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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended: June 30, 2014

OR

 

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

For the transition period from                      to                     

Commission File Number: 0-25092

 

 

INSIGHT ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   86-0766246

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

6820 South Harl Avenue, Tempe, Arizona 85283

(Address of principal executive offices) (Zip Code)

(480) 333-3000

(Registrant’s 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  x    No  ¨

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  x    No  ¨

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   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    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  ¨    No  x

The number of shares outstanding of the issuer’s common stock as of July 25, 2014 was 40,970,164.

 

 

 


Table of Contents

INSIGHT ENTERPRISES, INC.

QUARTERLY REPORT ON FORM 10-Q

Three Months Ended June 30, 2014

TABLE OF CONTENTS

 

         Page  

PART I - Financial Information

  
Item 1 –  

Financial Statements:

  

Consolidated Balance Sheets (unaudited) - June 30, 2014 and December 31, 2013

     1   

Consolidated Statements of Operations (unaudited) - Three and Six Months Ended June 30, 2014 and 2013

     2   

Consolidated Statements of Comprehensive Income (unaudited) - Three and Six Months Ended June 30, 2014 and 2013

     3   

Consolidated Statements of Cash Flows (unaudited) - Six Months Ended June 30, 2014 and 2013

     4   

Notes to Consolidated Financial Statements (unaudited)

     5   
Item 2 –  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     18   
Item 3 –  

Quantitative and Qualitative Disclosures About Market Risk

     29   
Item 4 –  

Controls and Procedures

     29   

PART II - Other Information

  
Item 1 –  

Legal Proceedings

     29   
Item 1A –  

Risk Factors

     29   
Item 2 –  

Unregistered Sales of Equity Securities and Use of Proceeds

     30   
Item 3 –  

Defaults Upon Senior Securities

     30   
Item 4 –  

Mine Safety Disclosures

     30   
Item 5 –  

Other Information

     30   
Item 6 –  

Exhibits

     31   

Signatures

     32   


Table of Contents

INSIGHT ENTERPRISES, INC.

FORWARD-LOOKING INFORMATION

Certain statements in this Quarterly Report on Form 10-Q, including statements in “Management’s 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; the effect of changes being implemented by our largest software partner to elements of its channel incentive program; our working capital needs; the expected effects of seasonality on our business; our intentions concerning the payment of dividends; projections of capital expenditures in 2014; the sufficiency of our capital resources and the availability of financing and our needs or plans relating thereto; the effect of new accounting principles or changes in accounting policies; our compliance with financial debt covenants; the effect of indemnification obligations; statements related to accounting estimates; our positions and strategies with respect to ongoing and threatened litigation; our intention not to repatriate certain foreign undistributed earnings where management considers those earnings to be reinvested indefinitely and plans for the use of such cash; our plans to use cash flow from operations for working capital, to pay down debt, make capital expenditures, repurchase shares of our common stock, and fund acquisitions; our exposure to off-balance sheet arrangements; 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 results described in 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;

 

    changes in the IT industry and/or rapid changes in technology;

 

    disruptions in our IT systems and voice and data networks, including risks and costs associated with the integration and upgrade of our IT systems;

 

    actions of our competitors, including manufacturers and publishers of products we sell;

 

    failure to comply with the terms and conditions of our commercial and public sector contracts;

 

    the security of our electronic and other confidential information;

 

    general economic conditions;

 

    our dependence on certain personnel;

 

    the variability of our net sales and gross profit;

 

    the integration and operation of acquired businesses, including our ability to achieve expected benefits of the acquisitions;

 

    the risks associated with our international operations;

 

    exposure to changes in, interpretations of, or enforcement trends related to tax rules and regulations; 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, except as may be required by law, 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,
2014
     December 31,
2013
 

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 149,927       $ 126,817   

Accounts receivable, net of allowance for doubtful accounts of $19,628 and $19,908, respectively

     1,325,866         1,257,910   

Inventories

     126,703         97,268   

Inventories not available for sale

     43,683         38,705   

Deferred income taxes

     16,945         16,436   

Other current assets

     68,119         57,528   
  

 

 

    

 

 

 

Total current assets

     1,731,243         1,594,664   

Property and equipment, net of accumulated depreciation of $262,201 and $250,412, respectively

     117,386         132,820   

Goodwill

     26,257         26,257   

Intangible assets, net of accumulated amortization of $84,314 and $78,430, respectively

     30,123         35,765   

Deferred income taxes

     58,880         58,651   

Other assets

     12,686         19,561   
  

 

 

    

 

 

 
   $ 1,976,575       $ 1,867,718   
  

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

Current liabilities:

     

Accounts payable

   $ 984,939       $ 850,951   

Accrued expenses and other current liabilities

     151,181         156,491   

Current portion of long-term debt

     369         217   

Deferred revenue

     55,390         44,146   
  

 

 

    

 

 

 

Total current liabilities

     1,191,879         1,051,805   

Long-term debt

     27,191         66,949   

Deferred income taxes

     726         443   

Other liabilities

     23,765         31,603   
  

 

 

    

 

 

 
     1,243,561         1,150,800   
  

 

 

    

 

 

 

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; 40,969 shares at June 30, 2014 and 42,023 shares at December 31, 2013 issued and outstanding

     410         420   

Additional paid-in capital

     340,618         348,703   

Retained earnings

     373,568         353,854   

Accumulated other comprehensive income – foreign currency translation adjustments

     18,418         13,941   
  

 

 

    

 

 

 

Total stockholders’ equity

     733,014         716,918   
  

 

 

    

 

 

 
   $ 1,976,575       $ 1,867,718   
  

 

 

    

 

 

 

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
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Net sales

   $ 1,417,897      $ 1,416,547      $ 2,632,427      $ 2,598,169   

Costs of goods sold

     1,223,298        1,225,620        2,274,083        2,249,105   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     194,599        190,927        358,344        349,064   

Operating expenses:

        

Selling and administrative expenses

     147,810        143,158        290,239        284,146   

Severance and restructuring expenses

     310        3,171        647        5,903   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from operations

     46,479        44,598        67,458        59,015   

Non-operating (income) expense:

        

Interest income

     (333     (337     (582     (649

Interest expense

     1,501        1,556        2,959        3,174   

Net foreign currency exchange loss (gain)

     461        (886     957        (725

Other expense, net

     443        342        692        716   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     44,407        43,923        63,432        56,499   

Income tax expense

     17,158        17,410        24,633        20,910   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 27,249      $ 26,513      $ 38,799      $ 35,589   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings per share:

        

Basic

   $ 0.67      $ 0.62      $ 0.94      $ 0.81   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.66      $ 0.62      $ 0.93      $ 0.81   
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in per share calculations:

        

Basic

     40,951        42,862        41,292        43,766   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     41,228        43,024        41,573        44,044   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

2


Table of Contents

INSIGHT ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014      2013     2014      2013  

Net earnings

   $ 27,249       $ 26,513      $ 38,799       $ 35,589   

Other comprehensive income (loss), net of tax:

          

Foreign currency translation adjustments

     4,548         (5,710     4,477         (14,022
  

 

 

    

 

 

   

 

 

    

 

 

 

Total comprehensive income

   $ 31,797       $ 20,803      $ 43,276       $ 21,567   
  

 

 

    

 

 

   

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

INSIGHT ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Six Months Ended June 30,  
     2014     2013  

Cash flows from operating activities:

    

Net earnings

   $ 38,799      $ 35,589   

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

    

Depreciation and amortization

     20,781        20,870   

Non-cash real estate impairment

     4,558        —     

Provision for losses on accounts receivable

     2,344        2,489   

Write-downs of inventories

     845        2,502   

Write-off of property and equipment

     487        51   

Non-cash stock-based compensation

     3,684        3,595   

Excess tax benefit from employee gains on stock-based compensation

     (423     (757

Deferred income taxes

     (422     2,995   

Changes in assets and liabilities:

    

