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EXCEL - IDEA: XBRL DOCUMENT - INSIGHT ENTERPRISES INC | Financial_Report.xls |
EX-31.1 - EXHIBIT 31.1 - INSIGHT ENTERPRISES INC | c20098exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - INSIGHT ENTERPRISES INC | c20098exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - INSIGHT ENTERPRISES INC | c20098exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: June 30, 2011
OR
o | 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)
Delaware | 86-0766246 | |
(State or other jurisdiction of | (I.R.S. Employer Identification Number) | |
incorporation or organization) |
6820 South Harl Avenue, Tempe, Arizona 85283
(Address of principal executive offices) (Zip Code)
(Address of principal executive offices) (Zip Code)
(480) 902-1001
(Registrants telephone number, including area code)
(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 check mark 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 þ 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.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
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 July 29, 2011 was 45,296,289.
INSIGHT ENTERPRISES, INC.
QUARTERLY REPORT ON FORM 10-Q
Three Months Ended June 30, 2011
QUARTERLY REPORT ON FORM 10-Q
Three Months Ended June 30, 2011
TABLE OF CONTENTS
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
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 operations,
non-operating income and expenses, net earnings or cash flows, working capital needs, sources 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; our plans relating to products and services; the effect of new
accounting principles or changes in accounting principles; 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 intention to reinvest undistributed earnings of foreign
subsidiaries; our expectations regarding seasonality; 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; our intentions regarding our stock repurchase program; 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:
| our reliance on partners for product availability and competitive products to sell as well as our competition with our partners; |
| our reliance on partners for marketing funds and purchasing incentives; |
| disruptions in our information technology (IT) systems and voice and data networks, including risks and costs associated with the integration and upgrade of our IT systems; |
| general economic conditions, including concerns regarding our ability to collect our accounts receivable and client credit constraints; |
| actions of our competitors, including manufacturers and publishers of products we sell; |
| changes in the IT industry and/or rapid changes in product standards; |
| failure to comply with the terms and conditions of our commercial and public sector contracts; |
| stockholder litigation and regulatory proceedings related to the restatement of our consolidated financial statements; |
| the availability of future financing and our ability to access and/or refinance our credit facilities; |
| the security of our electronic and other confidential information; |
| the variability of our net sales and gross profit; |
| the risks associated with our international operations; |
| exposure to changes in, interpretations of, or enforcement trends related to tax rules and regulations; |
| our dependence on key personnel; and |
| 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.
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements. |
INSIGHT ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 115,203 | $ | 123,763 | ||||
Accounts receivable, net of allowances for doubtful accounts of $18,711 and $17,540, respectively |
1,256,014 | 1,135,951 | ||||||
Inventories |
117,989 | 106,734 | ||||||
Inventories not available for sale |
39,410 | 50,677 | ||||||
Deferred income taxes |
21,533 | 23,283 | ||||||
Other current assets |
32,148 | 49,289 | ||||||
Total current assets |
1,582,297 | 1,489,697 | ||||||
Property and equipment, net of accumulated depreciation of $198,093 and $183,809, respectively |
138,943 | 141,399 | ||||||
Goodwill |
16,474 | 16,474 | ||||||
Intangible assets, net of accumulated amortization of $60,581 and $50,755, respectively |
64,477 | 69,081 | ||||||
Deferred income taxes |
70,952 | 73,796 | ||||||
Other assets |
15,107 | 12,836 | ||||||
$ | 1,888,250 | $ | 1,803,283 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 886,747 | $ | 881,688 | ||||
Accrued expenses and other current liabilities |
184,672 | 187,457 | ||||||
Current portion of long-term debt |
1,007 | 997 | ||||||
Deferred revenue |
53,993 | 67,373 | ||||||
Total current liabilities |
1,126,419 | 1,137,515 | ||||||
Long-term debt |
142,113 | 91,619 | ||||||
Deferred income taxes |
4,680 | 5,011 | ||||||
Other liabilities |
23,232 | 24,167 | ||||||
1,296,444 | 1,258,312 | |||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $0.01 par value, 3,000 shares authorized; no shares issued |
| | ||||||
Common stock, $0.01 par value, 100,000 shares authorized; 45,886 shares at June 30, 2011 and
46,325 shares at December 31, 2010 issued and outstanding |
459 | 463 | ||||||
Additional paid-in capital |
372,790 | 377,277 | ||||||
Retained earnings |
190,691 | 149,349 | ||||||
Accumulated other comprehensive income foreign currency translation adjustments |
27,866 | 17,882 | ||||||
Total stockholders equity |
591,806 | 544,971 | ||||||
$ | 1,888,250 | $ | 1,803,283 | |||||
See accompanying notes to consolidated financial statements.
1
Table of Contents
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales |
$ | 1,468,960 | $ | 1,266,913 | $ | 2,688,856 | $ | 2,301,534 | ||||||||
Costs of goods sold |
1,264,781 | 1,093,108 | 2,322,197 | 1,982,684 | ||||||||||||
Gross profit |
204,179 | 173,805 | 366,659 | 318,850 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling and administrative expenses |
146,386 | 127,830 | 285,487 | 255,541 | ||||||||||||
Severance and restructuring expenses |
3,405 | 1,318 | 3,929 | 1,389 | ||||||||||||
Earnings from operations |
54,388 | 44,657 | 77,243 | 61,920 | ||||||||||||
Non-operating (income) expense: |
||||||||||||||||
Interest income |
(400 | ) | (179 | ) | (758 | ) | (306 | ) | ||||||||
Interest expense |
1,644 | 1,691 | 3,456 | 4,058 | ||||||||||||
Net foreign currency exchange (gain) loss |
(686 | ) | 404 | (1,164 | ) | 613 | ||||||||||
Other expense, net |
383 | 403 | 789 | 749 | ||||||||||||
Earnings before income taxes |
53,447 | 42,338 | 74,920 | 56,806 | ||||||||||||
Income tax expense |
18,099 | 15,424 | 26,505 | 20,727 | ||||||||||||
Net earnings |
$ | 35,348 | $ | 26,914 | $ | 48,415 | $ | 36,079 | ||||||||
Net earnings per share: |
||||||||||||||||
Basic |
$ | 0.76 | $ | 0.58 | $ | 1.04 | $ | 0.78 | ||||||||
Diluted |
$ | 0.75 | $ | 0.58 | $ | 1.03 | $ | 0.77 | ||||||||
Shares used in per share calculations: |
||||||||||||||||
Basic |
46,609 | 46,238 | 46,559 | 46,156 | ||||||||||||
Diluted |
47,052 | 46,739 | 47,117 | 46,691 | ||||||||||||
See accompanying notes to consolidated financial statements.
