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NSIT > SEC Filings for NSIT > Form 10-Q on 1-Nov-2012All Recent SEC Filings

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Form 10-Q for INSIGHT ENTERPRISES INC


1-Nov-2012

Quarterly Report


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 leading provider of information technology ("IT") hardware, software and services to small, medium and large businesses and public sector clients in North America, Europe, the Middle East, Africa and Asia-Pacific. 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.

Consolidated net sales decreased 5% to $1.2 billion in the three months ended September 30, 2012, a decrease of $56.6 million compared to the three months ended September 30, 2011. Although sales in the three months ended September 30, 2012 declined year to year compared to the three months ended September 30, 2011, we saw gross margin growth across all of our operating segments during the quarter. The increase in gross margin was primarily due to a higher mix of fees from enterprise agreements in North America and to a higher mix of hardware sales in EMEA, which are generally transacted at higher gross margin than in North America. Gross profit for the three months ended September 30, 2012 increased 3% year over year to $167.6 million, and gross margin increased 100 basis points to 14.2%. We are beginning to see the benefits of our profitability initiatives, particularly in North America, which contributed to our higher gross margin performance in the quarter. This gross margin expansion more than offset a year over year increase of 1% in selling and administrative expenses, resulting in a 10% increase in earnings from operations during the third quarter of 2012. These results include a reduction in legal expenses of approximately $2.0 million associated with the recovery of costs incurred in previous periods. On a consolidated basis, we reported earnings from operations of $30.7 million, net earnings of $19.4 million and diluted earnings per share of $0.43 for the third quarter of 2012. This compares to earnings from operations of $27.9 million, net earnings of $17.2 million and diluted earnings per share of $0.38 for the third quarter of 2011.

Results for the third quarter of 2012 include Ensynch, which the Company acquired effective October 1, 2011 in North America, and Inmac, which the Company acquired effective February 1, 2012 in EMEA.

Our consolidated results of operations for the third quarter of 2012 include $705,000, $428,000 net of tax, of severance expense, compared to $529,000, $330,000 net of tax, recorded during the third quarter of 2011.

Net of tax amounts were computed using the statutory tax rate for the taxing jurisdictions in the operating segment in which the related expenses were recorded.

Details about segment results of operations can be found in Note 10 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.


Table of Contents

INSIGHT ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

Critical Accounting Estimates

General

Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles ("GAAP"). For a summary of significant accounting policies, see Note 1 to the Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2011. 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, 2011.

                             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 nine months ended September 30,
2012 and 2011:



                                         Three Months  Ended           Nine Months  Ended
                                            September 30,                 September 30,
                                          2012           2011          2012           2011
Net sales                                   100.0 %       100.0 %        100.0 %       100.0 %
Costs of goods sold                          85.8          86.8           86.4          86.5

Gross profit                                 14.2          13.2           13.6          13.5
Selling and administrative expenses          11.5          10.9           10.7          10.7
Severance and restructuring expenses          0.1           0.0            0.1           0.1

Earnings from operations                      2.6           2.3            2.8           2.7
Non-operating expense, net                    0.2           0.2            0.0           0.1

Earnings before income taxes                  2.4           2.1            2.8           2.6
Income tax expense                            0.8           0.7            1.0           0.9

Net earnings                                  1.6 %         1.4 %          1.8 %         1.7 %

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; 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 year amount as translated into U.S. dollars under the applicable accounting standards to the prior year amount in local currency translated into U.S. dollars utilizing the average translation rate for the current period.


Table of Contents

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 September 30, 2012 decreased 5% compared to the three months ended September 30, 2011. Net sales for the nine months ended September 30, 2012 increased 1% compared to the nine months ended September 30, 2011. Our net sales by operating segment were as follows (dollars in thousands):

                                Three Months Ended                             Nine Months Ended
                                   September 30,               %                 September 30,               %
                               2012            2011         Change           2012            2011         Change
North America               $   868,765     $   913,593          (5 %)    $ 2,718,062     $ 2,749,955          (1 %)
EMEA                            276,621         289,130          (4 %)      1,085,169       1,028,986           5 %
APAC                             36,023          35,296           2 %         151,535         147,934           2 %

Consolidated                $ 1,181,409     $ 1,238,019          (5 %)    $ 3,954,766     $ 3,926,875           1 %

Net sales in North America decreased 5%, or $44.8 million, for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Net sales of hardware, software and services decreased 6%, 1%, and 10%, respectively, from the prior year period. Hardware and services sales comparisons reflect lower spending by large enterprise clients during the current quarter.