(Increase) decrease in accounts receivable

     (61,142     25,499   

Increase in inventories

     (34,696     (22,913

Increase in other current assets

     (7,884     (21,607

Decrease (increase) in other assets

     6,987        (4,469

Increase in accounts payable

     133,294        52,458   

Increase (decrease) in deferred revenue

     9,883        (8,387

Decrease in accrued expenses and other liabilities

     (13,380     (165
  

 

 

   

 

 

 

Net cash provided by operating activities

     103,715        87,750   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (5,342     (10,529
  

 

 

   

 

 

 

Net cash used in investing activities

     (5,342     (10,529
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Borrowings on senior revolving credit facility

     218,492        541,035   

Repayments on senior revolving credit facility

     (234,992     (571,035

Borrowings on accounts receivable securitization financing facility

     392,000        434,000   

Repayments on accounts receivable securitization financing facility

     (417,000     (431,000

Borrowings under other financing agreements

     2,002        —     

Payments on capital lease obligation

     (108     (516

Net (repayments) borrowings under inventory financing facility

     (6,557     362   

Payment of deferred financing fees

     (200     —     

Excess tax benefit from employee gains on stock-based compensation

     423        757   

Payment of payroll taxes on stock-based compensation through shares withheld

     (1,624     (2,729

Repurchases of common stock

     (29,652     (50,000
  

 

 

   

 

 

 

Net cash used in financing activities

     (77,216     (79,126
  

 

 

   

 

 

 

Foreign currency exchange effect on cash balances

     1,953        (8,049
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     23,110        (9,954

Cash and cash equivalents at beginning of period

     126,817        152,119   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 149,927      $ 142,165   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


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 worldwide information technology (“IT”) provider of hardware, software and services solutions to businesses and public sector clients 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

Our offerings in North America and select countries in EMEA 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.

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, 2014, our results of operations for the three and six months ended June 30, 2014 and 2013 and our cash flows for the six months ended June 30, 2014 and 2013. The consolidated balance sheet as of December 31, 2013 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 and consequently do not include all of the disclosures normally required by United States generally accepted accounting principles (“GAAP”).

The results of operations for interim periods are not necessarily indicative of results for the full year, due in part to the seasonal nature of our 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, 2013.

The consolidated financial statements include the accounts of Insight Enterprises, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. References to “the Company,” “Insight,” “we,” “us,” “our” and other similar words refer to Insight Enterprises, Inc. and its consolidated subsidiaries, unless the context suggests otherwise.

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 reporting 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, valuation of inventories, 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.

 

5


Table of Contents

INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Recently Issued Accounting Pronouncements

On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 was issued as the culmination of the joint project between the FASB and the International Accounting Standards Board (“IASB”) to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for the fiscal year beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. An entity may choose to adopt the new standard either retrospectively or through a cumulative effect adjustment as of the start of the first period for which it applies the new standard. We are in the process of determining the effect that the adoption of ASU 2014-09 will have on our consolidated financial statements and disclosures and have not yet selected our planned transition approach.

In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This new guidance became effective for annual reporting periods beginning after December 15, 2013 and subsequent interim periods. We applied the requirements of ASU 2013-11 prospectively beginning January 1, 2014, which resulted in a decrease to noncurrent deferred tax assets and a decrease to noncurrent reserves for uncertain tax positions of approximately $1,068,000 as of June 30, 2014. Had we applied the requirements of ASU 2013-11 retrospectively to the December 31, 2013 consolidated balance sheet, the effect would have been materially the same.

There have been no other 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, 2013 that affect or may affect our financial statements.

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 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
June 30,
     Six Months Ended
June 30,
 
     2014      2013      2014      2013  

Numerator:

           

Net earnings

   $ 27,249       $ 26,513       $ 38,799       $ 35,589   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Weighted average shares used to compute basic EPS

     40,951         42,862         41,292         43,766   

Dilutive potential common shares due to dilutive restricted stock units, net of tax effect

     277         162         281         278   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares used to compute diluted EPS

     41,228         43,024         41,573         44,044   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings per share:

           

Basic

   $ 0.67       $ 0.62       $ 0.94       $ 0.81   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.66       $ 0.62       $ 0.93       $ 0.81   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended June 30, 2014 and 2013, 1,000 and 520,000, respectively, of our restricted stock units were not included in the diluted EPS calculations because their inclusion would have been anti-dilutive. For the six months ended June 30, 2014 and 2013, the excluded restricted stock units were 31,000 and 352,000, respectively. These share-based awards could be dilutive in the future.

 

6


Table of Contents

INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

3. Debt, Inventory Financing Facility, Capital Lease and Other Financing Obligations

Debt

Our long-term debt consists of the following (in thousands):

 

     June 30,
2014
    December 31,
2013
 

Senior revolving credit facility

   $ —        $ 16,500   

Accounts receivable securitization financing facility

     25,000        50,000   

Capital lease and other financing obligations

     2,560        666   
  

 

 

   

 

 

 

Total

     27,560        67,166   

Less: current portion of capital lease and other financing obligations

     (369     (217

Less: current portion of revolving credit facilities

     —          —     
  

 

 

   

 

 

 

Long-term debt

   $ 27,191      $ 66,949   
  

 

 

   

 

 

 

Our senior revolving credit facility (“revolving facility”) has an aggregate U.S. dollar equivalent maximum borrowing capacity of $350,000,000. The revolving facility matures April 26, 2017, is guaranteed by the Company’s material domestic subsidiaries and is secured by a lien on substantially all of the Company’s and each guarantor’s assets. As of June 30, 2014, $350,000,000 was available under the revolving facility. See “Debt Covenants” below.

On June 25, 2014, we entered into an amendment to our accounts receivable securitization financing facility (the “ABS facility”) to extend the maturity date of the facility from April 24, 2015 to June 30, 2017, to change the administrative agent and to modify fees for unused capacity under the facility. The maximum borrowing capacity of the ABS facility remained unchanged at $200,000,000. 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. Under the ABS facility, the floating interest rate applicable at June 30, 2014 was 1.05% per annum. As of June 30, 2014, qualified receivables were sufficient to permit access to the full $200,000,000 facility amount, of which $25,000,000 was outstanding. See “Debt Covenants” below.

Debt Covenants

Our revolving facility and our ABS facility contain various covenants customary for transactions of this type, including limitations on the payment of dividends and 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, 2014, we were in compliance with all such covenants.

Our consolidated debt balance that can be outstanding at the end of any fiscal quarter under our revolving 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 our trailing twelve month net earnings (loss) plus (i) interest expense, excluding 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 (“adjusted earnings”). The maximum leverage ratio permitted under the agreements is 2.75 times trailing twelve-month adjusted earnings. A significant drop in our 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 our combined facility maximum amount. Based on our maximum leverage ratio as of June 30, 2014, our consolidated debt balance that could have been outstanding under our revolving facility and our ABS facility was reduced from the maximum borrowing capacity of $550,000,000 to $488,833,000, of which $25,000,000 was outstanding at June 30, 2014.

 

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INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Inventory Financing Facility

Our inventory financing facility has a maximum borrowing capacity of $200,000,000 and matures on April 26, 2017. As of June 30, 2014 and December 31, 2013, $108,695,000 and $115,252,000, respectively, was included in accounts payable within our consolidated balance sheets related to our inventory financing facility.

Capital Lease and Other Financing Obligations

The present value of minimum lease payments under our capital lease, which expires on December 31, 2016, is included in our current and long-term debt balances as summarized in the table above.

From time to time, we also enter into other financing agreements with financial intermediaries to facilitate the purchase of products from certain vendors. At June 30, 2014, amounts owed under other financing agreements of $2,002,000, which are payable in installments through August 2016, are included in our current and long-term debt balances as summarized in the table above.

4. Severance and Restructuring Activities

Severance Costs Expensed for 2014 Resource Actions

During the three months ended June 30, 2014, North America, EMEA and APAC recorded severance expense totaling $128,000, $382,000 and $109,000, respectively, and during the six months ended June 30, 2014, North America, EMEA and APAC recorded severance expense totaling $524,000, $869,000 and $109,000, respectively, related to 2014 resource actions. These charges were associated with severance for the elimination of certain positions based on a re-alignment of roles and responsibilities.

