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| NSIT > SEC Filings for NSIT > Form 10-Q on 15-May-2009 | All Recent SEC Filings |
15-May-2009
Quarterly Report
• legal and other professional fees of $4.1 million, $2.5million net of tax, associated with the trade credits investigation and restatement quantification; and
• severance and restructuring expenses of $6.3 million, $4.0 million net of tax, related to resource actions taken in the first quarter and early April. Comparatively, in the first quarter of 2008, we recorded $1.9 million, $1.1 million net of tax, in severance and restructuring charges.
On a consolidated basis, we reported a net loss of $6.8 million and a diluted
loss per share of $0.15 for the first quarter. These results also include a tax
charge of approximately $600,000 related to the re-measurement of certain
deferred tax assets.
Our focus on cash flow initiatives continued to yield benefits in the first
quarter and as a result, we ended the quarter with outstanding long-term debt of
$171 million, down $57 million from December 31, 2008.
Reconciliations of segment results of operations to consolidated results of
operations can be found in Note 12 to the Consolidated Financial Statements in
Part I, Item 1 of this report.
Our discussion and analysis of financial condition and results of operations is
intended to assist in the understanding of our consolidated financial
statements, the changes in certain key items in those consolidated financial
statements from period to period and the primary factors that contributed to
those changes, as well as how certain critical accounting estimates affect our
Consolidated Financial Statements.
• the projected negative impact of known rebate program changes from our key software partner, which we now project will result in a $20 - $25 million reduction to our gross profit in 2009, mostly in the second and fourth quarters given our strong software mix in those quarters; and
• the offsetting benefits of the aggressive cost reduction actions taken to date.
Critical Accounting Estimates
General
Our consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles ("GAAP"). For a summary of significant
accounting policies, see Note 1 to the Consolidated Financial Statements in
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS
The following table sets forth for the periods presented certain financial data
as a percentage of net sales for the three months ended March 31, 2009 and 2008:
Three Months Ended
March 31,
2009 2008
As Restated
(1)
Net sales 100.0 % 100.0 %
Costs of goods sold 86.1 86.3
Gross profit 13.9 13.7
Selling and administrative expenses 14.0 12.3
Severance and restructuring expenses 0.7 0.2
(Loss) earnings from operations (0.8 ) 1.3
Non-operating expense, net 0.3 0.1
(Loss) earnings before income taxes (1.1 ) 1.2
Income tax (benefit) expense (0.4 ) 0.5
Net (loss) earnings ( 0.7 %) 0.7 %
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(1) See Note 2 "Restatement of Consolidated Financial Statements" in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2008.
Net Sales. Net sales for the three months ended March 31, 2009 decreased 14% compared to the three months ended March 31, 2008. Our net sales by operating segment were as follows (dollars in thousands):
Three Months Ended
March 31, %
2009 2008 Change
As Restated
(1)
North America $ 660,101 $ 762,134 (13 %)
EMEA 270,725 318,221 (15 %)
APAC 20,334 23,143 (12 %)
Consolidated $ 951,160 $ 1,103,498 (14 %)
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(1) See Note 2 "Restatement of Consolidated Financial Statements" in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2008.
Net sales in North America decreased 13%, or $102.0 million, primarily due to a
25% decline in hardware sales as incremental sales in the 2009 period from our
acquisition of Calence were more than offset by declines across hardware product
categories other than networking and connectivity. Software sales were flat year
over year, and sales of services were up over 90%, reflecting both the
acquisition of Calence and overall strength in the Company's services business.
North America had 1,265 account executives at March 31, 2009, a decrease from
1,292 at March 31, 2008. Net sales per average number of account executives in
North America decreased 10% to approximately $518,000 for the three months ended
March 31, 2009 from approximately $577,000 for the three months ended March 31,
2008.
Net sales in EMEA decreased 15%, or $47.5 million, in U.S. dollars. Excluding
the effects of foreign currency movements, net sales were up 8% over the first
quarter of last year. The segment's United Kingdom operations performed well
during the first quarter with hardware sales down only 2% in local currency year
over year, while the United Kingdom-based software and services businesses grew
51% and 186%, respectively, in local currency. Across the rest of the EMEA
region, net sales were up 2% in local currency. EMEA had 684 account executives
at March 31, 2009, an increase from 605 at March 31, 2008. Net sales per average
number of account executives in EMEA decreased to approximately $397,000 for the
three months ended March 31, 2009 compared to approximately $541,000 for the
three months ended March 31, 2008.