2
Table of Contents
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net earnings |
$ | 48,415 | $ | 36,079 | ||||
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities: |
||||||||
Depreciation and amortization |
19,125 | 19,020 | ||||||
Provision for losses on accounts receivable |
2,254 | (423 | ) | |||||
Write-downs of inventories |
4,432 | 2,764 | ||||||
Write-off of computer software development costs |
1,390 | | ||||||
Non-cash stock-based compensation |
3,823 | 2,862 | ||||||
Excess tax benefit from employee gains on stock-based compensation |
(1,541 | ) | (908 | ) | ||||
Deferred income taxes |
3,768 | 6,572 | ||||||
Changes in assets and liabilities: |
||||||||
Increase in accounts receivable |
(93,498 | ) | (49,556 | ) | ||||
Increase in inventories |
(4,002 | ) | (2,146 | ) | ||||
Decrease (increase) in other current assets |
17,691 | (4,184 | ) | |||||
Increase in other assets |
(1,832 | ) | (3,344 | ) | ||||
Increase in accounts payable |
18,556 | 153,368 | ||||||
Decrease in deferred revenue |
(14,779 | ) | (3,848 | ) | ||||
Decrease in accrued expenses and other liabilities |
(7,220 | ) | (27,218 | ) | ||||
Net cash (used in) provided by operating activities |
(3,418 | ) | 129,038 | |||||
Cash flows from investing activities: |
||||||||
Payment of additional purchase price consideration for Calence |
| (5,123 | ) | |||||
Purchases of property and equipment |
(10,395 | ) | (8,311 | ) | ||||
Net cash used in investing activities |
(10,395 | ) | (13,434 | ) | ||||
Cash flows from financing activities: |
||||||||
Borrowings on senior revolving credit facility |
661,000 | 514,000 | ||||||
Repayments on senior revolving credit facility |
(610,000 | ) | (580,000 | ) | ||||
Borrowings on accounts receivable securitization financing facility |
| 25,000 | ||||||
Repayments on accounts receivable securitization financing facility |
| (25,000 | ) | |||||
Payments on capital lease obligation |
(496 | ) | (435 | ) | ||||
Net repayments under inventory financing facility |
(37,975 | ) | (8,123 | ) | ||||
Proceeds from sales of common stock under employee stock plans |
23 | 35 | ||||||
Excess tax benefit from employee gains on stock-based compensation |
1,541 | 908 | ||||||
Payment of payroll taxes on stock-based compensation through shares withheld |
(2,522 | ) | (1,246 | ) | ||||
Repurchases of common stock |
(14,149 | ) | | |||||
Net cash used in financing activities |
(2,578 | ) | (74,861 | ) | ||||
Foreign currency exchange effect on cash flows |
7,831 | (10,669 | ) | |||||
(Decrease) increase in cash and cash equivalents |
(8,560 | ) | 30,074 | |||||
Cash and cash equivalents at beginning of period |
123,763 | 68,066 | ||||||
Cash and cash equivalents at end of period |
$ | 115,203 | $ | 98,140 | ||||
See accompanying notes to consolidated financial statements.
3
Table of Contents
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:
Operating Segment | Geography | |
North America
|
United States and Canada | |
EMEA
|
Europe, Middle East and Africa | |
APAC
|
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 June 30, 2011, our
results of operations for the three and six months ended June 30, 2011 and 2010 and our cash flows
for the six months ended June 30, 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
Table of Contents
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Numerator: |
||||||||||||||||
Net earnings |
$ | 35,348 | $ | 26,914 | $ | 48,415 | $ | 36,079 | ||||||||
Denominator: |
||||||||||||||||
Weighted average shares used to compute basic EPS |
46,609 | 46,238 | 46,559 | 46,156 | ||||||||||||
Dilutive potential common shares due to dilutive
options and restricted stock units, net of tax
effect |
443 | 501 | 558 | 535 | ||||||||||||
Weighted average shares used to compute diluted EPS |
47,052 | 46,739 | 47,117 | 46,691 | ||||||||||||
Net earnings per share: |
||||||||||||||||
Basic |
$ | 0.76 | $ | 0.58 | $ | 1.04 | $ | 0.78 | ||||||||
Diluted |
$ | 0.75 | $ | 0.58 | $ | 1.03 | $ | 0.77 | ||||||||
For the three months ended June 30, 2011 and 2010, 207,000 and 354,000, respectively, of
weighted average outstanding stock options were not included in the diluted EPS calculations
because the exercise prices of these options were greater than the average market price of our
common stock during the respective periods. For the six months ended June 30, 2011 and 2010, the
excluded weighted average outstanding stock options were 216,000 and 446,000, respectively.
3. Debt, Capital Lease Obligation and Inventory Financing Facility
Debt
Our long-term debt consists of the following (in thousands):
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Senior revolving credit facility |
$ | 141,000 | $ | 90,000 | ||||
Accounts receivable securitization financing facility |
| | ||||||
Capital lease obligation |
2,120 | 2,616 | ||||||
Total |
143,120 | 92,616 | ||||||
Less: current portion of obligation under capital lease |
(1,007 | ) | (997 | ) | ||||
Less: current portion of revolving credit facilities |
| | ||||||
Long-term debt |
$ | 142,113 | $ | 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 June 30, 2011, availability under the ABS
facility was $150,000,000.
5
Table of Contents
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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 June 30, 2011 was equal
to the maximum available under the facilities of $450,000,000.
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
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 June 30, 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 $1,785,000 and $1,283,000 as of June 30,
2011 and December 31, 2010, respectively.
Inventory Financing Facility
As of June 30, 2011 and December 31, 2010, $97,137,000 and $135,112,000, respectively, was
included in accounts payable within the consolidated balance sheets related to our inventory
financing facility.
4. Income Taxes
Our effective tax rate for the three and six months ended June 30, 2011 was 33.9% and 35.4%,
respectively. For the three months ended June 30, 2011, our effective tax rate was lower than the
United States federal statutory rate of 35.0% due primarily to lower taxes on earnings in foreign
jurisdictions and the release of a valuation allowance in the United Kingdom, partially offset by
state income taxes, net of federal tax. For the six months ended June 30, 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 tax, partially offset by lower taxes on earnings in foreign
jurisdictions as well as the release of a valuation allowance in the United Kingdom.
Our effective tax rate for the three and six months ended June 30, 2010 was 36.4% and 36.5%,
respectively. For the three and six months ended June 30, 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 tax, partially offset by lower taxes on earnings in foreign jurisdictions.
As of June 30, 2011 and December 31, 2010, we had $6,230,000 and $6,013,000, respectively, of
unrecognized tax benefits. Of these amounts, approximately $568,000 and $425,000 relate to accrued
interest as of June 30, 2011 and December 31, 2010, respectively.
6
Table of Contents
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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.
5. Severance and Restructuring Activities
Severance Costs Expensed for 2011 Resource Actions
During the three months ended June 30, 2011, North America and EMEA recorded severance expense
totaling $1,164,000 and $2,286,000, respectively, and during the six months ended June 30, 2011,
North America and EMEA recorded severance expense totaling $1,485,000 and $2,525,000, respectively,
related to 2011 resource actions. The charges were associated with severance for the elimination
of certain positions based on a re-alignment of roles and responsibilities. The remaining
outstanding obligations as of June 30, 2011 of $926,000 and $2,333,000 for North America and EMEA,
respectively, 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 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 June 30, 2011 (in thousands):
North America | EMEA | Consolidated | ||||||||||
Balance at December 31, 2010 |
$ | 1,166 | $ | 575 | $ | 1,741 | ||||||
Foreign currency translation adjustments |
| 70 | 70 | |||||||||
Adjustments |
(45 | ) | (36 | ) | (81 | ) | ||||||
Cash payments |
(488 | ) | (200 | ) | (688 | ) | ||||||
Balance at June 30, 2011 |
$ | 633 | $ | 409 | $ | 1,042 | ||||||
In North America, adjustments totaling $45,000 were recorded as a reduction to severance
and restructuring expense during the three months ended June 30, 2011 and a reduction of the
related severance accrual due to changes in estimates as cash payments were made. No adjustments
were recorded for EMEA during the three months ended June 30, 2011. In North America and EMEA,
adjustments totaling $45,000 and $36,000, respectively, were recorded as a reduction to severance
and restructuring expense during the six months ended June 30, 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 June 30, 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 $1,188,000 and $1,113,000, respectively. The increase in this total liability during
the six months ended June 30, 2011 was attributable to foreign currency translation adjustments.