The following table details the 2014 activity and the outstanding obligations related to the 2014 resource actions as of June 30, 2014 (in thousands):

 

     North America     EMEA     APAC      Consolidated  

Severance costs

   $ 524      $ 869      $ 109       $ 1,502   

Foreign currency translation adjustments

     —          (5     —           (5

Cash payments

     (414     (320     —           (734
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2014

   $ 110      $ 544      $ 109       $ 763   
  

 

 

   

 

 

   

 

 

    

 

 

 

The remaining outstanding obligations are expected to be paid during the next 12 months and are therefore included in accrued expenses and other current liabilities.

Severance Costs Expensed for 2013 Resource Actions

During the year ended December 31, 2013, North America and EMEA recorded severance expense totaling $3,429,000 and $9,603,000, respectively, relating to 2013 resource actions. The charges related to a continued review of resource needs in North America and significant restructuring activities in EMEA, primarily in the United Kingdom and Germany, as we worked to rationalize our selling and administrative expenses in EMEA.

 

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INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

The following table details the 2014 activity and the outstanding obligations related to the 2013 resource actions as of June 30, 2014 (in thousands):

 

     North America     EMEA     Consolidated  

Balance at December 31, 2013

   $ 1,223      $ 2,910      $ 4,133   

Foreign currency translation adjustments

     (11     8        (3

Adjustments

     (196     (394     (590

Cash payments

     (685     (1,884     (2,569
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

   $ 331      $ 640      $ 971   
  

 

 

   

 

 

   

 

 

 

In North America and EMEA, adjustments were recorded to decrease severance and restructuring expense and the related severance accrual during the six months ended June 30, 2014 due to changes in estimates as cash payments were made. The remaining outstanding obligations are expected to be paid during the next 12 months and are therefore included in accrued expenses and other current liabilities.

Severance Costs Expensed for 2012 Resource Actions

During the year ended December 31, 2012, North America and EMEA recorded severance expense totaling $3,022,000 and $3,973,000, respectively, associated with severance for the elimination of certain positions based on a re-alignment of roles and responsibilities. As of December 31, 2013, the total remaining obligations recorded in our North America and EMEA segments related to these resource actions were approximately $487,000 and $337,000, respectively. During the six months ended June 30, 2014, adjustments totaling $265,000 were recorded in North America to decrease severance and restructuring expense and the related severance accrual due to changes in estimates of the remaining payouts. The outstanding obligations as of June 30, 2014 of $222,000 and $335,000 in North America and EMEA, respectively, are expected to be paid during the next 12 months and are therefore included in accrued expenses and other current liabilities.

5. Stock-Based Compensation

By operating segment, we recorded the following pre-tax amounts for stock-based compensation, net of estimated forfeitures, related to restricted stock units (“RSUs”) in selling and administrative expenses in our consolidated financial statements (in thousands):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2014      2013      2014      2013  

North America

   $ 1,478       $ 1,085       $ 2,839       $ 2,575   

EMEA

     383         366         718         898   

APAC

     65         54         127         122   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Consolidated

   $ 1,926       $ 1,505       $ 3,684       $ 3,595   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2014, total compensation cost not yet recognized related to nonvested RSUs is $16,484,000, which is expected to be recognized over the next 1.45 years on a weighted-average basis.

 

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INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

The following table summarizes our RSU activity during the six months ended June 30, 2014:

 

     Number     Weighted Average
Grant Date Fair Value
     Fair Value  

Nonvested at January 1, 2014

     811,565      $ 19.91      

Granted(a)

     463,907        23.42      

Vested, including shares withheld to cover taxes

     (288,291     19.57       $ 6,871,303 (b) 
       

 

 

 

Forfeited

     (40,439     20.57      
  

 

 

      

Nonvested at June 30, 2014(a)

     946,742        21.62       $ 29,102,849 (c) 
  

 

 

      

 

 

 

Expected to vest

     820,045         $ 25,208,183 (c) 
  

 

 

      

 

 

 

 

(a)  Includes 144,521 RSUs subject to remaining performance conditions. The number of RSUs ultimately awarded under the performance-based RSUs varies based on whether we achieve certain financial results for 2014.
(b)  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.
(c) The aggregate fair value represents the total pre-tax fair value, based on our closing stock price of $30.74 as of June 30, 2014, 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, 2014 and 2013, 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, 2014 and 2013 of 69,792 and 135,400, 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, 2014 and 2013, total payments for the employees’ tax obligations to the taxing authorities were $1,624,000 and $2,729,000, 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.

6. Impairment Loss on Assets Held for Sale

In May 2014, we signed a lease that will result in the relocation of our sales and administrative operations that are currently housed in the property that we own in Bloomingdale, Illinois. We began marketing the property for sale in April 2014, and we expect to vacate the property by the end of 2014. The property is classified as a held for sale asset, which is included in other current assets in our accompanying consolidated balance sheet as of June 30, 2014. During the quarter ended June 30, 2014, our North America operating segment recorded non-cash charges of $5,178,000, consisting of an impairment loss of $4,558,000 and accelerated depreciation of $620,000, to reduce the carrying amount of the related assets to their estimated fair value less costs to sell. The charges are included in selling and administrative expenses in our accompanying consolidated statements of operations.

7. Income Taxes

Our effective tax rate for the three and six months ended June 30, 2014 was 38.6% and 38.8%, respectively. For the three and six months ended June 30, 2014, our effective tax rate was higher than the United States federal statutory rate of 35.0% due primarily to an increase in the valuation allowance for deferred tax assets related to certain foreign operating losses and foreign tax credits and to state income taxes, net of federal benefit. These increases in the effective rate were partially offset by the effect of lower taxes on earnings in foreign jurisdictions.

 

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INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Our effective tax rate for the three and six months ended June 30, 2013 was 39.6% and 37.0%, respectively. For the three and six months ended June 30, 2013, our effective tax rate was higher than the United States federal statutory rate of 35.0% due primarily to an increase in the valuation allowance for deferred tax assets related to certain foreign operating losses and foreign tax credits and to state income taxes, net of federal benefit. These increases in the effective rate were partially offset by the effect of lower taxes on earnings in foreign jurisdictions. The six month rate during the 2013 period was lower than the rate for the second quarter of 2013 due to the recognition of certain tax benefits related to the re-measurement or settlement of specific uncertain tax positions during the first quarter of 2013.

As of June 30, 2014 and December 31, 2013, we had approximately $4,826,000 and $4,546,000, respectively, of unrecognized tax benefits. Of these amounts, approximately $420,000 and $364,000, respectively, related to accrued interest.

Several of our subsidiaries are currently under audit for tax years 2006 through 2013. 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.

8. 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. We do not designate our hedges for hedge accounting, and our foreign currency derivative instruments are not subject to any master netting arrangements with our counterparties.

The following table summarizes our derivative financial instruments as of June 30, 2014 and December 31, 2013 (in thousands):

 

          June 30, 2014      December 31, 2013  
     Balance Sheet Location    Asset
Derivatives
Fair Value
     Liability
Derivatives
Fair Value
     Asset
Derivatives
Fair Value
     Liability
Derivatives
Fair Value
 

Derivatives not designated as hedging instruments:

              

Foreign exchange forward contracts

   Other current assets    $ 16       $ —         $ 91       $ —     
     

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives not designated as hedging instruments

   $ 16       $ —         $ 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, 2014 and 2013 (in thousands):

 

Derivatives Not Designated

as Hedging Instruments

  

Location of (Gain) Loss

Recognized in

Earnings on Derivatives

   Amount of (Gain) Loss Recognized in
Earnings on Derivatives
 
          Three Months Ended
June 30,
     Six Months Ended
June 30,
 
          2014     2013      2014      2013  

Foreign exchange forward contracts

  

Net foreign currency exchange (gain) loss

   $ (117   $ 141       $ 108       $ (260
     

 

 

   

 

 

    

 

 

    

 

 

 

Total

      $ (117   $ 141       $ 108       $ (260
     

 

 

   

 

 

    

 

 

    

 

 

 

 

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INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

9. Fair Value Measurements

The following table summarizes the valuation of our foreign exchange derivative financial instruments by the following three categories as of June 30, 2014 and December 31, 2013 (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.

