 2011, which would have
been received by the option holders had all option holders exercised options and sold the
underlying shares on that date.
As of March 31, 2011, all outstanding options are exercisable, including 200,000 options with
an exercise price of $17.77 and a remaining contractual life of 1.72 years. The remaining 26,748
outstanding options have exercise prices ranging from $14.00 to $26.70 and a weighted average
remaining contractual life of 0.15 years.
As of December 31, 2010, all stock options had vested and total compensation cost related to
all previously granted stock options had been recognized. For the three months ended March 31,
2010, we recorded stock-based compensation expense related to stock options, net of an estimate of
forfeitures, of $91,000.
Restricted Stock
For the three months ended March 31, 2011 and 2010, we recorded stock-based
compensation expense, net of estimated forfeitures, related to restricted stock units (RSUs) of
$1,895,000 and $1,123,000, respectively. As of March 31, 2011, total compensation cost not yet
recognized related to nonvested RSUs is $16,474,000, which is expected to be recognized over the
next 1.32 years on a weighted-average basis.
8
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes our RSU activity during the three months ended March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Number |
|
|
Grant Date Fair Value |
|
|
Fair Value |
|
Nonvested at January 1, 2011 |
|
|
1,599,376 |
|
|
$ |
9.99 |
|
|
|
|
|
Granted |
|
|
477,103 |
|
|
|
18.30 |
|
|
|
|
|
Vested, including shares withheld to
cover taxes |
|
|
(524,266 |
) |
|
|
8.96 |
|
|
$ |
9,325,424 |
(a) |
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(36,646 |
) |
|
|
7.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2011 |
|
|
1,515,567 |
|
|
|
13.03 |
|
|
$ |
25,810,106 |
(b) |
|
|
|
|
|
|
|
|
|
|
|
Expected to vest |
|
|
1,383,429 |
|
|
|
|
|
|
$ |
23,559,796 |
(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The fair value of vested RSUs represents the total pre-tax fair value, based on
the closing stock price on the day of vesting, which would have been received by holders of
RSUs had all such holders sold their underlying shares on that date. |
|
(b) |
|
The aggregate fair value represents the total pre-tax fair value, based on our
closing stock price of $17.03 as of March 31, 2011, which would have been received by
holders of RSUs had all such holders sold their underlying shares on that date. |
During the three months ended March 31, 2011 and 2010, the RSUs that vested for
teammates in the United States were net-share settled such that we withheld shares with value
equivalent to the teammates minimum statutory United States tax obligations for the applicable
income and other employment taxes and remitted the corresponding cash amount to the appropriate
taxing authorities. The total shares withheld during the three months ended March 31, 2011 and
2010 of 138,284 and 87,040, respectively, were based on the value of the RSUs on their vesting
date as determined by our closing stock price on such vesting date. For the three months ended
March 31, 2011 and 2010, total payments for the employees tax obligations to the taxing
authorities were $2,448,000 and $1,151,000, respectively, and are reflected as a financing
activity within the consolidated statements of cash flows. These net-share settlements had the
economic effect of repurchases of common stock as they reduced the number of shares that would
have otherwise been issued as a result of the vesting and did not represent a repurchase of shares
or an expense to us.
7. Derivative Financial Instruments
We use derivatives to partially offset our exposure to fluctuations in certain foreign
currencies. We do not enter into derivatives for speculative or trading purposes. Derivatives are
recorded at fair value on the balance sheet and gains or losses resulting from changes in fair
value of the derivative are recorded currently in income. The Company does not designate its
foreign currency derivatives as hedges for hedge accounting.
The following table summarizes our derivative financial instruments as of March 31, 2011 and
December 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
Asset |
|
|
Liability |
|
|
Asset |
|
|
Liability |
|
|
|
|
|
Derivatives |
|
|
Derivatives |
|
|
Derivatives |
|
|
Derivatives |
|
|
|
Balance Sheet Location |
|
Fair Value |
|
|
Fair Value |
|
|
Fair Value |
|
|
Fair Value |
|
Derivatives not
designated as
hedging
instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange
forward
contracts |
|
Other current assets |
|
$ |
69 |
|
|
$ |
|
|
|
$ |
28 |
|
|
$ |
|
|
Foreign exchange forward contracts |
|
Accrued expenses and other current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
not designated as
hedging instruments |
|
|
|
$ |
69 |
|
|
$ |
|
|
|
$ |
28 |
|
|
$ |
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes the effect of our derivative financial instruments on our
results of operations during the three months ended March 31, 2011 and 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as |
|
Location of Loss Recognized |
|
Amount of Loss Recognized in |
|
Hedging Instruments |
|
in Earnings on Derivatives |
|
Earnings on Derivatives |
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
Foreign exchange forward contracts |
|
Net foreign currency exchange (gain) loss |
|
$ |
(344 |
) |
|
$ |
(398 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
(344 |
) |
|
$ |
(398 |
) |
|
|
|
|
|
|
|
|
|
8. Fair Value Measurements
The following table summarizes the valuation of our financial instruments by the following
three categories as of March 31, 2011 and December 31, 2010 (in thousands):
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market
data.