All remaining outstanding obligations are expected to be paid in the next twelve months and are
therefore included in accrued expenses and other current liabilities.
7
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INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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 | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
North America |
$ | 1,399 | $ | 1,247 | $ | 2,821 | $ | 2,189 | ||||||||
EMEA |
468 | 359 | 892 | 597 | ||||||||||||
APAC |
61 | 42 | 110 | 76 | ||||||||||||
Total |
$ | 1,928 | $ | 1,648 | $ | 3,823 | $ | 2,862 | ||||||||
Stock Options
The following table summarizes our stock option activity during the six months ended June 30,
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 |
(1,600 | ) | 14.14 | $ | 5,986 | |||||||||||
Forfeited or expired |
(37,747 | ) | 19.67 | |||||||||||||
Outstanding at June 30, 2011 |
204,105 | 17.71 | $ | 13,239 | 1.45 | |||||||||||
Exercisable at June 30, 2011 |
204,105 | 17.71 | $ | 13,239 | 1.45 | |||||||||||
Vested and expected to vest |
204,105 | 17.71 | $ | 13,239 | 1.45 | |||||||||||
The aggregate intrinsic value in the preceding table represents the total pre-tax
intrinsic value, based on our closing stock price of $17.71 as of June 30, 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 June 30, 2011, all outstanding options are exercisable, including 200,000 options with
an exercise price of $17.77 and a remaining contractual life of 1.47 years. The remaining 4,105
outstanding options have exercise prices ranging from $14.00 to $21.67 and a weighted average
remaining contractual life of 0.24 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 and six months ended June
30, 2010, we recorded stock-based compensation expense related to stock options, net of an estimate
of forfeitures, of $92,000 and $183,000, respectively.
Restricted Stock
For the three months ended June 30, 2011 and 2010, we recorded stock-based
compensation expense, net of estimated forfeitures, related to restricted stock units (RSUs) of
$1,928,000 and $1,556,000, respectively. For the six months ended June 30, 2011 and 2010, we
recorded stock-based compensation expense, net of an estimate of forfeitures, related to RSUs of
$3,823,000 and $2,679,000, respectively. As of June 30, 2011, total compensation cost not yet
recognized related to nonvested RSUs is $14,720,000, which is expected to be recognized over the
next 1.25 years on a weighted-average basis.
8
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INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes our RSU activity during the six months ended June 30, 2011:
Weighted Average | ||||||||||||
Number | Grant Date Fair Value | Fair Value | ||||||||||
Nonvested at January 1, 2011 |
1,599,376 | $ | 9.99 | |||||||||
Granted |
524,374 | 18.14 | ||||||||||
Vested, including shares
withheld to cover taxes |
(575,682 | ) | 9.24 | $ | 9,512,322 | (a) | ||||||
Forfeited |
(89,802 | ) | 10.29 | |||||||||
Nonvested at June 30, 2011 |
1,458,266 | 13.20 | $ | 25,825,891 | (b) | |||||||
Expected to vest |
1,350,277 | $ | 23,913,406 | (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 $17.71 as of June 30, 2011, which would have been received by
holders of RSUs had all such holders sold their underlying shares on that date. |
During the six months ended June 30, 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 six months ended June 30, 2011 and 2010 of 142,551 and
93,473, 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 six months ended June 30, 2011 and 2010,
total payments for the employees tax obligations to the taxing authorities were $2,522,000 and
$1,246,000, 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.
9
Table of Contents
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes our derivative financial instruments as of June 30, 2011 and
December 31, 2010 (in thousands):
June 30, 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 | $ | 155 | $ | | $ | 28 | $ | | |||||||||
Foreign
exchange
forward
contracts |
Accrued expenses and other current liabilities | | | | 91 | |||||||||||||
Total derivatives
not designated as
hedging instruments |
$ | 155 | $ | | $ | 28 | $ | 91 | ||||||||||
The following table summarizes the effect of our derivative financial instruments on our
results of operations during the three and six months ended June 30, 2011 and 2010 (in thousands):
Derivatives Not Designated as | Location of Gain Recognized in | Amount of Gain Recognized in | ||||||||||||||||
Hedging Instruments | Earnings on Derivatives | Earnings on Derivatives | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||
June 30, | June 30, | |||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||
Foreign exchange forward contracts |
Net foreign currency exchange gain | $ | (256 | ) | $ | (1,063 | ) | $ | (600 | ) | $ | (1,461 | ) | |||||
Total |
$ | (256 | ) | $ | (1,063 | ) | $ | (600 | ) | $ | (1,461 | ) | ||||||
8. Fair Value Measurements
The following table summarizes the valuation of our financial instruments by the following
three categories as of June 30, 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.
June 30, 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 | $ | | $ | 1,242 | $ | | $ | 1,245 | |||||||||
Level 2 | 155 | | 28 | | ||||||||||||||
Level 3 | | | | | ||||||||||||||
$ | 155 | $ | 1,242 | $ | 28 | $ | 1,245 | |||||||||||
Accrued expenses and other
current liabilities |
Level 1 | $ | | $ | | $ | | $ | | |||||||||
Level 2 | | | 91 | | ||||||||||||||
Level 3 | | | | | ||||||||||||||
$ | | $ | | $ | 91 | $ | | |||||||||||
10
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INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
9. Comprehensive Income
Comprehensive income for the three and six months ended June 30, 2011 and 2010 includes the
following component (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net earnings |
$ | 35,348 | $ | 26,914 | $ | 48,415 | $ | 36,079 | ||||||||
Other comprehensive income, net of tax: |
||||||||||||||||
Foreign currency translation adjustments |
1,961 | (8,044 | ) | 9,984 | (15,163 | ) | ||||||||||
Total comprehensive income |
$ | 37,309 | $ | 18,870 | $ | 58,399 | $ | 20,916 | ||||||||
10. Share Repurchase Program
On May 26, 2011, we announced that our Board of Directors had authorized the repurchase of up
to $50,000,000 of our common stock. Any share repurchases will be made on the open market, through
block trades, through 10b5-1 plans or otherwise. The amount of shares purchased and the timing of
the purchases will be based on working capital requirements, general business conditions and other
factors. We intend to retire the repurchased shares. During the three months ended June 30, 2011,
we purchased in open market transactions 873,261 shares of our common stock at a total cost of
approximately $14,149,000 (an average price of $16.20 per share). All shares repurchased to date
have been retired as of June 30, 2011.