 

Balance Sheet Classification

          June 30,
2014
     December 31,
2013
 
     Level 1       $ —         $ —     

Other current assets

     Level 2         16         91   
     Level 3         —           —     
     

 

 

    

 

 

 
        16         91   
     

 

 

    

 

 

 

10. Share Repurchase Programs

On October 30, 2013, we announced that our Board of Directors had authorized a repurchase of up to $50,000,000 of our common stock. Any share repurchases may 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. Under this repurchase authorization, we purchased 1,272,299 shares of our common stock on the open market at a total cost of approximately $29,652,000 (an average price of $23.31 per share) during the six months ended June 30, 2014, and all shares repurchased through June 30, 2014 have been retired. As of June 30, 2014, approximately $12,574,000 remains available for repurchases of our common stock under this repurchase program.

During the comparative six months ended June 30, 2013, we purchased 2,646,722 shares of our common stock on the open market at a total cost of approximately $50,000,000 (an average price of $18.89 per share) under a previous repurchase program that was authorized in February 2013 and completed in May 2013. All shares repurchased were retired.

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, 2014, we had approximately $1,565,000 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.

 

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INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Indemnifications

From time to time, in the ordinary course of business, we enter into contractual arrangements under which we agree to indemnify either our clients or third-party service providers from certain losses incurred relating to services performed on our behalf or for losses arising from defined events, which may include litigation or claims relating to past performance. These arrangements include, but are not limited to, the indemnification of our clients for certain claims arising out of our performance under our sales contracts, the indemnification of our landlords for certain claims arising from our use of leased facilities and the indemnification of the lenders that provide our credit facilities for certain claims arising from their extension of credit to us. Such indemnification obligations may not be subject to maximum loss clauses.

Management believes that payments, if any, related to these indemnifications are not probable at June 30, 2014. Accordingly, we have not accrued any liabilities related to such indemnifications in our consolidated financial statements.

We have entered into separate indemnification agreements with certain of 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 incurred by such individual in connection with any action arising out of such individual’s 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. There are no pending legal proceedings that involve the indemnification of any of the Company’s 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, indemnification claims, 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. Many of these proceeding are at preliminary stages, and many of these proceedings seek an indeterminate amount of damages. We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable or there is a reasonable possibility that a loss, or an additional loss, may have been incurred and determine if accruals are appropriate. If accruals are not appropriate, we further evaluate each legal proceeding to assess whether an estimate of possible loss or range of possible loss can be made for disclosure. 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.

 

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INSIGHT ENTERPRISES, INC.

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 (“Calence”), received a subpoena from the Office of the Inspector General of the Federal Communications Commission requesting documents and information related to the expenditure of funds under the E-Rate program, which provides schools and libraries with discounts to obtain affordable telecommunications and internet access and related hardware and software. We have completed our response to the subpoena. The basis of the investigation is a qui tam lawsuit filed in the United States District Court for the Southern District of Texas by a contractor who provided services to the former owners of Calence. The lawsuit, designated United States ex rel. Shupe v. Cisco Systems, Inc., Avnet, Inc. and Calence, LLC, was first filed in January 2010 and was unsealed in June 2012, and an amended complaint was filed and served in September 2012. The amended complaint alleged violations of the False Claims Act and sought various remedies including treble damages and civil penalties. In connection with the unsealing of the complaint, the DOJ filed a notice with the court declining to intervene in the qui tam action. However, that filing should not be viewed as a final assessment by the DOJ of the merits of this qui tam action. In November 2012, the Company filed a motion to dismiss the amended complaint, and that motion was granted in an order from the District Court in May 2013; however, motions to dismiss filed by the other defendants were denied in the May 2013 order. The Court gave the plaintiff leave to amend, and the plaintiff filed a second amended complaint in May 2013. The claims in the second amended complaint are similar to the claims in the dismissed complaint. In June 2013, the defendants filed a petition with the United States Court of Appeals for the Fifth Circuit for review of the May 2013 order, in July 2013 the Fifth Circuit granted the defendants’ petition to file an appeal, and the proceedings in the District Court were stayed pending the resolution of the appeal. The appeal was filed and fully briefed, the Fifth Circuit heard oral arguments in April 2014 and, in July 2014, the Fifth Circuit reversed the District Court’s decision (with respect to the motions to dismiss which were not granted in the May 2013 order) and remanded the case to the District Court for further proceedings consistent with its decision regarding E-Rate claims under the False Claims Act. The Company disputes the claims and intends to defend the lawsuit vigorously. Based on the limited information currently available, the Company is not able to estimate what the possible loss or range of loss might be, if any. 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 and defending the lawsuit. We have recovered a substantial portion of our fees to date and continue to pursue our indemnification claims.

Aside from the matter 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.

 

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Table of Contents

INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

12. Segment Information

We operate in three reportable geographic operating segments: North America; EMEA; and APAC. Currently, our offerings in North America and select countries in EMEA 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, 2014 and 2013 (in thousands):

 

     North America      EMEA      APAC  
     Three Months Ended
June 30,
     Three Months Ended
June 30,
     Three Months Ended
June 30,
 

Sales Mix

   2014      2013      2014      2013      2014      2013  

Hardware

   $ 527,187       $ 531,068       $ 139,423       $ 108,826       $ 4,043       $ 1,995   

Software

     310,838         337,033         297,014         302,472         74,915         68,482   

Services

     51,227         54,962         10,420         9,818         2,830         1,891   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 889,252       $ 923,063       $ 446,857       $ 421,116       $ 81,788       $ 72,368   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     North America      EMEA      APAC  
     Six Months Ended
June 30,
     Six Months Ended
June 30,
     Six Months Ended
June 30,
 

Sales Mix

   2014      2013      2014      2013      2014      2013  

Hardware

   $ 1,015,597       $ 1,002,134       $ 291,277       $ 250,502       $ 5,634       $ 2,829   

Software

     557,009         559,404         525,429         538,862         117,734         113,672   

Services

     97,328         108,529         18,094         18,663         4,325         3,574   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,669,934       $ 1,670,067       $ 834,800       $ 808,027       $ 127,693       $ 120,075   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

All significant 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, 2014.

A portion of our operating segments’ selling and administrative expenses arise from shared services and infrastructure that we have historically provided to them in order to realize economies of scale and to use resources efficiently. 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.

 

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Table of Contents

INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

The tables below present information about our reportable operating segments as of and for the three months ended June 30, 2014 and 2013 (in thousands):

 

     Three Months Ended June 30, 2014  
     North America     EMEA      APAC      Consolidated  

Net sales

   $ 889,252      $ 446,857       $ 81,788       $ 1,417,897   

Costs of goods sold

     764,214        390,771         68,313         1,223,298   
  

 

 

   

 

 

    

 

 

    

 

 

 

Gross profit

     125,038        56,086         13,475         194,599   

Operating expenses:

          

Selling and administrative expenses

     94,558        46,030         7,222         147,810   

Severance and restructuring expenses

     (14     215         109         310   
  

 

 

   

 

 

    

 

 

    

 

 

 

Earnings from operations

   $ 30,494      $ 9,841       $ 6,144       $ 46,479   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total assets at period end

   $ 1,687,341      $ 623,873       $ 194,982       $ 2,506,196
  

 

 

   

 

 

    

 

 

    

 

 

 

 

* Consolidated total assets do not reflect the net effect of corporate assets and intercompany eliminations of $529,621,000.

 

     Three Months Ended June 30, 2013  
     North America      EMEA      APAC      Consolidated  

Net sales

   $ 923,063       $ 421,116       $ 72,368       $ 1,416,547   

Costs of goods sold

     798,399         366,878         60,343         1,225,620   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     124,664         54,238         12,025         190,927   

Operating expenses:

           

Selling and administrative expenses

     90,295         46,309         6,554         143,158   

Severance and restructuring expenses

     967         2,204         —           3,171   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings from operations

   $ 33,402       $ 5,725       $ 5,471       $ 44,598   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at period end

   $ 1,710,852       $ 601,624       $ 152,218       $ 2,464,694 ** 
  

 

 

    

 

 

    

 

 

    

 

 

 

 

** Consolidated total assets do not reflect the net effect of corporate assets and intercompany eliminations of $497,459,000.