Level 3: Unobservable inputs that are not corroborated by market data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Non-qualified |
|
|
|
|
|
|
Non-qualified |
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
Foreign |
|
|
Compensation |
|
|
Foreign |
|
|
Compensation |
|
|
|
|
|
|
|
Exchange |
|
|
Plan |
|
|
Exchange |
|
|
Plan |
|
Balance Sheet Classification |
|
|
|
|
|
Derivatives |
|
|
Investments |
|
|
Derivatives |
|
|
Investments |
|
Other current assets |
|
Level 1 |
|
$ |
|
|
|
$ |
1,249 |
|
|
$ |
|
|
|
$ |
1,245 |
|
|
|
Level 2 |
|
|
69 |
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
69 |
|
|
$ |
1,249 |
|
|
$ |
28 |
|
|
$ |
1,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current
liabilities |
|
Level 1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
Level 2 |
|
|
|
|
|
|
|
|
|
|
91 |
|
|
|
|
|
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
91 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Comprehensive Income
Comprehensive income for the three months ended March 31, 2011 and 2010 includes the following
component (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Net earnings |
|
$ |
13,067 |
|
|
$ |
9,165 |
|
Other comprehensive gain (loss), net of tax: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
8,023 |
|
|
|
(7,119 |
) |
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
21,090 |
|
|
$ |
2,046 |
|
|
|
|
|
|
|
|
10
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. Commitments and Contingencies
Contractual
In the ordinary course of business, we issue performance bonds to secure our performance under
certain contracts or state tax requirements. As of March 31, 2011 and December 31, 2010, we had
approximately $12,215,000 and $14,285,000, respectively, of performance bonds outstanding. These
bonds are issued on our behalf by a surety company on an unsecured basis; however, if the surety
company is ever required to pay out under the bonds, we have contractually agreed to reimburse
them.
Employment Contracts and Severance Plans
We have employment contracts with, and plans covering, certain officers and management
teammates under which severance payments would become payable in the event of specified
terminations without cause or terminations under certain circumstances after a change in control.
In addition, vesting of stock-based compensation would accelerate following a change in control.
If severance payments under the current employment agreements or plan payments were to become
payable, the severance payments would generally range from three to twenty-four months of salary.
Indemnifications
From time to time, in the ordinary course of business, we enter into contractual arrangements
under which we agree to indemnify either our clients or third-party service providers from certain
losses incurred relating to services performed on our behalf or for losses arising from defined
events, which may include litigation or claims relating to past performance. These arrangements
include, but are not limited to, the indemnification of our clients for certain claims arising out
of our performance under our sales contracts, the indemnification of our landlords for certain
claims arising from our use of leased facilities and the indemnification of the lenders that
provide our credit facilities for certain claims arising from their extension of credit to us.
Such indemnification obligations may not be subject to maximum loss clauses.
Management believes that payments, if any, related to these indemnifications are not probable
at March 31, 2011. Accordingly, we have not accrued any liabilities related to such
indemnifications in our consolidated financial statements.
We have entered into separate indemnification agreements with our executive officers and with
each of our directors. These agreements require us, among other requirements, to indemnify such
officers and directors against expenses (including attorneys fees), judgments and settlements paid
by such individual in connection with any action arising out of such individuals status or service
as our executive officer or director (subject to exceptions such as where the individual failed to
act in good faith or in a manner the individual reasonably believed to be in or not opposed to the
best interests of the Company) and to advance expenses incurred by such individual with respect to
which such individual may be entitled to indemnification by us. Other than the pending purported
class action litigation and the Federal derivative action discussed under the caption Legal
Proceedings below, there are no pending legal proceedings that involve the indemnification of any
of the Companys directors or officers.
Contingencies Related to Third-Party Review
From time to time, we are subject to potential claims and assessments from third parties. We
are also subject to various governmental, client and vendor audits. We continually assess whether
or not such claims have merit and warrant accrual. Where appropriate, we accrue estimates of
anticipated liabilities in the consolidated financial statements. Such estimates are subject to
change and may affect our results of operations and our cash flows.
11
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Legal Proceedings
We are party to various legal proceedings arising in the ordinary course of business,
including preference payment claims asserted in client bankruptcy proceedings, claims of alleged
infringement of patents, trademarks, copyrights and other intellectual property rights, claims of
alleged non-compliance with contract provisions and claims related to alleged violations of laws
and regulations.
We make a provision for a liability when it is both probable that a liability has been
incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at
least quarterly and are adjusted to reflect the effects of negotiations, settlements, rulings,
advice of legal counsel and other information and events pertaining to a particular claim or
proceeding. Although litigation is inherently unpredictable, we believe that we have adequate
provisions for any probable and estimable losses. It is possible, nevertheless, that our
consolidated financial position, results of operations or liquidity could be materially and
adversely affected in any particular period by the resolution of a legal proceeding. Legal
expenses related to defense, negotiations, settlements, rulings and advice of outside legal counsel
are expensed as incurred.
Beginning in March 2009, three purported class action lawsuits were filed in the U.S. District
Court for the District of Arizona against us and certain of our current and former directors and
officers on behalf of purchasers of our securities during the period April 22, 2004 to February 6,
2009. The second amended complaint (the only remaining complaint then on file) of the lead
plaintiff was dismissed with prejudice in November 2010, and another purported class member
plaintiff has appealed the order of dismissal with prejudice to the U.S. Court of Appeals for the
Ninth Circuit. In June 2009, three shareholder derivative lawsuits were filed, two in the Superior
Court in Maricopa County, Arizona (the State derivative actions) and one in the U.S. District
Court for the District of Arizona (the Federal derivative action), by persons identifying
themselves as Insight shareholders and purporting to act on behalf of Insight, naming Insight as a
nominal defendant and current and former officers and directors as defendants. The Federal
derivative action was dismissed with prejudice in July 2010, and the plaintiff in that action has
appealed the order of dismissal to the U.S. Court of Appeals for the Ninth Circuit. The two State
derivative actions were consolidated into a single action, and in October 2010, the State
derivative actions were dismissed with prejudice. The plaintiff in the State derivative actions
did not appeal the order of dismissal. We have tendered a claim to our D&O liability insurance
carriers, and our carriers have acknowledged their obligations under these policies subject to a
reservation of rights. Based on the information available at this time, the Company is not able to
estimate the possible loss or range of loss for the purported class action or the Federal
derivative action at this time.