11. 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 June 30, 2011, we had approximately $12,609,000
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.
11
Table of Contents
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Management believes that payments, if any, related to these indemnifications are not probable
at June 30, 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.
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.
12
Table of Contents
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
In August 2010, in connection with an investigation being conducted by the United States
Department of Justice (the DOJ), our subsidiary, Calence, LLC, 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. 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 and six months ended June 30, 2011 and 2010
(in thousands):
North America | EMEA | APAC | ||||||||||||||||||||||
Three Months Ended | Three Months Ended | Three Months Ended | ||||||||||||||||||||||
June 30, | June 30, | June 30, | ||||||||||||||||||||||
Sales Mix | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
Hardware |
$ | 615,697 | $ | 528,295 | $ | 104,819 | $ | 98,330 | $ | 453 | $ | 352 | ||||||||||||
Software |
310,817 | 285,974 | 291,952 | 256,614 | 74,858 | 40,380 | ||||||||||||||||||
Services |
62,809 | 51,232 | 6,108 | 4,266 | 1,447 | 1,470 | ||||||||||||||||||
$ | 989,323 | $ | 865,501 | $ | 402,879 | $ | 359,210 | $ | 76,758 | $ | 42,202 | |||||||||||||
North America | EMEA | APAC | ||||||||||||||||||||||
Six Months Ended | Six Months Ended | Six Months Ended | ||||||||||||||||||||||
June 30, | June 30, | June 30, | ||||||||||||||||||||||
Sales Mix | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
Hardware |
$ | 1,157,345 | $ | 982,746 | $ | 225,935 | $ | 219,562 | $ | 632 | $ | 410 | ||||||||||||
Software |
556,387 | 470,965 | 502,092 | 448,124 | 108,971 | 68,900 | ||||||||||||||||||
Services |
122,630 | 100,084 | 11,829 | 8,817 | 3,035 | 1,926 | ||||||||||||||||||
$ | 1,836,362 | $ | 1,553,795 | $ | 739,856 | $ | 676,503 | $ | 112,638 | $ | 71,236 | |||||||||||||
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 or six months ended June 30, 2011.
13
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INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
A portion of our operating segments selling and administrative expenses arise from shared
services and infrastructure that we provide 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 June 30, 2011 and 2010 (in thousands):
Three Months Ended June 30, 2011 | ||||||||||||||||
North America | EMEA | APAC | Consolidated | |||||||||||||
Net sales |
$ | 989,323 | $ | 402,879 | $ | 76,758 | $ | 1,468,960 | ||||||||
Costs of goods sold |
857,184 | 343,021 | 64,576 | 1,264,781 | ||||||||||||
Gross profit |
132,139 | 59,858 | 12,182 | 204,179 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling and administrative expenses |
94,994 | 44,606 | 6,786 | 146,386 | ||||||||||||
Severance and restructuring expenses |
1,119 | 2,286 | | 3,405 | ||||||||||||
Earnings from operations |
$ | 36,026 | $ | 12,966 | $ | 5,396 | 54,388 | |||||||||
Non-operating expense, net |
941 | |||||||||||||||
Earnings before income taxes |
53,447 | |||||||||||||||
Income tax expense |
18,099 | |||||||||||||||
Net earnings |
$ | 35,348 | ||||||||||||||
Total assets at period end |
$ | 1,454,329 | $ | 602,727 | $ | 128,824 | $ | 2,185,880 | * | |||||||
* | Consolidated total assets do not reflect the net effect of corporate assets and intercompany
eliminations of $297,630,000. |
Three Months Ended June 30, 2010 | ||||||||||||||||
North America | EMEA | APAC | Consolidated | |||||||||||||
Net sales |
$ | 865,501 | $ | 359,210 | $ | 42,202 | $ | 1,266,913 | ||||||||
Costs of goods sold |
745,877 | 312,727 | 34,504 | 1,093,108 | ||||||||||||
Gross profit |
119,624 | 46,483 | 7,698 | 173,805 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling and administrative expenses |
86,366 | 36,491 | 4,973 | 127,830 | ||||||||||||
Severance and restructuring expenses |
943 | 375 | | 1,318 | ||||||||||||
Earnings from operations |
$ | 32,315 | $ | 9,617 | $ | 2,725 | 44,657 | |||||||||
Non-operating expense, net |
2,319 | |||||||||||||||
Earnings before income taxes |
42,338 | |||||||||||||||
Income tax expense |
15,424 | |||||||||||||||
Net earnings |
$ | 26,914 | ||||||||||||||
Total assets at period end |
$ | 1,408,031 | $ | 498,976 | $ | 64,595 | $ | 1,971,602 | ** | |||||||
** | Consolidated total assets do not reflect the net effect of corporate assets and intercompany
eliminations of $350,554,000. |
14
Table of Contents
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The tables below present information about our reportable operating segments as of and
for the six months ended June 30, 2011 and 2010 (in thousands):
Six Months Ended June 30, 2011 | ||||||||||||||||
North America | EMEA | APAC | Consolidated | |||||||||||||
Net sales |
$ | 1,836,362 | $ | 739,856 | $ | 112,638 | $ | 2,688,856 | ||||||||
Costs of goods sold |
1,594,763 | 632,783 | 94,651 | 2,322,197 | ||||||||||||
Gross profit |
241,599 | 107,073 | 17,987 | 366,659 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling and administrative expenses |
187,575 | 85,658 | 12,254 | 285,487 | ||||||||||||
Severance and restructuring expenses |
1,440 | 2,489 | | 3,929 | ||||||||||||
Earnings from operations |
$ | 52,584 | $ | 18,926 | $ | 5,733 | 77,243 | |||||||||
Non-operating expense, net |
2,323 | |||||||||||||||
Earnings before income taxes |
74,920 | |||||||||||||||
Income tax expense |
26,505 | |||||||||||||||
Net earnings |
$ | 48,415 | ||||||||||||||
Total assets at period end |
$ | 1,454,329 | $ | 602,727 | $ | 128,824 | $ | 2,185,880 | * | |||||||
* | Consolidated total assets do not reflect the net effect of corporate assets and intercompany
eliminations of $297,630,000. |
Six Months Ended June 30, 2010 | ||||||||||||||||
North America | EMEA | APAC | Consolidated | |||||||||||||
Net sales |
$ | 1,553,795 | $ | 676,503 | $ | 71,236 | $ | 2,301,534 | ||||||||
Costs of goods sold |
1,335,224 | 588,759 | 58,701 | 1,982,684 | ||||||||||||
Gross profit |
218,571 | 87,744 | 12,535 | 318,850 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling and administrative expenses |
171,229 | 74,890 | 9,422 | 255,541 | ||||||||||||
Severance and restructuring expenses |
943 | 446 | | 1,389 | ||||||||||||
Earnings from operations |
$ | 46,399 | $ | 12,408 | $ | 3,113 | 61,920 | |||||||||
Non-operating expense, net |
5,114 | |||||||||||||||
Earnings before income taxes |
56,806 | |||||||||||||||
Income tax expense |
20,727 | |||||||||||||||
Net earnings |
$ | 36,079 | ||||||||||||||
Total assets at period end |
$ | 1,408,031 | $ | 498,976 | $ | 64,595 | $ | 1,971,602 | ** | |||||||
** | Consolidated total assets do not reflect the net effect of corporate assets and intercompany
eliminations of $350,554,000. |
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 June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
North America |
$ | 7,549 | $ | 7,602 | $ | 15,234 | $ | 15,483 | ||||||||
EMEA |
1,746 | 1,503 | 3,467 | 3,196 | ||||||||||||
APAC |
212 | 172 | 424 | 341 | ||||||||||||
Total |
$ | 9,507 | $ | 9,277 | $ | 19,125 | $ | 19,020 | ||||||||
15
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INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 second quarter of 2011, resulting in double
digit sales growth for the fifth consecutive quarter. Consolidated net sales were $1.47 billion in
the second quarter of 2011, an increase of 16% from $1.27 billion in the second quarter of 2010.