The tables below present information about our reportable operating segments as of and for the six months ended June 30, 2014 and 2013 (in thousands):

 

     Six Months Ended June 30, 2014  
     North America      EMEA      APAC      Consolidated  

Net sales

   $ 1,669,934       $ 834,800       $ 127,693       $ 2,632,427   

Costs of goods sold

     1,437,483         729,393         107,207         2,274,083   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     232,451         105,407         20,486         358,344   

Operating expenses:

           

Selling and administrative expenses

     183,739         93,135         13,365         290,239   

Severance and restructuring expenses

     63         475         109         647   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings from operations

   $ 48,649       $ 11,797       $ 7,012       $ 67,458   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at period end

   $ 1,687,341       $ 623,873       $ 194,982       $ 2,506,196
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* Consolidated total assets do not reflect the net effect of corporate assets and intercompany eliminations of $529,621,000.

 

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INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

     Six Months Ended June 30, 2013  
     North America      EMEA      APAC      Consolidated  

Net sales

   $ 1,670,067       $ 808,027       $ 120,075       $ 2,598,169   

Costs of goods sold

     1,442,876         705,179         101,050         2,249,105   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     227,191         102,848         19,025         349,064   

Operating expenses:

           

Selling and administrative expenses

     179,491         92,065         12,590         284,146   

Severance and restructuring expenses

     2,024         3,879         —           5,903   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings from operations

   $ 45,676       $ 6,904       $ 6,435       $ 59,015   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at period end

   $ 1,710,852       $ 601,624       $ 152,218       $ 2,464,694 ** 
  

 

 

    

 

 

    

 

 

    

 

 

 

 

** Consolidated total assets do not reflect the net effect of corporate assets and intercompany eliminations of $497,459,000.

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,  
     2014      2013      2014      2013  

North America

   $ 8,372       $ 8,147       $ 16,044       $ 16,307   

EMEA

     2,153         2,064         4,330         4,121   

APAC

     230         205         407         442   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,755       $ 10,416       $ 20,781       $ 20,870   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Item 2. Management’s 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 global provider of information technology (“IT”) hardware, software and services solutions to businesses and public sector institutions in North America, Europe, the Middle East, Africa (“EMEA”) and Asia-Pacific (“APAC”). Our offerings in North America and select countries in EMEA 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.

Consolidated net sales were consistent at $1.4 billion in the three months ended June 30, 2014 and 2013. Second quarter sales results were primarily driven by improved operating trends and financial results in our EMEA segment, including double digit growth in hardware sales partly offset by lower software sales, and strong results in our APAC segment during the quarter, including higher services sales. These positive top line results were partly offset by declines in all product categories in our North America segment. Software comparisons year over year, particularly in North America, were negatively affected by a higher mix of transactions which are recorded on a net basis during the quarter. Consolidated gross profit increased 2% year over year to $194.6 million, with gross margin increasing approximately 20 basis points year over year to 13.7%, driven by strong gross margin performance in North America. Additionally, we continued to tightly manage discretionary expenses globally. Our second quarter of 2014 results include a non-cash charge of $5.2 million ($3.2 million, net of tax), including an impairment loss of $4.6 million and accelerated depreciation of $620,000, to reduce the carrying amount of our owned real estate in Bloomingdale, Illinois that is currently held for sale to its estimated fair value less costs to sell. Our consolidated results of operations for the second quarter of 2014 also include severance expense, net of adjustments, totaling $310,000, $179,000 net of tax, compared to $3.2 million, $2.6 million net of tax, recorded during the second quarter of 2013. All of this resulted in a 4% year over year increase in earnings from operations. On a consolidated basis, we reported earnings from operations of $46.5 million, net earnings of $27.2 million and diluted earnings per share of $0.66 for the second quarter of 2014. This compares to earnings from operations of $44.6 million, net earnings of $26.5 million and diluted earnings per share of $0.62 for the second quarter of 2013.

Net of tax amounts referenced above were computed using the statutory tax rate for the taxing jurisdictions in the operating segment in which the related expenses were recorded, adjusted for the effects of valuation allowances on net operating losses in certain jurisdictions.

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.

As previously disclosed, our largest software partner made changes to its channel incentive program beginning in October 2013. The changes vary in substance and timing across this partner’s offerings. Some of the changes became effective in the fourth quarter of 2013, and some become effective as client contracts renew under their stated terms over the next few years. We are executing well globally against our plans to mitigate the adverse effect of these partner program changes in the software category. As a result, we now believe that we will receive between $10 and $15 million less in incentives from this partner in the full year 2014 compared to 2013, with the majority of the effect to be realized in the back half of the year.

 

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INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

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

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, 2013. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results, however, may differ from estimates we have made. Members of our senior management have discussed the critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors.

There have been no changes to the items disclosed as critical accounting estimates in “Management’s 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, 2013.

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, 2014 and 2013:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Net sales

     100.0     100.0     100.0     100.0

Costs of goods sold

     86.3        86.5        86.4        86.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     13.7        13.5        13.6        13.4   

Selling and administrative expenses

     10.4        10.1        11.0        10.9   

Severance and restructuring expenses

     0.0        0.3        0.0        0.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from operations

     3.3        3.1        2.6        2.3   

Non-operating expense, net

     0.2        0.0        0.2        0.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     3.1        3.1        2.4        2.2   

Income tax expense

     1.2        1.2        0.9        0.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     1.9     1.9     1.5     1.4
  

 

 

   

 

 

   

 

 

   

 

 

 

We experience certain seasonal trends in our sales of IT hardware, software and services. Software sales are typically 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, while sales in the state and local government and education markets are stronger in our second 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 “Management’s 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 period amount as translated into U.S. dollars under the applicable accounting standards to the prior period amount in local currency translated into U.S. dollars utilizing the average translation rate for the current period.

 

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INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Net Sales. Net sales for the three months ended June 30, 2014 remained flat compared to the three months ended June 30, 2013 at $1.4 billion. Net sales for the six months ended June 30, 2014 increased 1% compared to the six months ended June 30, 2013. Our net sales by operating segment were as follows (dollars in thousands):

 

     Three Months Ended
June 30,
     %     Six Months Ended
June 30,
     %  
     2014      2013      Change     2014      2013      Change  

North America

   $ 889,252       $ 923,063         (4 %)    $ 1,669,934       $ 1,670,067         —     

EMEA

     446,857         421,116         6     834,800         808,027         3

APAC

     81,788         72,368         13     127,693         120,075         6
  

 

 

    

 

 

      

 

 

    

 

 

    

Consolidated

   $ 1,417,897       $ 1,416,547         —        $ 2,632,427       $ 2,598,169         1
  

 

 

    

 

 

      

 

 

    

 

 

    

Net sales in North America decreased 4%, or $33.8 million, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Net sales of hardware, software and services decreased 1%, 8% and 7%, respectively, year to year. Sales in the hardware category were down due to lower sales of data center products to large enterprise and public sector clients. Software sales comparisons reflect a higher mix of software maintenance sales compared to the prior year, which were recorded net of related costs within the net sales line item of our financial statements. The decline in services sales was attributable to fewer technical service engagements in the second quarter of 2014.

Net sales in North America remained flat for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 at $1.7 billion. On a year to date basis, net sales of hardware increased 1% year over year, while net sales of software and services declined less than 1% and 10%, respectively, year to year.

Net sales in EMEA increased 6%, or $25.7 million, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Excluding the effects of foreign currency movements, net sales increased 1% compared to the second quarter of last year. Net sales of hardware and services increased 28% and 6%, respectively, year over year, while net sales of software declined 2% year to year, all in U.S. dollars. Excluding the effects of foreign currency movements, hardware net sales increased 18% year over year, services net sales were flat and software net sales declined 6% compared to the second quarter of 2013. The increase in hardware net sales was due primarily to higher volume across all client groups, with year over year growth most notably with mid-market and public sector clients in the United Kingdom. The decline in software net sales was due primarily to lower volume of software sales to our existing public sector clients.