In August 2010, in connection with an investigation being conducted by the United States
Department of Justice (the DOJ), Calence received a subpoena from the Office of the Inspector
General of the Federal Communications Commission (the FCC OIG) requesting documents and
information related to the expenditure, by the Universal Service Administration Company, of funds
under the E-Rate program. The E-Rate program provides schools and libraries with discounts to
obtain affordable telecommunications and internet access and related hardware and software. We are
cooperating with the DOJ and FCC OIG and are in the process of responding to the subpoena, and,
based on the information available at this time, the Company is not able to estimate what the
possible loss or range of loss might be, if any, at this time. The Company is pursuing its rights
under the Calence acquisition agreements to indemnification for losses that may arise out of or
result from this matter, including our fees and expenses for responding to the subpoena.
Aside from the matters discussed above, the Company is not involved in any pending or
threatened legal proceedings that it believes could reasonably be expected to have a material
adverse effect on its financial condition, results of operations or liquidity.
12
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. Segment Information
We operate in three reportable geographic operating segments: North America; EMEA; and APAC.
Currently, our offerings in North America and the United Kingdom include IT hardware, software and
services. Our offerings in the remainder of our EMEA segment and in APAC are almost entirely
software and select software-related services. Net sales by product or service type for North
America, EMEA and APAC were as follows for the three months ended March 31, 2011 and 2010 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
EMEA |
|
|
APAC |
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
March 31, |
|
Sales Mix |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Hardware |
|
$ |
541,648 |
|
|
$ |
454,451 |
|
|
$ |
121,116 |
|
|
$ |
121,232 |
|
|
$ |
179 |
|
|
$ |
58 |
|
Software |
|
|
245,570 |
|
|
|
184,991 |
|
|
|
210,140 |
|
|
|
191,510 |
|
|
|
34,113 |
|
|
|
28,520 |
|
Services |
|
|
59,821 |
|
|
|
48,852 |
|
|
|
5,721 |
|
|
|
4,551 |
|
|
|
1,588 |
|
|
|
456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
847,039 |
|
|
$ |
688,294 |
|
|
$ |
336,977 |
|
|
$ |
317,293 |
|
|
$ |
35,880 |
|
|
$ |
29,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All intercompany transactions are eliminated upon consolidation, and there are no differences
between the accounting policies used to measure profit and loss for our segments and on a
consolidated basis. Net sales are defined as net sales to external clients. None of our clients
exceeded ten percent of consolidated net sales for the three months ended March 31, 2011.
A portion of our operating segments selling and administrative expenses arise from shared
services and infrastructure that we have historically provided to them in order to realize
economies of scale. These expenses, collectively identified as corporate charges, include senior
management expenses, internal audit, legal, tax, insurance services, treasury and other corporate
infrastructure expenses. Charges are allocated to our operating segments, and the allocations have
been determined on a basis that we considered to be a reasonable reflection of the utilization of
services provided to or benefits received by the operating segments.
The tables below present information about our reportable operating segments as of and for the
three months ended March 31, 2011 and 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2011 |
|
|
|
North America |
|
|
EMEA |
|
|
APAC |
|
|
Consolidated |
|
Net sales |
|
$ |
847,039 |
|
|
$ |
336,977 |
|
|
$ |
35,880 |
|
|
$ |
1,219,896 |
|
Costs of goods sold |
|
|
737,579 |
|
|
|
289,762 |
|
|
|
30,075 |
|
|
|
1,057,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
109,460 |
|
|
|
47,215 |
|
|
|
5,805 |
|
|
|
162,480 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
92,581 |
|
|
|
41,052 |
|
|
|
5,468 |
|
|
|
139,101 |
|
Severance and restructuring expenses |
|
|
321 |
|
|
|
203 |
|
|
|
|
|
|
|
524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations |
|
$ |
16,558 |
|
|
$ |
5,960 |
|
|
$ |
337 |
|
|
|
22,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,473 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at period end |
|
$ |
1,469,794 |
|
|
$ |
519,069 |
|
|
$ |
63,508 |
|
|
$ |
2,052,371 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Consolidated total assets do not reflect the net effect of corporate assets and intercompany
eliminations of $351,432,000. |
13
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010 |
|
|
|
North America |
|
|
EMEA |
|
|
APAC |
|
|
Consolidated |
|
Net sales |
|
$ |
688,294 |
|
|
$ |
317,293 |
|
|
$ |
29,034 |
|
|
$ |
1,034,621 |
|
Costs of goods sold |
|
|
589,347 |
|
|
|
276,032 |
|
|
|
24,197 |
|
|
|
889,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
98,947 |
|
|
|
41,261 |
|
|
|
4,837 |
|
|
|
145,045 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
84,863 |
|
|
|
38,399 |
|
|
|
4,449 |
|
|
|
127,711 |
|
Severance and restructuring expenses |
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations |
|
$ |
14,084 |
|
|
$ |
2,791 |
|
|
$ |
388 |
|
|
|
17,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,468 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at period end |
|
$ |
1,382,584 |
|
|
$ |
403,544 |
|
|
$ |
60,349 |
|
|
$ |
1,846,477 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
** |
|
Consolidated total assets do not reflect the net effect of corporate assets and intercompany
eliminations of $351,739,000. |
We recorded the following pre-tax amounts, by operating segment, for depreciation and
amortization, in the accompanying consolidated financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
7,685 |
|
|
$ |
7,881 |
|
EMEA |
|
|
1,721 |
|
|
|
1,693 |
|
APAC |
|
|
212 |
|
|
|
169 |
|
|
|
|
|
|
|
|
Total |
|
$ |
9,618 |
|
|
$ |
9,743 |
|
|
|
|
|
|
|
|
14
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of
Operations. |
The following discussion should be read in conjunction with the consolidated financial
statements and the related notes that appear elsewhere in this Quarterly Report on Form 10-Q
Quarterly Overview
We are a leading provider of information technology (IT) hardware, software and
services to small, medium and large businesses and public sector institutions in North America,
Europe, the Middle East, Africa and Asia-Pacific. Currently, our offerings in North America and
the United Kingdom include IT hardware, software and services. Our offerings in the remainder of
our EMEA segment and in APAC are almost entirely software and software-related services.