Gross profit for the three months ended June 30, 2011 increased 17% to $204.2 million, and gross
margin increased 20 basis points to 13.9%. On a consolidated basis, we reported earnings from
operations of $54.4 million, net earnings of $35.3 million and diluted earnings per share of $0.75
for the second quarter of 2011. This compares to earnings from operations of $44.7 million, net
earnings of $26.9 million and diluted earnings per share of $0.58 for the second quarter of 2010.
Our consolidated results of operations for the second quarter of 2011 include $3.4 million,
$2.3 million net of tax, of severance expense, compared to $1.3 million, $844,000 net of tax,
recorded during the second quarter of 2010. Net of tax amounts were computed using the statutory
tax rate for the taxing jurisdictions in the operating segment in which the related expenses were
recorded.
Details about segment results of operations can be found in Note 12 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.
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INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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.
Results of Operations
The following table sets forth for the periods presented certain financial data as a
percentage of net sales for the three and six months ended June 30, 2011 and 2010:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Costs of goods sold |
86.1 | 86.3 | 86.4 | 86.1 | ||||||||||||
Gross profit |
13.9 | 13.7 | 13.6 | 13.9 | ||||||||||||
Selling and administrative expenses |
10.0 | 10.1 | 10.6 | 11.1 | ||||||||||||
Severance and restructuring expenses |
0.2 | 0.1 | 0.1 | 0.1 | ||||||||||||
Earnings from operations |
3.7 | 3.5 | 2.9 | 2.7 | ||||||||||||
Non-operating expense, net |
0.1 | 0.2 | 0.1 | 0.2 | ||||||||||||
Earnings before income taxes |
3.6 | 3.3 | 2.8 | 2.5 | ||||||||||||
Income tax expense |
1.2 | 1.2 | 1.0 | 0.9 | ||||||||||||
Net earnings |
2.4 | % | 2.1 | % | 1.8 | % | 1.6 | % | ||||||||
We experience some seasonal trends in our sales of IT hardware, software and services.
Software sales are typically seasonally higher in our second and fourth quarters, particularly the
second quarter; business clients, particularly larger enterprise businesses in the U.S., tend to
spend more in our fourth quarter as they utilize their remaining capital budget authorizations and
less in the first quarter; sales to the federal government in the U.S. are often stronger in our
third quarter; and sales to public sector clients in the United Kingdom are often stronger in our
first quarter. These trends create overall seasonality in our consolidated results such that sales
and profitability are expected to be higher in the second and fourth quarters of the year.
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 June 30, 2011 increased 16% compared to the
three months ended June 30, 2010. Net sales for the six months ended June 30, 2011 increased 17%
compared to the six months ended June 30, 2010. Our net sales by operating segment were as follows
(dollars in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, | % | June 30, | % | |||||||||||||||||||||
2011 | 2010 | Change | 2011 | 2010 | Change | |||||||||||||||||||
North America |
$ | 989,323 | $ | 865,501 | 14 | % | $ | 1,836,362 | $ | 1,553,795 | 18 | % | ||||||||||||
EMEA |
402,879 | 359,210 | 12 | % | 739,856 | 676,503 | 9 | % | ||||||||||||||||
APAC |
76,758 | 42,202 | 82 | % | 112,638 | 71,236 | 58 | % | ||||||||||||||||
Consolidated |
$ | 1,468,960 | $ | 1,266,913 | 16 | % | $ | 2,688,856 | $ | 2,301,534 | 17 | % | ||||||||||||
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INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Net sales in North America increased 14%, or $123.8 million, for the three months ended
June 30, 2011 compared to the three months ended June 30, 2010. Net sales of hardware, software
and services increased 17%, 9% and 23%, respectively, year over year. We continued to see double
digit growth year over year across both
our large accounts and middle market client groups in the second quarter. 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 North America increased 18%, or $282.6 million for the six months ended June 30,
2011 compared to the six months ended June 30, 2010, primarily as a result of generally higher
demand for IT products. On a year to date basis, net sales of hardware, software and services
increased 18%, 18% and 23%, respectively, year over year.
Net sales in EMEA increased 12%, or $43.7 million, in U.S. dollars, for the three months ended
June 30, 2011 compared to the three months ended June 30, 2010. Excluding the effects of foreign
currency movements, net sales were flat compared to the second 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 our other markets. Net sales of hardware were up 7% year over year in
U.S. dollars, down 2% excluding the effects of foreign currency movements, as growth rates have
moderated somewhat due to a decrease in spending in the public sector market, mostly offset by
growth in the mid market client space. Software net sales increased 14% year over year in U.S.
dollars, 1% excluding the effects of foreign currency movements, due primarily to a modest increase
in volume, as softness in the public sector market was offset by new client engagements in the mid
market client space. Net sales of services increased 43% year over year in U.S. dollars, 27%
excluding the effects of foreign currency movements, due primarily to higher volume and new client
engagements.
Net sales in EMEA increased 9%, or $63.4 million, in U.S. dollars, for the six months ended
June 30, 2011 compared to the six months ended June 30, 2010. Excluding the effects of foreign
currency movements, net sales were up 2% compared to the first six months of last year. On a year
to date basis, hardware and software sales increased 3% and 12%, respectively, while sales of
services improved 34% year over year, in U.S. dollars. Excluding the effects of foreign currency
movements, hardware sales declined 3% year to year, while net sales of software and services
increased 4% and 25%, respectively, year over year. The year to date decrease in hardware sales
primarily resulted from a decrease in spending in the public sector market, while the increases in
software and services sales primarily resulted from higher volume and new client engagements.
Our APAC segment recognized net sales of $76.8 million for the three months ended June 30,
2011, a year over year increase of 82% from the three months ended June 30, 2010 in U.S. dollars,
55% excluding the effects of foreign currency movements. The significant increase primarily
resulted from new public sector client engagements in the 2011 quarter.
Net sales in APAC increased 58%, or $41.4 million, in U.S. dollars, for the six months ended
June 30, 2011 compared to the six months ended June 30, 2010, 39% excluding the effects of foreign
currency movements. The year to date increase primarily resulted from higher volume and new client
engagements, particularly public sector clients.