Net sales in EMEA increased 3%, or $26.8 million for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. Excluding the effects of foreign currency movements, net sales decreased 2% compared to the six months ended June 30, 2013. On a year to date basis, net sales of hardware increased 16% year over year, while net sales of software and services decreased by 2% and 3%, respectively, year to year, all in U.S. dollars. Excluding the effects of foreign currency movements, hardware net sales increased 8%, while net sales of software and services declined 7% and 9%, respectively.

Net sales in APAC increased 13%, or $9.4 million, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Excluding the effects of foreign currency movements, net sales increased 16% compared to the second quarter of last year. The increase primarily resulted from a lower mix of software maintenance sales, which are recorded net of related costs within the net sales line item of our financial statements, during the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

 

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INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Our APAC segment recognized net sales of $127.7 million for the six months ended June 30, 2014, an increase of 6% compared to the six months ended June 30, 2013 in U.S. dollars, 12% excluding the effects of foreign currency movements. The increase primarily resulted from a lower mix of software maintenance sales during the six months ended June 30, 2014 compared to the six months ended June 30, 2013 as well as higher volume with mid-market and 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, 2014 and 2013:

 

     North America     EMEA     APAC  
     Three Months Ended
June 30,
    Three Months Ended
June 30,
    Three Months Ended
June 30,
 

Sales Mix

   2014     2013     2014     2013     2014     2013  

Hardware

     59     58     31     26     5     3

Software

     35     36     67     72     92     95

Services

     6     6     2     2     3     2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     100     100     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The percentage of net sales by category for North America, EMEA and APAC were as follows for the six months ended June 30, 2014 and 2013:

 

     North America     EMEA     APAC  
     Six Months Ended
June 30,
    Six Months Ended
June 30,
    Six Months Ended
June 30,
 

Sales Mix

   2014     2013     2014     2013     2014     2013  

Hardware

     61     60     35     31     5     2

Software

     33     33     63     67     92     95

Services

     6     7     2     2     3     3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     100     100     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit. Gross profit for the three months ended June 30, 2014 increased 2% compared to the three months ended June 30, 2013, with gross margin increasing approximately 20 basis points to 13.7% for the three months ended June 30, 2014 compared to 13.5% for the three months ended June 30, 2013. For the six months ended June 30, 2014, gross profit increased 3% compared to the six months ended June 30, 2013, with gross margin increasing approximately 20 basis points to 13.6% for the six months ended June 30, 2014 compared to 13.4% for the six months ended June 30, 2013. 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,  
     2014      % of
Net Sales
    2013      % of
Net Sales
    2014      % of
Net Sales
    2013      % of
Net Sales
 

North America

   $ 125,038         14.1   $ 124,664         13.5   $ 232,451         13.9   $ 227,191         13.6

EMEA

     56,086         12.6     54,238         12.9     105,407         12.6     102,848         12.7

APAC

     13,475         16.5     12,025         16.6     20,486         16.0     19,025         15.8
  

 

 

      

 

 

      

 

 

      

 

 

    

Consolidated

   $ 194,599         13.7   $ 190,927         13.5   $ 358,344         13.6   $ 349,064         13.4
  

 

 

      

 

 

      

 

 

      

 

 

    

North America’s gross profit for the three months ended June 30, 2014 remained relatively flat compared to the three months ended June 30, 2013; however, as a percentage of net sales, gross margin increased approximately 60 basis points to 14.1% for the second quarter of 2014 from 13.5% in the second quarter of 2013. The increase was primarily attributable to a 47 basis point increase in product margin, which includes vendor funding and freight. The increase in product margin resulted from an increase in margin from hardware product sales and an increase in vendor funding due to improvements in the mix of hardware sales with key strategic partners year over year. In addition, improved inventory management resulted in a decrease in the write-downs in inventories year to year, which increased gross margin by 8 basis points, and margin generated by services improved 5 basis points year over year.

 

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INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

North America’s gross profit for the six months ended June 30, 2014, increased 2% compared to the six months ended June 30, 2013. As a percentage of net sales, gross margin increased approximately 30 basis points to 13.9% from 13.6%, year over year, reflecting a 47 basis point improvement in year to date product margin, which includes vendor funding and freight, driven primarily by an increase in margin from hardware product sales and an increase in vendor funding year over year. The increase in product margin year over year was offset partially by a decline in margin from agency fees for enterprise software agreements of 22 basis points due to the negative effect of program changes from our largest software partner offset partially by the positive effect of a higher mix of software maintenance sales recorded on a net basis in the six months ended June 30, 2014 compared to the six months ended June 30, 2013.

EMEA’s gross profit increased 3% in U.S. dollars for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Excluding the effects of foreign currency movements, gross profit declined 3% compared to the second quarter of last year. Gross margin decreased approximately 30 basis points to 12.6% for the second quarter of 2014 from 12.9% in the second quarter of 2013. A net decrease in product margin, which includes vendor funding and freight, of 33 basis points was driven by a decrease in vendor funding resulting from software partner program changes year to year and a decrease in software product margin due to the relative mix of software deals transacted during the three months ended June 30, 2014 compared to the three months ended June 30, 2013. These decreases in product margin were partially offset by an improvement in hardware product margin as hardware sales, which are transacted at higher margins, increased as a percentage of total sales year over year.

EMEA’s gross profit increased 2% in U.S. dollars for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. Excluding the effects of foreign currency movements, gross profit declined 3% compared to the first six months of last year. As a percentage of net sales, gross margin for the six month periods decreased to 12.6% from 12.7% year to year, due primarily to a decrease in margin generated by services of 11 basis points year to year. Year over year increases in hardware product margin during the six months ended June 30, 2014 compared to the first six months of 2013 were fully offset by decreases in vendor funding resulting from software partner program changes year to year.

APAC’s gross profit increased 12% for the three months ended June 30, 2014 compared to the three months ended June 30, 2013, with gross margin decreasing to 16.5% for the three months ended June 30, 2014, compared to 16.6% for the three months ended June 30, 2013. Excluding the effects of foreign currency movements, gross profit increased 15% compared to the second quarter of last year. The decrease in gross margin in the second quarter of 2014 compared to the second quarter of 2013 was due primarily to a lower mix of fees from enterprise software agreements year to year offset partially by an increase in vendor funding and an increase in services net sales year over year.

APAC’s gross profit increased 8% for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. 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 increased approximately 20 basis points year over year, due primarily to an increase in vendor funding offset partially by a lower mix of fees from enterprise software agreements in the six months ended June 30, 2014 compared to the first six months of 2013.

 

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INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Operating Expenses.

Selling and Administrative Expenses. Selling and administrative expenses increased $4.7 million, or 3%, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. For the six months ended June 30, 2014, selling and administrative expenses increased $6.1 million, or 2%, compared to the six months ended June 30, 2013. Our selling and administrative expenses as a percent of net sales by operating segment were as follows (dollars in thousands):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2014      % of
Net Sales
    2013      % of
Net Sales
    2014      % of
Net Sales
    2013      % of
Net Sales
 

North America

   $ 94,558         10.6   $ 90,295         9.8   $ 183,739         11.0   $ 179,491         10.7

EMEA

     46,030         10.3     46,309         11.0     93,135         11.2     92,065         11.4

APAC

     7,222         8.8     6,554         9.1     13,365         10.5     12,590         10.5
  

 

 

      

 

 

      

 

 

      

 

 

    

Consolidated

   $ 147,810         10.4   $ 143,158         10.1   $ 290,239         11.0   $ 284,146         10.9
  

 

 

      

 

 

      

 

 

      

 

 

    

North America’s selling and administrative expenses increased 5%, or $4.3 million, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 and increased approximately 80 basis points year over year as a percentage of net sales to 10.6%. As discussed in Note 6 to the Consolidated Financial Statements in Part I, Item 1 of this report, our second quarter of 2014 results include non-cash charges of $5.2 million, including an impairment loss of $4.6 million and accelerated depreciation of $620,000, to reduce the carrying amount of our owned real estate in Bloomingdale, Illinois that is currently held for sale to its estimated fair value less costs to sell. IT contract labor expenses decreased by $1.2 million year to year resulting from the completion of our North America IT systems integration project in 2013. Higher teammate-related expenses were offset partially by reduced spending in other expense categories, such as professional services.