Strong momentum in IT spending continued in the first quarter of 2011, resulting in double
digit sales growth for the fourth consecutive quarter. Consolidated net sales were $1.22 billion
in the first quarter of 2011, an increase of 18% from $1.03 billion in the first quarter of 2010.
Gross profit for the three months ended March 31, 2011 increased 12% to $162.5 million, and gross
margin declined 70 basis points to 13.3%. On a consolidated basis, we reported earnings from
operations of $22.9 million, net earnings of $13.1 million and diluted earnings per share of $0.28
for the first quarter of 2011. This compares to earnings from operations of $17.3 million, net
earnings of $9.2 million and diluted earnings per share of $0.20 for the first quarter of 2010.
Details about segment results of operations can be found in Note 11 to the Consolidated
Financial Statements in Part I, Item 1 of this report.
Our discussion and analysis of financial condition and results of operations is intended to
assist in the understanding of our consolidated financial statements, the changes in certain key
items in those consolidated financial statements from period to period and the primary factors that
contributed to those changes, as well as how certain critical accounting estimates affect our
consolidated financial statements.
Critical Accounting Estimates
General
Our consolidated financial statements have been prepared in accordance with United States
generally accepted accounting principles (GAAP). For a summary of significant accounting
policies, see Note 1 to the Consolidated Financial Statements in Part II, Item 8 of our Annual
Report on Form 10-K for the year ended December 31, 2010. The preparation of these consolidated
financial statements requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, net sales and expenses. We base our estimates on historical experience and
on various other assumptions that we believe to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results, however, may differ from
estimates we have made. Members of our senior management have discussed the critical accounting
estimates and related disclosures with the Audit Committee of our Board of Directors.
There have been no changes to the items disclosed as critical accounting estimates in
Managements Discussion and Analysis of Financial Condition and Results of Operations in Part II,
Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2010.
15
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Results of Operations
The following table sets forth for the periods presented certain financial data as a
percentage of net sales for the three months ended March 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
Costs of goods sold |
|
|
86.7 |
|
|
|
86.0 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
13.3 |
|
|
|
14.0 |
|
Selling and administrative expenses |
|
|
11.4 |
|
|
|
12.3 |
|
Severance and restructuring expenses |
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
Earnings from operations |
|
|
1.9 |
|
|
|
1.7 |
|
Non-operating expense, net |
|
|
0.1 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
1.8 |
|
|
|
1.4 |
|
Income tax expense |
|
|
0.7 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
Net earnings |
|
|
1.1 |
% |
|
|
0.9 |
% |
|
|
|
|
|
|
|
Throughout this Results of Operations section of Managements Discussion and Analysis
of Financial Condition and Results of Operations, we refer to changes in net sales, gross profit
and selling and administrative expenses in EMEA and APAC excluding the effects of foreign currency
movements. In computing these change amounts and percentages, we compare the current year amount
as translated into U.S. dollars under the applicable accounting standards to the prior year amount
in local currency translated into U.S. dollars utilizing the average translation rate for the
current quarter.
Net Sales. Net sales for the three months ended March 31, 2011 increased 18% compared to the
three months ended March 31, 2010. Our net sales by operating segment were as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, |
|
|
% |
|
|
|
2011 |
|
|
2010 |
|
|
Change |
|
North America |
|
$ |
847,039 |
|
|
$ |
688,294 |
|
|
|
23 |
% |
EMEA |
|
|
336,977 |
|
|
|
317,293 |
|
|
|
6 |
% |
APAC |
|
|
35,880 |
|
|
|
29,034 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
1,219,896 |
|
|
$ |
1,034,621 |
|
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
Net sales in North America increased 23%, or $158.7 million, for the three months ended
March 31, 2011 compared to the three months ended March 31, 2010. Net sales of hardware, software
and services increased 19%, 33% and 22%, respectively, year over year. The software results were
driven by strong demand for data protection, security and business productivity products in both
the commercial and public sector client groups. We also continued to see strong demand in hardware
for notebooks, desktops and accessories, particularly in the large enterprise and corporate client
groups. Overall, the increases in all categories resulted from higher volume with the year over
year improvement in the demand environment for IT products.
Net sales in EMEA increased 6%, or $19.7 million, in U.S. dollars, for the three months ended
March 31, 2011 compared to the three months ended March 31, 2010. Excluding the effects of foreign
currency movements, net sales were up 4% compared to the first quarter of last year. EMEAs growth
rate lags our growth rate in North America and APAC as the European economy has recovered more
slowly post- recession than in our other markets. Net sales of hardware were flat year over year
in U.S. dollars, down 3% excluding the effects of foreign currency movements, as growth rates have
moderated somewhat due to a decrease in spending in the public sector market. Software net sales
increased 10% year over year in U.S. dollars, 8% excluding the effects of foreign
currency movements, due primarily to higher volume and new client engagements. Net sales of
services increased 26% year over year in U.S. dollars, 23% excluding the effects of foreign
currency movements, due primarily to higher volume.
16
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Our APAC segment recognized net sales of $35.9 million for the three months ended March 31,
2011, a year over year increase of 24% from the three months ended March 31, 2010 in U.S. dollars,
13% excluding the effects of foreign currency movements. The increase primarily resulted from an
increase in sales to public sector clients in the 2011 quarter.