The percentage of net sales by category for North America, EMEA and APAC were as follows for
the three months ended June 30, 2011 and 2010:
North America | EMEA | APAC | ||||||||||||||||||||||
Three Months Ended | Three Months Ended | Three Months Ended | ||||||||||||||||||||||
June 30, | June 30, | June 30, | ||||||||||||||||||||||
Sales Mix | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
Hardware |
62 | % | 61 | % | 26 | % | 27 | % | 1 | % | 1 | % | ||||||||||||
Software |
32 | % | 33 | % | 72 | % | 72 | % | 97 | % | 96 | % | ||||||||||||
Services |
6 | % | 6 | % | 2 | % | 1 | % | 2 | % | 3 | % | ||||||||||||
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||
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INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The percentage of net sales by category for North America, EMEA and APAC were as follows
for the six months ended June 30, 2011 and 2010:
North America | EMEA | APAC | ||||||||||||||||||||||
Six Months Ended | Six Months Ended | Six Months Ended | ||||||||||||||||||||||
June 30, | June 30, | June 30, | ||||||||||||||||||||||
Sales Mix | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
Hardware |
63 | % | 63 | % | 30 | % | 33 | % | 1 | % | 1 | % | ||||||||||||
Software |
30 | % | 30 | % | 68 | % | 66 | % | 97 | % | 97 | % | ||||||||||||
Services |
7 | % | 7 | % | 2 | % | 1 | % | 2 | % | 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 June 30, 2011 increased 17%
compared to the three months ended June 30, 2010, with a 20 basis point increase in gross margin.
For the six months ended June 30, 2011, gross profit increased 15% compared to the six months ended
June 30, 2010, with a 30 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 June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
% of | % of | % of | % of | |||||||||||||||||||||||||||||
2011 | Net Sales | 2010 | Net Sales | 2011 | Net Sales | 2010 | Net Sales | |||||||||||||||||||||||||
North America |
$ | 132,139 | 13.4 | % | $ | 119,624 | 13.8 | % | $ | 241,599 | 13.2 | % | $ | 218,571 | 14.1 | % | ||||||||||||||||
EMEA |
59,858 | 14.9 | % | 46,483 | 12.9 | % | 107,073 | 14.5 | % | 87,744 | 13.0 | % | ||||||||||||||||||||
APAC |
12,182 | 15.9 | % | 7,698 | 18.2 | % | 17,987 | 16.0 | % | 12,535 | 17.6 | % | ||||||||||||||||||||
Consolidated |
$ | 204,179 | 13.9 | % | $ | 173,805 | 13.7 | % | $ | 366,659 | 13.6 | % | $ | 318,850 | 13.9 | % | ||||||||||||||||
North Americas gross profit for the three months ended June 30, 2011 increased 10%
compared to the three months ended June 30, 2010, but, as a percentage of net sales, gross margin
decreased 40 basis points year to year, due primarily to a 15 basis point decrease in product
margin, which includes vendor funding and freight, a decrease in margin related to a lower mix of
agency fees for enterprise software agreements of 14 basis points and a decrease in margin
contributed by services sales of 8 basis points. The decrease in product margin year to year was
primarily related to freight expenses. For the six months ended June 30, 2011, gross profit
increased 11% compared to the six months ended June 30, 2010, but, as a percentage of net sales,
gross margin decreased by 90 basis points reflecting the year to date decreases in margin related
to both agency fees for enterprise software agreements and sales of services of approximately 30
basis points each and a decrease in product margin, which includes vendor funding and freight, of
approximately 20 basis points, primarily related to freight. Additionally, year to date
write-downs of inventories as a percentage of sales decreased margin by approximately 10 basis
points.
EMEAs gross profit increased 29% in U.S. dollars for the three months ended June 30, 2011
compared to the three months ended June 30, 2010. Excluding the effects of foreign currency
movements, gross profit was up 15% compared to the second quarter of last year. As a percentage of
net sales, gross margin increased 200 basis points due primarily to an increase in product margin,
which includes vendor funding and freight, of approximately 130 basis points, an increase in agency
fees for enterprise software agreement renewals contributing an increase in margin of 47 basis
points and an increase in margin contributed by services sales of 17 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
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INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
commercial
business in the three months ended June 30, 2011 compared to more lower margin public sector business in the three months ended June 30, 2010. For the six months
ended June 30, 2011, gross profit increased 22% compared to the six months ended June 30, 2011.
Excluding the effects of foreign currency movements, gross profit increased 14% compared to the
first six months of last year. As a percentage of net sales, gross margin for the six month
periods increased 150 basis points, primarily due to an increase in product margin, which includes
vendor funding and freight, of 93 basis points, an increase in agency fees for enterprise software
agreements contributing an increase in margin of 43 basis points and an increase in margin
contributed by services sales of 13 basis points.
APACs gross profit increased 58% for the three months ended June 30, 2011 compared to the
three months ended June 30, 2010. Excluding the effects of foreign currency movements, gross
profit increased 34% compared to the second quarter of last year. As a percentage of net sales,
gross margin declined by 230 basis points, primarily due to the effect of an increase in the mix of
public sector business, which is typically transacted at lower margins. For the six months ended
June 30, 2011, gross profit increased 43% compared to the six months ended June 30, 2010.
Excluding the effects of foreign currency movements, gross profit increased 25% compared to the
first six months of last year. As a percentage of net sales, gross margin declined 160 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 $18.6
million, or 15%, for the three months ended June 30, 2011 compared to the three months ended June
30, 2010. For the six months ended June 30, 2011, selling and administrative expenses increased
$29.9 million, or 12%, compared to the six months ended June 30, 2010. Selling and administrative
expenses as a percent of net sales by operating segment for the three and six months ended June 30,
2011 and 2010 were as follows (dollars in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
% of | % of | % of | % of | |||||||||||||||||||||||||||||
2011 | Net Sales | 2010 | Net Sales | 2011 | Net Sales | 2010 | Net Sales | |||||||||||||||||||||||||
North America |
$ | 94,994 | 9.6 | % | $ | 86,366 | 10.0 | % | $ | 187,575 | 10.2 | % | $ | 171,229 | 11.0 | % | ||||||||||||||||
EMEA |
44,606 | 11.1 | % | 36,491 | 10.2 | % | 85,658 | 11.6 | % | 74,890 | 11.1 | % | ||||||||||||||||||||
APAC |
6,786 | 8.8 | % | 4,973 | 11.8 | % | 12,254 | 10.9 | % | 9,422 | 13.2 | % | ||||||||||||||||||||
Consolidated |
$ | 146,386 | 10.0 | % | $ | 127,830 | 10.1 | % | $ | 285,487 | 10.6 | % | $ | 255,541 | 11.1 | % | ||||||||||||||||
North Americas selling and administrative expenses increased 10%, or $8.6 million, for
the three months ended June 30, 2011 compared to the three months ended June 30, 2010. Higher
variable compensation linked with increasing net sales accounted for approximately $3.6 million of
the increase, and salaries and benefits, including stock-based compensation, associated with
investments in headcount and related benefits accounted for approximately $2.9 million of the
increase. Further, the year over year comparison was affected by the prior years selling and
administrative expenses being reduced by $2.9 million upon the collection of a single account
receivable which we had previously specifically reserved as doubtful. During the three months
ended June 30, 2011, as expected, we continued to incur incremental selling and administrative
expenses associated with 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 40 basis points to 9.6% of net sales for the three months ended
June 30, 2011 compared to the three months ended June 30, 2010. The decline is primarily
attributable to the benefits of ongoing expense management efforts. For the six months ended June
30, 2011, selling and administrative expenses increased 10%, or $16.3 million compared to the six
months ended June 30, 2010. During the six months ended June 30, 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 period 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. As noted above, the year over year comparison was also affected by the prior years
selling and administrative expenses being reduced by $2.9 million upon the collection of a single
account receivable which we had previously specifically reserved as doubtful.