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Our APAC segment recognized net sales of $20.3 million for the three months
ended March 31, 2009, a decrease of 12% year over year. Excluding the effects of
foreign currency movements, net sales were up 8% over the first quarter of last
year.
Percentage of net sales by category for North America, EMEA and APAC were as
follows for the three months ended March 31, 2009 and 2008:
North America EMEA APAC
Three Months Ended Three Months Ended Three Months Ended
March 31, March 31, March 31,
Sales Mix 2009 2008 2009 2008 2009 2008
Network and connectivity 14 % 12 % 5 % 4 % - -
Notebooks and PDAs 8 % 11 % 7 % 9 % - -
Servers and storage 7 % 10 % 5 % 8 % - -
Desktops 6 % 8 % 5 % 4 % - -
Printers 4 % 4 % 2 % 3 % - -
Memory and processors 3 % 3 % 1 % 1 % - -
Supplies and accessories 2 % 4 % 4 % 4 % - -
Monitors and video 4 % 5 % 3 % 4 % - -
Miscellaneous 9 % 9 % 2 % 3 % - -
Hardware 57 % 66 % 34 % 40 % - -
Software 36 % 31 % 65 % 59 % 100 % 100 %
Services 7 % 3 % 1 % 1 % <1 % <1 %
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100 % 100 % 100 % 100 % 100 % 100 %
Currently, our offerings in North America and the United Kingdom include IT
hardware, software and services. Our offerings in the remainder of our EMEA
segment and in APAC currently only include software and select software-related
services.
Gross Profit. Gross profit for the three months ended March 31, 2009 declined
13% compared to the three months ended March 31, 2008, with a 20 basis point
increase in gross margin. Our gross profit and gross profit as a percentage of
net sales by operating segment for the three months ended March 31, 2009 and
2008 were as follows (dollars in thousands):
Three Months Ended March 31,
% of Net % of Net
2009 Sales 2008 Sales
As Restated As Restated
(1) (1)
North America $ 93,042 14.1 % $ 101,208 13.3 %
EMEA 35,904 13.3 % 46,649 14.7 %
APAC 2,825 13.9 % 3,765 16.3 %
Consolidated $ 131,771 13.9 % $ 151,622 13.7 %
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(1) See Note 2 "Restatement of Consolidated Financial Statements" in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2008.
Three Months Ended March 31,
% of Net % of Net
2009 Sales 2008 Sales
As As
Restated Restated
(1) (1)
North America $ 95,107 14.4 % $ 91,771 12.0 %
EMEA 34,906 12.9 % 39,479 12.4 %
APAC 3,330 16.4 % 4,211 18.2 %
Consolidated $ 133,343 14.0 % $ 135,461 12.3 %
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(1) See Note 2 "Restatement of Consolidated Financial Statements" in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2008.
• Non-cash stock-based compensation expense of $4.1 million associated with the termination of the long-term incentive award for the Chief Executive Officer and the President of our North America operating segment discussed in Note 7 to our Consolidated Financial Statements in Part I, Item 1 of this report; and
• Professional fees and costs of $4.1 million associated with the trade credits restatement issues discussed in Note 2 "Restatement of Consolidated Financial Statements" in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2008.
These increases in administrative expenses were offset by the cost reduction
initiatives we have implemented over the past several quarters and lower
variable costs.
EMEA's selling and administrative expenses decreased 12%, or $4.6 million, for
the three months ended March 31, 2009 compared to the three months ended
March 31, 2008. The decrease in selling and administrative expenses is primarily
attributable to the effects of foreign currency translation, which accounted for
an approximately $9 million decline in selling and administrative expenses. This
decline was offset by non-cash stock-based compensation expense of $1.4 million
associated with the termination of the long-term incentive award for the Chief
Executive Officer and the President of our EMEA operating segment discussed in
Note 7 to our Consolidated Financial Statements in Part I, Item 1 of this report
and increased salaries, wages and facility expenses due to increases in employee
headcount.
APAC's selling and administrative expenses decreased 21% for the three months
ended March 31, 2009 compared to the three months ended March 31, 2008. The
decrease is primarily attributable to the effects of foreign currency
translation on selling and administrative expenses.
Severance and Restructuring Expenses. During the three months ended March 31,
2009, North America, EMEA and APAC recorded severance expense of $5.9 million,
$417,000, and $71,000, respectively. During the three months ended March 31,
2008, North America, EMEA and APAC recorded severance expense of $1.0 million,
$869,000, and $22,000, respectively.