The percentage of net sales by category for North America, EMEA and APAC were as follows for
the three months ended March 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
EMEA |
|
|
APAC |
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
March 31, |
|
Sales Mix |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Hardware |
|
|
64 |
% |
|
|
66 |
% |
|
|
36 |
% |
|
|
38 |
% |
|
|
1 |
% |
|
|
|
|
Software |
|
|
29 |
% |
|
|
27 |
% |
|
|
62 |
% |
|
|
60 |
% |
|
|
95 |
% |
|
|
98 |
% |
Services |
|
|
7 |
% |
|
|
7 |
% |
|
|
2 |
% |
|
|
2 |
% |
|
|
4 |
% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currently, our offerings in North America and the United Kingdom include IT hardware,
software and services. Our offerings in the remainder of our EMEA segment and in APAC are almost
entirely software and software-related services.
Gross Profit. Gross profit for the three months ended March 31, 2011 increased 12%
compared to the three months ended March 31, 2010, with a 70 basis point decrease in gross margin.
Our gross profit and gross profit as a percentage of net sales by operating segment were as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
2011 |
|
|
Net Sales |
|
|
2010 |
|
|
Net Sales |
|
North America |
|
$ |
109,460 |
|
|
|
12.9 |
% |
|
$ |
98,947 |
|
|
|
14.4 |
% |
EMEA |
|
|
47,215 |
|
|
|
14.0 |
% |
|
|
41,261 |
|
|
|
13.0 |
% |
APAC |
|
|
5,805 |
|
|
|
16.2 |
% |
|
|
4,837 |
|
|
|
16.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
162,480 |
|
|
|
13.3 |
% |
|
$ |
145,045 |
|
|
|
14.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Americas gross profit for the three months ended March 31, 2011 increased 11%
compared to the three months ended March 31, 2010, but, as a percentage of net sales, gross margin
decreased 150 basis points year to year, due primarily to a decrease in margin contributed by
services sales of 58 basis points, a decrease in margin related to a lower mix of agency fees for
enterprise software agreements of 50 basis points, a 27 basis point decrease in product margin,
which includes vendor funding and freight, and an increase in the write-downs of inventories as a
percentage of sales which decreased margin by 10 basis points. The decrease in product margin year
to year was primarily related to unrecoverable freight expenses. Included in the decrease in
product margin year to year is a 22 basis point decline in margin attributable to the
extinguishment of certain restatement-related trade credits during the prior year quarter that did
not recur in the first quarter of 2011.
EMEAs gross profit increased 14% in U.S. dollars for the three months ended March 31, 2011
compared to the three months ended March 31, 2010. Excluding the effects of foreign currency
movements, gross profit was up 12% compared to the first quarter of last year. As a percentage of
net sales, gross margin increased 100 basis points due primarily to an increase in product margin,
which includes vendor funding, of 52 basis points, an increase in agency fees for enterprise
software agreement renewals contributing an increase in margin of 36 basis
points and an increase in margin contributed by services sales of 9 basis points. These
increases in margin were primarily the result of a change in the mix of business year over year to
a higher mix of commercial business in the three months ended March 31, 2011 compared to more lower
margin public sector business in the three months ended March 31, 2010.
17
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
APACs gross profit increased 20% for the three months ended March 31, 2011 compared to the
three months ended March 31, 2010. Excluding the effects of foreign currency movements, gross
profit increased 10% compared to the first quarter of last year. As a percentage of net sales,
gross margin declined by 50 basis points, primarily due to the effect of an increase in the mix of
public sector business, which is typically transacted at lower margins, as well as the effects of
the prior year release of a sales tax reserve of approximately $480,000 upon settlement with the
local taxing authorities in the first quarter of 2010.
Operating Expenses.
Selling and Administrative Expenses. Selling and administrative expenses increased $11.4
million, or 9%, for the three months ended March 31, 2011 compared to the three months ended March
31, 2010. Selling and administrative expenses as a percent of net sales by operating segment for
the three months ended March 31, 2011 and 2010 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
2011 |
|
|
Net Sales |
|
|
2010 |
|
|
Net Sales |
|
North America |
|
$ |
92,581 |
|
|
|
10.9 |
% |
|
$ |
84,863 |
|
|
|
12.3 |
% |
EMEA |
|
|
41,052 |
|
|
|
12.2 |
% |
|
|
38,399 |
|
|
|
12.1 |
% |
APAC |
|
|
5,468 |
|
|
|
15.2 |
% |
|
|
4,449 |
|
|
|
15.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
139,101 |
|
|
|
11.4 |
% |
|
$ |
127,711 |
|
|
|
12.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Americas selling and administrative expenses increased 9%, or $7.7 million, for
the three months ended March 31, 2011 compared to the three months ended March 31, 2010. Salaries
and benefits, including stock-based compensation, associated with investments in headcount and
related benefits accounted for approximately $3.2 million of the increase, and higher variable
compensation linked with increasing net sales accounted for approximately $2.7 million of the
increase. During the three months ended March 31, 2011, as expected, we incurred incremental
selling and administrative expenses associated with the North America IT systems integration
project. In addition, we incurred a non-cash charge of approximately $1.4 million during the
quarter to write-off certain computer software development costs that will not be placed into
service as a result of the North America IT systems integration project. Although selling and
administrative expenses increased year over year, selling and administrative expenses as a
percentage of net sales declined 140 basis points to 10.9% of net sales for the three months ended
March 31, 2011 compared to the three months ended March 31, 2010. The decline is primarily
attributable to the benefits of ongoing expense management efforts.