20
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INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
EMEAs selling and administrative expenses increased 22%, or $8.1 million in U.S. dollars, for
the three months ended June 30, 2011 compared to the three months ended June 30, 2010, increasing
90 basis points year over year as a percent of net sales to 11.1%. Excluding the effects of
foreign currency movements, selling and administrative expenses increased 10% compared to the
second quarter of last year. This increase year over year was primarily driven by increases in
salaries and benefits due to investments in headcount and related benefits, which accounted for
approximately $4.8 million of the increase, as well as higher variable compensation on increased
gross profit, which accounted for approximately $1.5 million of the increase. Additionally, we
incurred incremental selling and administrative expenses associated with investments in our IT
systems in EMEA during the quarter. For the six months ended June 30, 2011, selling and
administrative expenses increased 14%, or $10.8 million in U.S. dollars, compared to the six months
ended June 30, 2010. Excluding the effects of foreign currency movements, selling and
administrative expenses increased 7% compared to the first six months of last year. The increase
in selling and administrative expenses is primarily attributable to increases in salaries and
benefits due to investments in headcount and related benefits and increases in variable
compensation on increased gross profit.
APACs selling and administrative expenses increased 36% or $1.8 million in U.S. dollars, for
the three months ended June 30, 2011 compared to the three months ended June 30, 2010, but
decreased significantly year to year as a percent of net sales by 300 basis points to 8.8%.
Excluding the effects of foreign currency movements, selling and administrative expenses increased
16% compared to the second quarter of last year. The increase year over year was primarily driven
by increases in salaries and benefits due to investments in headcount and increases in variable
compensation on increased gross profit. For the six months ended June 30, 2011, selling and
administrative expenses increased 30%, or $2.8 million in U.S. dollars compared to the six months
ended June 30, 2010. Excluding the effects of foreign currency movements, selling and
administrative expenses increased 14% compared to the first six months of last year. The year over
year increase in selling and administrative expenses in the six month periods was primarily
attributable to increases in salaries and benefits due to investments in headcount and increases in
variable compensation on increased gross profit.
Severance and Restructuring Expenses. During the three months ended June 30, 2011, North
America and EMEA recorded severance expense of $1.1 million, net of adjustments, and $2.3 million,
respectively, related to certain restructuring activities. During the six months ended June 30,
2011, North America and EMEA recorded severance expense totaling $1.4 million, net of adjustments,
and $2.5 million, net of adjustments, respectively, related to certain restructuring activities.
Comparatively, during the three months ended June 30, 2010, North America and EMEA recorded
severance expense of $943,000 and $375,000, respectively, and, during the six months ended June 30,
2010, North America and EMEA recorded severance expense of $943,000 and $446,000, respectively.
Non-Operating (Income) Expense.
Interest Income. Interest income for the three and six months ended June 30, 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 and six months ended June 30, 2011 and 2010
primarily relates to borrowings under our financing facilities and capital lease obligation and
imputed interest under our inventory financing facility. Interest expense was flat for the three
months ended June 30, 2011 compared to the three months ended June 30, 2010. For the six months
ended June 30, 2011 compared to the six months ended June 30, 2010, interest expense declined due
primarily to lower average borrowing rates year to year. Imputed interest under our inventory
financing facility was $462,000 and $1.1 million for the three and six months ended
June 30, 2011, respectively, compared to $627,000 and $1.2 million for the three and six months
ended June 30, 2010. These decreases were due to decreased weighted average interest rates,
partially offset by higher average balances outstanding under the facility. During the three
months ended June 30, 2010, we reduced interest expense by $553,000 for a change in estimate of
accrued interest related to two state unclaimed property settlements.
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INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 June 30, 2011 was 33.9%
compared to 36.4% for the three months ended June 30, 2010. Our effective tax rate for the six
months ended June 30, 2011 and 2010 was 35.4% and 36.5%, respectively. The decrease in our
effective tax rate for the three months ended June 30, 2011 was primarily due to the release of a
valuation allowance in the United Kingdom. The decrease in effective tax rates for the six month
periods was primarily due to a release of a valuation allowance in the United Kingdom, partially
offset by a revaluation of our deferred tax assets to reflect changes to certain statutory tax
rates.
Liquidity and Capital Resources
The following table sets forth certain consolidated cash flow information for the six
months ended June 30, 2011 and 2010 (in thousands):
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Net cash (used in) provided by operating activities |
$ | (3,418 | ) | $ | 129,038 | |||
Net cash used in investing activities |
(10,395 | ) | (13,434 | ) | ||||
Net cash used in financing activities |
(2,578 | ) | (74,861 | ) | ||||
Foreign currency exchange effect on cash flow |
7,831 | (10,669 | ) | |||||
(Decrease) increase in cash and cash equivalents |
(8,560 | ) | 30,074 | |||||
Cash and cash equivalents at beginning of period |
123,763 | 68,066 | ||||||
Cash and cash equivalents at end of period |
$ | 115,203 | $ | 98,140 | ||||
Cash and Cash Flow
Our primary uses of cash during the six months ended June 30, 2011 were to fund working
capital requirements, including repayments under our inventory financing facility, to repurchase
shares of our common stock and for capital expenditures. Operating activities in the six months
ended June 30, 2011 used $3.4 million in cash, compared to the $129.0 million in cash provided
during the six months ended June 30, 2010. The decrease in cash provided by operating activities
year to year is primarily due to a significant scheduled payment to a supplier that was made prior
to June 30, 2011. In the prior year period, the scheduled supplier payment was deferred to early
in the third quarter of 2010. We had net borrowings on our long-term debt under our revolving
credit facility of $51.0 million, made net repayments under our inventory financing facility of
$38.0 million and funded $14.1 million of repurchases of our common stock in June 2011. Capital
expenditures were $10.4 million for the six months ended June 30, 2011, a 25% increase over the six
months ended June 30, 2010, primarily
related to investments in our IT systems. Cash flows for the six months ended June 30, 2011
benefited $7.8 million from the foreign currency exchange effect on cash flows while cash flows for
the six months ended June 30, 2010 were negatively affected by $10.7 million as a result of foreign
currency exchange rates.