North America’s selling and administrative expenses increased 2%, or $4.2 million, for the six months ended June 30, 2014 compared to the six months ended June 30, 2013, due primarily to the non-cash charges related to the Bloomingdale, Illinois real estate discussed above, higher teammate benefit expenses that increased approximately $1.8 million year over year due to higher health benefits claims in the six months ended June 30, 2014 and higher variable compensation on higher gross profits. These increases in selling and administrative expenses were partially offset by reduced spending in other expense categories, such as professional services.

EMEA’s selling and administrative expenses decreased 1%, or $279,000, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 and decreased approximately 70 basis points year to year as a percentage of net sales to 10.3%. Excluding the effects of foreign currency movements, selling and administrative expenses declined 7% compared to the second quarter of last year. The year to year decrease was primarily driven by a decrease in support salaries and wages due to restructuring actions in prior periods.

EMEA’s selling and administrative expenses increased 1%, or $1.1 million, for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. Excluding the effects of foreign currency movements, selling and administrative expenses declined 4% compared to the first six months of last year. The year to year decrease was primarily driven by a decrease in support salaries and wages due to restructuring actions in prior periods, partially offset by higher variable compensation expense.

APAC’s selling and administrative expenses increased 10%, or $668,000, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 but decreased as a percentage of net sales by approximately 30 basis points year to year to 8.8%. Excluding the effects of foreign currency movements, selling and administrative expenses increased 15% compared to the second quarter of last year. The increase was primarily driven by an increase in variable compensation expense on higher sales.

APAC’s selling and administrative expenses increased 6%, or $775,000, for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. Excluding the effects of foreign currency movements, selling and administrative expenses increased 14% compared to the first six months of last year due to increases in variable compensation and expenses resulting from our planned investments in the new IT system in the region.

 

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INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Severance and Restructuring Expenses. During the three months ended June 30, 2014, EMEA and APAC recorded severance expense, net of adjustments, of approximately $215,000 and $109,000, respectively. North America recorded a net reduction of severance expense of $14,000 during the quarter as current period severance charges were more than offset by changes in estimates of previous accruals as cash payment were made. During the six months ended June 30, 2014, North America, EMEA and APAC recorded severance expense, net of adjustments, totaling $63,000, $475,000 and $109,000, respectively. The charges were related to the elimination of certain positions as part of a re-alignment of roles and responsibilities. Comparatively, during the three months ended June 30, 2013, North America and EMEA recorded severance expense, net of adjustments, of approximately $1.0 million and $2.2 million, respectively, and during the six months ended June 30, 2013, North America and EMEA recorded severance expense, net of adjustments, totaling $2.0 million and $3.9 million, respectively.

Non-Operating (Income) Expense.

Interest Income. Interest income for the three and six months ended June 30, 2014 and 2013 was generated from interest earned on cash and cash equivalent bank balances. The decrease in interest income year to year is primarily due to lower average interest-bearing cash and cash equivalent balances during the three and six months ended June 30, 2014.

Interest Expense. Interest expense for the three and six months ended June 30, 2014 and 2013 primarily relates to borrowings under our financing facilities and imputed interest under our inventory financing facility. Interest expense for the three and six months ended June 30, 2014 decreased 4%, or $55,000, and 7%, or $215,000, respectively, compared to the three and six months ended June 30, 2013. The decrease was due primarily to lower average daily balances on our debt facilities in the 2014 periods and a decrease in imputed interest under our inventory financing facility. Imputed interest under our inventory financing facility was $552,000 and $1.1 million for the three and six months ended June 30, 2014, respectively, compared to $602,000 and $1.2 million for the three and six months ended June 30, 2013, respectively. This decrease was due to lower outstanding balances, partially offset by increases in our average incremental borrowing rate used to compute the imputed interest amounts. For a description of our various financing facilities, see Note 3 to our Consolidated Financial Statements in Part I, Item 1 of this report.

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, 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, 2014 was 38.6% compared to 39.6% for the three months ended June 30, 2013. Our effective tax rate for the six months ended June 30, 2014 was 38.8% compared to 37.0% for the six months ended June 30, 2013. The decrease in our effective tax rate for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 was primarily due to higher losses in certain foreign jurisdictions in the prior year period, resulting in an increase in the valuation allowance for deferred tax assets related to these foreign operating losses, which increased the effective tax rate for the second quarter of the prior year. The increase in our effective tax rate for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 was primarily due to the recognition of certain tax benefits related to the re-measurement or settlement of specific uncertain tax positions during the first quarter of 2013, which decreased the effective tax rate for the first six months of the prior year.

 

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INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Liquidity and Capital Resources

The following table sets forth certain consolidated cash flow information for the six months ended June 30, 2014 and 2013 (in thousands):

 

     Six Months Ended
June 30,
 
     2014     2013  

Net cash provided by operating activities

   $ 103,715      $ 87,750   

Net cash used in investing activities

     (5,342     (10,529

Net cash used in financing activities

     (77,216     (79,126

Foreign currency exchange effect on cash balances

     1,953        (8,049
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     23,110        (9,954

Cash and cash equivalents at beginning of period

     126,817        152,119   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 149,927      $ 142,165   
  

 

 

   

 

 

 

Cash and Cash Flow

Our primary uses of cash during the six months ended June 30, 2014 were to fund working capital requirements, to pay down our debt balances, to repurchase shares of our common stock and for capital expenditures. Operating activities provided $103.8 million in cash for the six months ended June 30, 2014, an 18% increase from the six months ended June 30, 2013. We had combined net repayments on our long-term debt facilities of $41.5 million during the six months ended June 30, 2014. Capital expenditures were $5.3 million in the six months ended June 30, 2014, a 49% decrease from the prior year period, reflecting lower IT investments year over year. Cash balances in the six months ended June 30, 2014 were positively affected by $2.0 million as a result of foreign currency exchange rates, compared to a negative effect of $8.0 million in the prior year period.

Net cash provided by operating activities. Cash flow from operations for the six months ended June 30, 2014 and 2013 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 asset and liability balances. For the six months ended June 30, 2014, the increases in accounts receivable and accounts payable can be primarily attributed to the seasonal increase in net sales from the fourth quarter to the second quarter, which results in higher accounts receivable and accounts payable balances as of June 30, compared to December 31. For the 2014 period, the increase in inventories is primarily attributable to an increase in inventory levels at June 30, 2014 to support specific client engagements and to hardware sale transactions in transit to clients as of June 30, 2014 such that delivery was not deemed to have occurred until the product was received by the client in early July 2014. The decrease in accrued expenses and other liabilities is primarily attributable to decreases in accrued VAT and sales taxes as of June 30, compared to December 31, due to the relative timing of related payments and to the reclassification of certain long-term liabilities to accounts payable as of June 30, 2014, as amounts became payable to partners under their contractual terms. For the 2013 period, we also anticipated seasonal increases in accounts receivable and accounts payable. However, the accounts receivable and accounts payable balances at December 31, 2012 reflected a single significant sale transacted with a public sector client in North America late in December 2012, which increased the December 31, 2012 accounts receivable and accounts payable balances. As a result, accounts receivable declined instead of increasing during the six months ended June 30, 2013, and accounts payable increased less than the seasonal norm during the six months ended June 30, 2013. The increase in inventories in the 2013 period was primarily attributable to hardware sale transactions in transit to clients as of June 30, 2013 such that delivery was not deemed to have occurred until the product was received by the client in early July 2013 and to an increase in inventory levels at June 30, 2013 to support specific client engagements. The increase in other current assets in the 2013 period was primarily attributed to an overpayment of income taxes resulting in a receivable balance at June 30, 2013 and to the timing of the payment of certain prepaid expenses.