EMEAs selling and administrative expenses increased 7%, or $2.7 million in U.S. dollars, for
the three months ended March 31, 2011 compared to the three months ended March 31, 2010, increasing
slightly by 10 basis points year over year as a percent of net sales to 12.2%. Excluding the
effects of foreign currency movements, selling and administrative expenses increased 5% compared to
the first quarter of last year. This increase year over year was primarily driven by higher
variable compensation on increased net sales as well as increases in salaries and benefits due to
investments in headcount and related benefits in the first quarter of 2011.
APACs selling and administrative expenses increased 23% or $1.0 million in U.S. dollars, for
the three months ended March 31, 2011 compared to the three months ended March 31, 2010, decreasing
slightly by 10 basis points year over year as a percent of net sales to 15.2%. Excluding the
effects of foreign currency movements, selling and administrative expenses increased 12% compared
to the first quarter of last year. The
increase year over year was primarily driven by increases in salaries and benefits due to
investments in headcount in the first quarter of 2011.
18
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Severance and Restructuring Expenses. During the three months ended March 31, 2011, North
America and EMEA recorded net severance expense of $321,000 and $203,000 related to ongoing
restructuring efforts. During the quarter, $239,000 in new severance costs in EMEA were offset
partially by $36,000 of adjustments to prior severance accruals due to current period changes in
estimates. Comparatively, during the three months ended March 31, 2010, EMEA recorded net
severance expense of $71,000, representing $306,000 in new severance costs offset in large part by
$235,000 of adjustments to prior severance accruals dues to changes in estimates during the period.
Non-Operating (Income) Expense.
Interest Income. Interest income for the three months ended March 31, 2011 and 2010 was
generated through cash equivalent short-term investments. The increase in interest income year
over year is primarily due to increases in cash balances.
Interest Expense. Interest expense for the three months ended March 31, 2011 and 2010
primarily relates to borrowings under our financing facilities and capital lease obligation and
imputed interest under our inventory financing facility. The decrease in interest expense for the
three months ended March 31, 2011 compared to the three months ended March 31, 2010 is due
primarily to the effect of decreases in the weighted average borrowings outstanding as we have used
excess cash to pay down debt. These decreases were offset slightly by imputed interest under our
inventory financing facility, which increased to $617,000 for the three months ended March 31, 2011
from $534,000 for the three months ended March 31, 2010 due to increased weighted average
borrowings under the facility.
Net Foreign Currency Exchange Gains/Losses. These gains/losses result from foreign currency
transactions, including gains/losses on foreign currency derivative contracts and intercompany
balances that are not considered long-term in nature. The change in net foreign currency exchange
gains/losses is due primarily to the underlying changes in the applicable exchange rates, as
mitigated by our use of foreign exchange forward contracts to hedge certain non-functional currency
assets and liabilities against changes in exchange rate movements.
Other Expense, Net. Other expense, net, consists primarily of bank fees associated with our
cash management activities.
Income Tax Expense. Our effective tax rate for the three months ended March 31, 2011 was
39.1% compared to 36.7% for the three months ended March 31, 2010. The increase in our effective
tax rate for the three months ended March 31, 2011 was primarily due to a revaluation of our
deferred tax assets to reflect changes to statutory tax rates as a result of new legislation passed
in certain states during the first quarter of 2011.
19
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources
The following table sets forth certain consolidated cash flow information for the three
months ended March 31, 2011 and 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Net cash provided by operating activities |
|
$ |
83,626 |
|
|
$ |
110,037 |
|
Net cash used in investing activities |
|
|
(5,044 |
) |
|
|
(2,794 |
) |
Net cash used in financing activities |
|
|
(68,020 |
) |
|
|
(87,360 |
) |
Foreign currency exchange effect on cash flow |
|
|
6,262 |
|
|
|
(2,625 |
) |
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
16,824 |
|
|
|
17,258 |
|
Cash and cash equivalents at beginning of period |
|
|
123,763 |
|
|
|
68,066 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
140,587 |
|
|
$ |
85,324 |
|
|
|
|
|
|
|
|
Cash and Cash Flow
Our primary uses of cash during the three months ended March 31, 2011 were to fund working
capital requirements, including repayments under our inventory financing facility, and to pay down
debt. Operating activities in the three months ended March 31, 2011 provided $83.6 million in
cash, a 24% decrease from the three months ended March 31, 2010. Our operating cash flows enabled
us to make net repayments under our inventory financing facility of $46.9 million, to reduce our
long-term debt under our revolving credit facilities by $20.0 million and to increase our cash
balance by $16.8 million since December 31, 2010. Capital expenditures were $5.0 million for the
three months ended March 31, 2011, an 81% increase over the three months ended March 31, 2010,
primarily related to investments in our IT systems. Cash flows for the three months ended March
31, 2011 benefited $6.3 million from the foreign currency exchange effect on cash flows while cash
flows for the three months ended March 31, 2010 were negatively affected by $2.6 million as a
result of foreign currency exchange rates.
Net cash provided by operating activities. Cash flows from operations for the three
months ended March 31, 2011 and 2010 reflect our net earnings, adjusted for non-cash items such as
depreciation, amortization and stock-based compensation expense, as well as changes in accounts
receivable, inventories, other current assets, accounts payable, deferred revenue and accrued
expenses and other liabilities. For the 2011 period, the decreases in accounts receivable and
accounts payable are due to the seasonal decrease in net sales from the fourth quarter to the first
quarter. We increased inventory levels during the three months ended March 31, 2011 to support
specific client engagements and a general increase in volume. The increase in accounts payable
associated with the inventory purchases partially offset the seasonal decrease in accounts payable
during the quarter discussed above. For the 2010 period, the decrease in accounts receivable
reflects the effect of a large software transaction at the end of the 2009 first quarter that was
not included in accounts receivable as of March 31, 2010. We received the invoice from the
software license provider for the annual renewal of this same transaction in March 2010 and
recorded the related payable as of March 31, 2010; however, under contractual terms, the sale to
the client could not be invoiced until April 1, 2010. This transaction resulted in an approximate
$52 million increase in other current assets. The increase in accounts payable in the 2010 period
resulted primarily from the effect of the timing of certain scheduled payments to our largest
supplier and continued enhanced management of working capital during the 2010 quarter.