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INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Net cash (used in) provided by operating activities. Cash flows from operations for
the six months ended June 30, 2011 and 2010 reflect our net earnings, adjusted for non-cash items
such as depreciation, amortization, stock-based compensation expense and write-offs and write-downs
of assets, as well as changes in accounts receivable, other current assets, accounts payable,
deferred revenue and accrued expenses and other liabilities. For the 2011 period, the increases in
accounts receivable and accounts payable are due to the seasonal increase in net sales from the
fourth quarter to the second quarter. The increase in accounts payable during the six months ended
June 30, 2011 was significantly lower than the increase in accounts payable during the six months
ended June 30, 2010 as a result of the change in timing of the significant supplier payment
discussed above. The decreases in other current assets and deferred revenue in the six months
ended June 30, 2011 were primarily due to a large project for which we deferred revenue recognition
and the related costs as of December 31, 2010 until we received client acceptance of the work
performed throughout the first two quarters of 2011. For the 2010 period, the increases in
accounts receivable and accounts payable were due primarily to the increase in net sales compared
to the prior year. The decrease in accrued expenses and other liabilities in the six months ended
June 30, 2010 was primarily due to payments made to settle certain state unclaimed property
liabilities and reduce income taxes payable.
Our consolidated cash flow operating metrics for the quarter ended June 30, 2011 and 2010 are
as follows:
2011 | 2010 | |||||||
Days sales outstanding in ending accounts receivable (DSOs) (a) |
78 | 72 | ||||||
Days inventory outstanding (DIOs) (b) |
9 | 7 | ||||||
Days purchases outstanding in ending accounts payable (DPOs) (c) |
(64 | ) | (67 | ) | ||||
Cash conversion cycle (days) (d) |
23 | 12 | ||||||
(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 91 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 91 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 91 days. | |
(d) | Calculated as DSOs plus DIOs, less DPOs. |
Our cash conversion cycle was 23 days in the quarter ended June 30, 2011 compared to 12 days
in the quarter ended June 30, 2010. These results were primarily due to an increase in DSOs in our
foreign operating segments due to the effect on the average daily net sales computation of higher
software net sales more heavily transacted at the end of this years second quarter. Additionally,
the increase in DIOs resulted from investments in inventory to support specific client engagements
and a general increase in volume. Also contributing to the increase in the cash conversion cycle,
DPOs decreased in the 2011 quarter due to the effect of the timing of a scheduled supplier payment
that was made prior to June 30, 2011 (as discussed above). In the prior year period, DPOs
benefited from the supplier payment being deferred to early in the third quarter of 2010.
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,
fund repurchases of our common stock and support our capital expenditures for the year.
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INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Net cash used in investing activities. Capital expenditures of $10.4 million and $8.3 million
for the six months ended June 30, 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 six months ended June 30, 2011, we had net
borrowings on our debt facilities that increased our outstanding debt balances under our revolving
credit facilities by $51.0 million, and we used $38.0 million to pay down our inventory financing
facility in accordance with its payment terms. During the six months ended June 30, 2011, we also
funded repurchases of 873,261 shares of our common stock in open market transactions at a total
cost of approximately $14.1 million (an average price of $16.20 per share). These repurchases were
part of a program approved by our Board of Directors in May 2011 authorizing the purchase of up to
$50.0 million of our common stock. All shares repurchased have been retired as of June 30, 2011.
During the six months ended June 30, 2010, we made net repayments on our debt facilities that
reduced our outstanding debt balances by $66.0 million and made net repayments under our inventory
financing facility of $8.1 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 June 30, 2011 was equal to the maximum available under the facilities of $450.0 million. Our
debt balance as of June 30, 2011 was $143.1 million, including our capital lease obligation. As of
June 30, 2011, the current portion of our long-term debt relates to our capital lease obligation
for certain IT equipment.
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 June 30, 2011, we had approximately $95.0
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 a
portion of our excess cash balances in the U.S. to fund $14.1 million of repurchases of our common
stock. As of June 30, 2011, the majority of our foreign cash resides in the Netherlands, the
United Kingdom, Australia and Canada. 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.
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INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 11 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 Managements Discussion and Analysis of Financial Condition and
Results of Operations Liquidity and Capital Resources in Part II, Item 7 of our Annual Report
on Form 10-K for the year ended December 31, 2010.
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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 June 30,
2011. All U.S. dollar and foreign currency amounts (Canadian Dollars) are presented in thousands.
Buy | ||
Foreign Currency |
CAD | |
Foreign Amount |
10,000 | |
Exchange Rate |
0.9845 | |
USD Equivalent |
$10,157 | |
Weighted Average Maturity |
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 June
30, 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 June 30, 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
Item 1. | Legal Proceedings. |
For a discussion of legal proceedings, see Note 11 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.
Item 1A. | Risk Factors. |
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.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
There were no unregistered sales of equity securities during the three months ended June 30,
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
(c) | (d) | |||||||||||||||
(a) | Total Number of Shares | Approximate Dollar Value | ||||||||||||||
Total Number | (b) | Purchased as Part of | of Shares That May Yet be | |||||||||||||
of Shares | Average Price | Publicly Announced | Purchased Under the Plans | |||||||||||||
Period | Purchased | Paid per Share | Plans or Programs | or Programs | ||||||||||||
April 1, 2011 through
April 30, 2011 |
| $ | | | $ | | ||||||||||
May 1, 2011 through May
31, 2011 |
| | | 50,000,000 | ||||||||||||
June 1, 2011 through
June 30, 2011 |
873,261 | 16.20 | 873,261 | 35,851,000 | ||||||||||||
Total |
873,261 | $ | 16.20 | 873,261 | ||||||||||||
On May 26, 2011, we announced that our Board of Directors had authorized the repurchase of up
to $50,000,000 of our common stock. There is no stated expiration date for our current share
repurchase plan. Any share repurchases will be made on the open market, through block trades,
through 10b5-1 plans or otherwise. The amount of shares purchased and the timing of the purchases
will be based on working capital requirements, general business conditions and other factors. We
intend to retire the repurchased shares. All shares repurchased to date have been retired as of
June 30, 2011.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | (Removed and Reserved). |
Item 5. | Other Information. |
None.
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INSIGHT ENTERPRISES, INC.
Item 6. | Exhibits. |
(a) Exhibits (unless otherwise noted, exhibits are filed herewith).
Exhibit No. | Description | |||
3.1 | 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). |
|||
3.2 | 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). |
|||
4.1 | 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). |
|||
31.1 | Certification of Chief Executive Officer Pursuant to Securities
Exchange Act Rule 13a-14. |
|||
31.2 | Certification of Chief Financial Officer Pursuant to Securities
Exchange Act Rule 13a-14. |
|||
32.1 | 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. |
|||
101 | Interactive data files pursuant to Rule 405 of Regulation S-T. In
accordance with Rule 406T of Regulation S-T, the information in this
exhibit shall not be deemed to be filed for purposes of Section 18
of the Exchange Act, or otherwise subject to liability under that
section, and shall not be incorporated by reference into any
registration statement or other document filed under the Securities
Act of 1933, as amended, except as expressly set forth by specific
reference in such filing. |
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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.
Date: August 3, 2011 | INSIGHT ENTERPRISES, INC. | |||||
By: | /s/ Kenneth T. Lamneck
|
|||||
President and Chief Executive Officer | ||||||
(Duly Authorized Officer) | ||||||
By: | /s/ Glynis A. Bryan
|
|||||
Chief Financial Officer | ||||||
(Principal Financial Officer) | ||||||
By: | /s/ David C. Olsen
|
|||||
Corporate Controller | ||||||
(Principal Accounting Officer) |
29