 

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INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Our consolidated cash flow operating metrics for the quarters ended June 30, 2014 and 2013 were as follows:

 

     2014     2013  

Days sales outstanding in ending accounts receivable (“DSOs”) (a)

     85        85   

Days inventory outstanding (“DIOs”) (b)

     9        8   

Days purchases outstanding in ending accounts payable (“DPOs”) (c)

     (73     (75
  

 

 

   

 

 

 

Cash conversion cycle (days) (d)

     21        18   
  

 

 

   

 

 

 

 

(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 21 days in the quarter ended June 30, 2014 compared to 18 days in the quarter ended June 30, 2013. The year over year increase in our cash conversion cycle was driven by a two day decrease in DPOs period to period due to the timing of supplier payments during the respective quarters and to a one day increase in DIOs resulting from increased inventory levels during the quarter ended June 30, 2014 to support specific client engagements.

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 the remainder of 2014 in excess of working capital needs to pay down our outstanding debt balances and support our capital expenditures for the year. We also may use cash to fund potential small acquisitions to add select capabilities and to repurchase shares of our common stock under our previously authorized share repurchase plan.

Net cash used in investing activities. Capital expenditures of $5.3 million and $10.5 million for the six months ended June 30, 2014 and 2013, respectively, were primarily related to investments in our IT systems. We expect capital expenditures for the full year 2014 to be between $15.0 million and $20.0 million, primarily for our IT systems upgrade projects and other facility and technology related upgrade projects.

Net cash used in financing activities. During the six months ended June 30, 2014 and 2013, we repurchased $29.7 million and $50.0 million, respectively, of our common stock in open market transactions. These repurchases were part of programs approved by our Board of Directors in October 2013 and February 2013, respectively. All shares repurchased were immediately retired. During the six months ended June 30, 2014, we had net combined repayments on our long-term debt under our revolving facility and our ABS facility that decreased our outstanding debt balance by $41.5 million, and we had net repayments of $6.6 million under our inventory financing facility during the period. During the six months ended June 30, 2013, we had net combined repayments on our long-term debt under our revolving facility and our ABS facility that decreased our outstanding debt balance by $27.0 million, and we had net borrowings of $362,000 under our inventory financing facility during the period.

 

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INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Our consolidated debt balance that can be outstanding at the end of any fiscal quarter under our revolving 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 Company’s trailing twelve month net earnings (loss) plus (i) interest expense, excluding 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 (“adjusted earnings”). The maximum leverage ratio permitted under the agreements is 2.75 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 Company’s 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 Company’s combined facility maximum amount. Based on the maximum leverage ratio as of June 30, 2014, the Company’s combined debt balance that could have been outstanding under our revolving facility and our ABS facility was reduced from the maximum borrowing capacity of $550.0 million to $488.8 million, of which $25.0 million was outstanding at June 30, 2014. Our debt balance as of June 30, 2014 was $27.6 million, including our capital lease obligation for certain IT equipment and other financing agreements with financial intermediaries to facilitate the purchase of products from certain vendors. As of June 30, 2014, the current portion of our long-term debt relates solely to our capital lease and other financing obligations.

Cash and cash equivalents held by foreign subsidiaries are generally subject to U.S. income taxation upon repatriation to the U.S. We do not provide for U.S. income taxes on the undistributed earnings of those of our foreign subsidiaries where earnings are reinvested and, in the opinion of management, will continue to be reinvested indefinitely outside of the U.S. As of June 30, 2014, we had approximately $125.0 million in cash and cash equivalents in certain of our foreign subsidiaries where we consider undistributed earnings of these foreign subsidiaries to be indefinitely reinvested. As of June 30, 2014, the majority of our foreign cash resides in the Netherlands, 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 our foreign subsidiaries. We intend to use undistributed earnings for general business purposes in the foreign jurisdictions as well as to fund our IT systems, potential small acquisitions and various facility upgrades.

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 as well as other strategic investments over the next 12 months. We currently do not intend nor foresee a need to repatriate any foreign undistributed earnings. We expect existing domestic cash and cash flows from operations to continue to be sufficient to fund our domestic operating cash activities and cash commitments for investing and financing activities, such as capital expenditures and debt repayments, for at least the next 12 months.

Off-Balance Sheet Arrangements

We have entered into off-balance sheet arrangements, which include indemnifications. The indemnifications are discussed in Note 11 to the Consolidated Financial Statements in Part I, Item 1 of this report and that discussion is incorporated by reference herein. We believe that none of our off-balance sheet arrangements have, or are reasonably likely to have, a material current or future effect on our financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources.

Recently Issued Accounting Pronouncements

The information contained in Note 1 to the Consolidated Financial Statements in Part I, Item 1 of this report concerning a description of recently issued accounting pronouncements which affect or may affect our financial statements, including our expected dates of adopting and the estimated effects on our results of operations and financial condition, is incorporated by reference herein.

 

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INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Contractual Obligations

There have been no material changes in our reported contractual obligations, as described under “Contractual Obligations” in “Management’s 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, 2013.

 

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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, 2013.

The following table summarizes our open foreign currency forward contract held at June 30, 2014. All U.S. dollar and foreign currency amounts (British Pounds Sterling) are presented in thousands.

 

     Buy

Foreign Currency

   GBP

Foreign Amount

   2,946

USD Equivalent

   $5,000

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, 2014, 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 SEC’s 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.

Change 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, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations of 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 “– Legal Proceedings” in Note 11 to the Consolidated Financial Statements in Part I, Item 1 of this report, which section is incorporated by reference herein.

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, 2013, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or operating results.

 

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INSIGHT ENTERPRISES, INC.

 

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, 2014.

We have never paid a cash dividend on our common stock, and we currently do not intend to pay any cash dividends in the foreseeable future. Our senior revolving credit facility contains restrictions on the payment of cash dividends.

Issuer Purchases of Equity Securities

 

Period

   (a)
Total Number
of Shares
Purchased
     (b)
Average Price
Paid per Share
     (c)
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
     (d)
Approximate Dollar
Value of Shares that May
Yet Be Purchased Under
the Plans or Programs
 

April 1, 2014 through April 30, 2014

     118,803       $ 24.76         118,803       $ 12,574,000   

May 1, 2014 through May 31, 2014

     —           —           —           12,574,000   

June 1, 2014 through June 30, 2014

     —           —           —           12,574,000   
  

 

 

       

 

 

    

Total

     118,803       $ 24.76         118,803      
  

 

 

       

 

 

    

On October 30, 2013, 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 may 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, and all shares repurchased through June 30, 2014 have been retired.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

 

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Item 6. Exhibits.

 

          Incorporated by Reference     

Exhibit

Number

  

Exhibit Description

   Form    File No.    Exhibit
Number
   Filing/Effective
Date
   Filed
Herewith

    3.1

   Composite Certificate of Incorporation of Insight Enterprises, Inc.    10-K    000-25092    3.1    February 17, 2006   

    3.2

   Amended and Restated Bylaws of Insight Enterprises, Inc.    8-K    000-25092    3.2    May 19, 2014   

    4.1

   Specimen Common Stock Certificate    S-1    33-86142    4.1    January 24, 1995   

  10.1

   Omnibus Amendment, dated as of June 25, 2014, among Insight Receivables, LLC, Insight Enterprises, Inc., Insight Direct USA, Inc., Insight Public Sector, Inc., the purchasers and managing agents party thereto and Wells Fargo Bank, National Association, as successor agent    8-K    000-25092    10.1    July 1, 2014   

  31.1

   Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14                X

  31.2

   Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14                X

  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                X

101

   Interactive data files pursuant to Rule 405 of Regulation S-T                X

 

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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: July 31, 2014     INSIGHT ENTERPRISES, INC.
    By:  

/s/ Kenneth T. Lamneck

      Kenneth T. Lamneck
      President and Chief Executive Officer
      (Duly Authorized Officer)
    By:  

/s/ Glynis A. Bryan

      Glynis A. Bryan
      Chief Financial Officer
      (Principal Financial Officer)
    By:  

/s/ Dana A. Leighty

      Dana A. Leighty
      Vice President, Finance
      (Principal Accounting Officer)

 

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