20
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Our consolidated cash flow operating metrics for the quarter ended March 31, 2011 and 2010 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
Days
sales outstanding in ending accounts
receivable (DSOs) (a) |
|
|
75 |
|
|
|
72 |
|
|
|
|
|
Days inventory outstanding (DIOs) (b) |
|
|
10 |
|
|
|
8 |
|
|
|
|
|
|
Days purchases outstanding in ending accounts payable (DPOs) (c) |
|
|
(71 |
) |
|
|
(69 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash conversion cycle (days) (d) |
|
|
14 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Calculated as the balance of accounts receivable, net at the end of the period divided
by daily net sales. Daily net sales is calculated as net sales for the quarter divided by
90 days. |
|
(b) |
|
Calculated as average inventories divided by daily costs of goods sold. Average
inventories is calculated as the sum of the balances of inventories at the beginning of the
quarter plus inventories at the end of the quarter divided by two. Daily costs of goods
sold is calculated as costs of goods sold for the quarter divided by 90 days. |
|
(c) |
|
Calculated as the balances of accounts payable, which includes the inventory financing
facility, at the end of the period divided by daily costs of goods sold. Daily costs of
goods sold is calculated as costs of goods sold for the quarter divided by 90 days. |
|
(d) |
|
Calculated as DSOs plus DIOs, less DPOs. |
Our cash conversion cycle was 14 days in the quarter ended March 31, 2011 compared to 11 days
in the quarter ended March 31, 2010. These results were primarily due to investments in inventory
to support specific client engagements and a general increase in volume.
We expect that cash flow from operations will be used, at least partially, to fund working
capital as we typically pay our partners on average terms that are shorter than the average terms
granted to our clients in order to take advantage of supplier discounts. We intend to use cash
generated in 2011 in excess of working capital needs to pay down our outstanding debt balances and
support our capital expenditures for the year.
Net cash used in investing activities. Capital expenditures of $5.0 million and $2.8 million
for the three months ended March 31, 2011 and 2010, respectively, primarily related to investments
in our IT systems. We expect capital expenditures for the full year 2011 between $20.0 million and
$25.0 million, primarily for the integration of our IT systems in North America onto a single
platform over the next two years, the IT systems upgrade in our EMEA operations and other facility
and technology related maintenance and upgrade projects.
Net cash used in financing activities. During the three months ended March 31, 2011, we made
net repayments on our debt facilities that reduced our outstanding debt balances under our
revolving credit facilities by $20.0 million, and we used $46.9 million to pay down our inventory
financing facility in accordance with its payment terms. As of March 31, 2011, the current portion
of our long-term debt relates to our capital lease obligation for certain IT equipment. During the
three months ended March 31, 2010, we made net repayments on our debt facilities that reduced our
outstanding debt balances by $67.0 million and made net repayments under our inventory financing
facility of $19.8 million.
Our consolidated debt balance that can be outstanding at the end of any fiscal quarter under
our senior revolving credit facility and our ABS facility is limited by certain financial
covenants, particularly a maximum leverage ratio. The maximum leverage ratio is calculated as
aggregate debt outstanding divided by the sum of the Companys trailing twelve month net earnings
(loss) plus (i) interest expense, less non-cash imputed interest on our inventory financing
facility, (ii) income tax expense (benefit), (iii) depreciation and amortization and (iv) non-cash
stock-based compensation (referred to herein as adjusted earnings). The maximum leverage ratio
permitted under the agreements is 2.50 times trailing twelve-month adjusted earnings. We
anticipate that we will be in compliance with our maximum leverage ratio requirements over the next
four quarters. However, a significant drop in the Companys adjusted earnings would limit the
amount of indebtedness that could be outstanding at the end of any fiscal quarter to a level that
would be below the Companys consolidated maximum debt capacity. As a result of this limitation,
of the $450.0 million of aggregate maximum debt capacity available
under our senior revolving credit facility and our ABS facility, the Companys debt balance
that could have been outstanding as of March 31, 2011 was limited to $431.4 million based on 2.50
times the Companys trailing twelve-month adjusted earnings. Our debt balance as of March 31, 2011
was $72.4 million, including our capital lease obligation.
21
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
We anticipate that cash flows from operations, together with the funds available under our
financing facilities will be adequate to support our presently anticipated cash and working capital
requirements for operations over the next 12 months.
Cash and cash equivalents held by foreign subsidiaries are generally subject to U.S. income
taxation upon repatriation to the U.S. For foreign entities not treated as branches for U.S. tax
purposes, we do not provide for U.S. income taxes on the undistributed earnings of these
subsidiaries as earnings are reinvested and, in the opinion of management, will continue to be
reinvested indefinitely outside of the U.S. As of March 31, 2011, we had approximately $119.0
million in cash and cash equivalents in certain of our foreign subsidiaries where we consider
undistributed earnings for these foreign subsidiaries to be permanently reinvested. We used our
excess cash balances in the U.S. to pay down debt as of March 31, 2011. As of March 31, 2011, the
majority of our foreign cash resides in the Netherlands, the United Kingdom and Australia. Certain
of these cash balances could and will be remitted to the U.S. by paying down intercompany payables
generated in the ordinary course of business. This repayment would not change our policy to
indefinitely reinvest earnings of its foreign subsidiaries. Our intention is that undistributed
earnings will be used for general business purposes in the foreign jurisdictions as well as to fund
our EMEA IT systems, various facility upgrades and the expansion of our sales of hardware and
services, in addition to software, to clients in EMEA countries.