Interest Income. Interest income for the three months ended March 31, 2009 and
2008 was generated through short-term investments. The decrease in interest
income year over year is due to decreases in interest rates.
Interest Expense. Interest expense for the three months ended March 31, 2009 and
2008 primarily relates to borrowings under our financing facilities and imputed
interest under our inventory financing facility in 2009. Imputed interest, which
is a non-cash item, was $363,000 for the three months ended March 31, 2009. The
decrease in interest expense is due primarily to decreases in weighted average
borrowings outstanding.
Net Foreign Currency Exchange Gains. These gains result from foreign currency
transactions, including intercompany balances that are not considered long-term
in nature. The decrease in the net foreign currency exchange gain is due
primarily to less volatility in the applicable exchange rates during the three
months ended March 31, 2009 and the effects of our recent use of foreign
exchange forward contracts to hedge certain non-functional currency assets and
liabilities from changes in exchange rate movements.
Other Expense, Net. Other expense, net, consists primarily of bank fees
associated with our cash management activities and were not considered material
during the three months ended March 31, 2009 or 2008.
Income Tax Expense. Our income tax benefit for the three months ended March 31,
2009 was $3.3 million compared to income tax expense of $4.6 million for the
three months ended March 31, 2008. The change from expense in 2008 to a benefit
in 2009 was the result of a net loss for the three months ended March 31, 2009
compared to net earnings for the three months ended March 31, 2008.
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 three months ended March 31, 2009 and 2008 (in thousands):
Three Months Ended
March 31,
2009 2008
As Restated
(1)
Net cash provided by operating activities $ 96,095 $ 67,256
Net cash used in investing activities (5,062 ) (7,391 )
Net cash used in financing activities (70,454 ) (12,150 )
Foreign currency exchange effect on cash flow (2,561 ) 1,263
Increase in cash and cash equivalents 18,018 48,978
Cash and cash equivalents at beginning of period 49,175 56,718
Cash and cash equivalents at end of period $ 67,193 $ 105,696
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(1) See Note 2 "Restatement of Consolidated Financial Statements" in Part I, Item 1 of this report.
Cash and Cash Flow
Our primary uses of cash during the three months ended March 31, 2009 were to
fund working capital requirements and capital expenditures and to pay down debt.
We generated very strong operating cash flows for the three months ended
March 31, 2009. Operating activities provided $96.1 million in cash, a 43%
increase over the three months ended March 31, 2008. Our strong operating cash
flows enabled us to reduce our long-term debt by $57.0 million during the
quarter and increase our cash balance by $18.0 million. Capital expenditures
were $5.1 million for the quarter, a 22% decrease over the three months ended
March 31, 2008, primarily related to expenditures for the upgrade of our IT
systems, including capitalized costs of software developed for internal use, IT
equipment and software licenses. Additionally, the three months ended March 31,
2009 were affected by a $2.6 million negative effect of foreign currency
exchange rates on cash flow.
Net cash provided by operating activities. Cash flows from operations for the
three months ended March 31, 2009 and 2008 reflect our net loss adjusted for
depreciation, amortization and non-cash stock-based compensation expense as well
as decreases in accounts receivable. These increases in operating cash flows
were partially offset by decreases in accounts payable. The decreases in
accounts receivable and accounts payable are due primarily to a decrease in net
sales compared to the prior year.
Our consolidated cash flow operating metrics for the quarter ended March 31,
2009 and 2008 are as follows:
2009 2008
As Restated
(1)
Days sales outstanding in ending accounts receivable
("DSOs")(a) 80 66
Inventory turns (excluding inventories not available
for sale) (b) 33 36
Days purchases outstanding in ending accounts
payable ("DPOs") (c) 73 45
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(1) See Note 2 "Restatement of Consolidated Financial Statements" in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2008.
(a) Calculated as the balance of accounts receivable, net at the end of the period divided by daily net sales. Daily net sales is calculated as net sales for the quarter divided by 90 days in 2009 and 91 days in 2008.
(b) Calculated as annualized costs of goods sold divided by average inventories. Average inventories is calculated as the sum of the balances of inventories at the beginning of the quarter plus inventories at the end of quarter divided by two.
(c) Calculated as the balances of accounts payable at the end of the period divided by daily costs of goods sold. Daily costs of goods sold is calculated as costs of goods sold for the quarter divided by 90 days in 2009 and 91 days in 2008.
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