Off Balance Sheet Arrangements
We have entered into off-balance sheet arrangements, which include guaranties and
indemnifications. The guaranties and indemnifications are discussed in Note 10 to our Consolidated
Financial Statements in Part I, Item 1 of this report. We believe that none of our off-balance
sheet arrangements has, or is reasonably likely to have, a material current or future effect on our
financial condition, results of operations, liquidity, capital expenditures or capital resources.
Recently Issued Accounting Pronouncements
See Note 1 to our Consolidated Financial Statements in Part I, Item 1 of this report for a
discussion of recently issued accounting pronouncements which affect or may affect our financial
statements.
Contractual Obligations
There have been no material changes in our reported contractual obligations, as described
under Contractual Obligations in Liquidity and Capital Resources in Part II, Item 7 of our
Annual Report on Form 10-K for the year ended December 31, 2010.
22
INSIGHT ENTERPRISES, INC.
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures About Market Risk. |
Other than the change in our open foreign currency forward contracts reflected below, there
have been no material changes in our reported market risks, as described in Quantitative and
Qualitative Disclosures About Market Risk in Part II, Item 7A of our Annual Report on Form 10-K
for the year ended December 31, 2010.
The following table summarizes our open foreign currency forward contracts held at March 31,
2011. All U.S. dollar and foreign currency amounts (British Pounds and Swiss Francs) are presented
in thousands.
|
|
|
|
|
|
|
|
|
|
|
Buy |
|
|
Sell |
|
Foreign Currency |
|
GBP |
|
|
CHF |
|
Foreign Amount |
|
|
6,262 |
|
|
|
1,000 |
|
Exchange Rate |
|
|
1.5970 |
|
|
|
1.2900 |
|
USD Equivalent |
|
$ |
10,000 |
|
|
$ |
1,095 |
|
Weighted Average Maturity |
|
Less than 1 month |
|
|
Less than 1 month |
|
|
|
|
Item 4. |
|
Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered
by this report, evaluated the effectiveness of our disclosure controls and procedures (as such term
is defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act) and determined that as of March
31, 2011, our disclosure controls and procedures were effective to ensure that information required
to be disclosed by us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms
and that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, to allow timely decisions regarding required
disclosure.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2011
that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Inherent Limitations of Disclosure Controls and Internal Control Over Financial Reporting
Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods
are subject to risks that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Part II OTHER INFORMATION
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Item 1. |
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Legal Proceedings. |
For a discussion of legal proceedings, see Note 10 to the Consolidated Financial Statements in
Part I, Item 1 of this report. For an additional discussion of certain risks associated with legal
proceedings, see Risk Factors We are subject to stockholder litigation and regulatory
proceedings related to the restatement of our consolidated financial statements, in Part I, Item
1A of our Annual Report on Form 10-K for the year ended December 31, 2010.
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INSIGHT ENTERPRISES, INC.
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the
year ended December 31, 2010, which could materially affect our business, financial condition or
future results. The risks described in our Annual Report on Form 10-K are not the only risks
facing our company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial may also materially adversely affect our business, financial
condition or operating results.
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds. |
There were no unregistered sales of equity securities during the three months ended March 31,
2011.
We have never paid a cash dividend on our common stock, and our senior revolving credit
facility contains restrictions on the payment of cash dividends. We currently intend to reinvest
all of our earnings into our business and do not intend to pay any cash dividends in the
foreseeable future.
Issuer Purchases of Equity Securities
We did not repurchase any shares of our common stock during the three months ended March 31,
2011.
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Item 3. |
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Defaults Upon Senior Securities. |
None.
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Item 4. |
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(Removed and Reserved). |
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Item 5. |
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Other Information. |
None.
(a) Exhibits (unless otherwise noted, exhibits are filed herewith).
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Exhibit No. |
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Description |
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3.1 |
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Composite Certificate of Incorporation of Insight Enterprises, Inc.
(incorporated by reference to Exhibit 3.1 of our Annual Report on Form
10-K for the year ended December 31, 2005). |
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3.2 |
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Amended and Restated Bylaws of the Insight Enterprises, Inc.
(incorporated by reference to Exhibit 3.1 of our current report on Form
8-K filed on January 14, 2008). |
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4.1 |
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Specimen Common Stock Certificate (incorporated by reference to Exhibit
4.1 of our Registration Statement on Form S-1 (No. 33-86142) declared
effective January 24, 1995). |
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10.1 |
(1) |
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Employment Agreement between Insight Enterprises, Inc. and Mary E.
Sculley, dated as of April 11, 2011. |
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10.2 |
(1) |
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Offer of employment letter to Mary E. Sculley, dated March 28, 2011. |
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31.1 |
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Certification of Chief Executive Officer Pursuant to Securities Exchange
Act Rule 13a-14. |
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31.2 |
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Certification of Chief Financial Officer Pursuant to Securities Exchange
Act Rule 13a-14. |
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32.1 |
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Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
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(1) |
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Management contract or compensatory plan or arrangement. |
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INSIGHT ENTERPRISES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: May 4, 2011 |
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INSIGHT ENTERPRISES, INC. |
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By:
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/s/ Kenneth T. Lamneck
Kenneth T. Lamneck
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President and Chief Executive Officer |
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(Duly Authorized Officer) |
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By:
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/s/ Glynis A. Bryan
Glynis A. Bryan
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Chief Financial Officer |
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(Principal Financial Officer) |
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By:
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/s/ David C. Olsen
David C. Olsen
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Corporate Controller |
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(Principal Accounting Officer) |
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