Net sales in North America decreased 1%, or $31.9 million, for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. On a year to date basis, net sales of software increased 7% year over year, while net sales of hardware and services decreased 4% and 11%, respectively, year to year.

Net sales in EMEA decreased 4%, or $12.5 million, in U.S. dollars, for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Excluding the effects of foreign currency movements, net sales increased 2% compared to the third quarter of last year. Net sales of hardware increased 18% year over year, while net sales of software and services declined 18% and 1%, respectively, year to year, all in U.S. dollars. Excluding the effects of foreign currency movements, hardware and services net sales increased 20% and 6%, respectively, while net sales of software declined 10% compared to the third quarter of 2011. The growth in hardware was attributable to the acquisition of Inmac, which contributed $26.8 million in net sales during the three months ended September 30, 2012. The decrease in software net sales was due primarily to lower volume in the large enterprise and public sector client space.

Net sales in EMEA increased 5%, or $56.2 million, in U.S. dollars, for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. Excluding the effects of foreign currency movements, net sales increased 12% compared to the first nine months of last year. On a year to date basis, net sales of hardware and services were up 23% and 10%, respectively, while net sales of software were down 3% year to year in U.S. dollars. Excluding the effects of foreign currency movements, net sales of hardware, software and services were up 26%, 5% and 17%, respectively, year over year.

Net sales in APAC increased 2%, or $727,000, in U.S. dollars, for the three months ended September 30, 2012, compared to the three months ended September 30, 2011. Excluding the effects of foreign currency movements, net sales increased 3% compared to the third quarter of last year. The increase primarily resulted from strength in mid-market sales in China and higher public sector spending in Australia.

Our APAC segment recognized net sales of $151.5 million for the nine months ended September 30, 2012, an increase of 2% compared to the nine months ended September 30, 2011 in U.S. dollars, 4% excluding the effects of foreign currency movements.

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.


Table of Contents

INSIGHT ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

The percentage of net sales by category for North America, EMEA and APAC were as follows for the three months ended September 30, 2012 and 2011:

                   North America                      EMEA                          APAC
                Three Months  Ended           Three Months  Ended           Three Months  Ended
                   September 30,                 September 30,                 September 30,
  Sales Mix      2012            2011         2012             2011         2012             2011
  Hardware            66 %          67 %           46 %           37 %            2 %            2 %
  Software            28 %          26 %           52 %           61 %           92 %           93 %
  Services             6 %           7 %            2 %            2 %            6 %            5 %

                     100 %         100 %          100 %          100 %          100 %          100 %

The percentage of net sales by category for North America, EMEA and APAC were as follows for the nine months ended September 30, 2012 and 2011:

                     North America                    EMEA                         APAC
                  Nine Months  Ended           Nine Months  Ended           Nine Months  Ended
                     September 30,                September 30,                September 30,
    Sales Mix      2012           2011         2012            2011         2012            2011
    Hardware            62 %         64 %          38 %           32 %           2 %            1 %
    Software            32 %         29 %          60 %           66 %          94 %           96 %
    Services             6 %          7 %           2 %            2 %           4 %            3 %

                       100 %        100 %         100 %          100 %         100 %          100 %

Gross Profit. Gross profit for the three months ended September 30, 2012 increased 3% compared to the three months ended September 30, 2011, with gross margin increasing 100 basis points to 14.2% for the three months ended September 30, 2012 compared to 13.2% for the three months ended September 30, 2011. For the nine months ended September 30, 2012, gross profit increased 2% compared to the nine months ended September 30, 2011, with gross margin increasing 10 basis points to 13.6% for the nine months ended September 30, 2012 compared to 13.5% for the nine months ended September 30, 2011. Our gross profit and gross profit as a percentage of net sales by operating segment were as follows (dollars in thousands):

                                               Three Months Ended September 30,                              Nine Months Ended September 30,
                                                    % of                           % of                           % of                           % of
                                     2012         Net Sales         2011         Net Sales         2012         Net Sales         2011         Net Sales
North America                      $ 116,975            13.5 %    $ 114,638            12.5 %    $ 360,968            13.3 %    $ 356,237            13.0 %
EMEA                                  43,308            15.7 %       42,118            14.6 %      152,971            14.1 %      149,191            14.5 %
APAC                                   7,342            20.4 %        6,759            19.1 %       25,344            16.7 %       24,746            16.7 %

Consolidated                       $ 167,625            14.2 %    $ 163,515            13.2 %    $ 539,283            13.6 %    $ 530,174            13.5 %

North America's gross profit for the three months ended September 30, 2012 increased 2% compared to the three months ended September 30, 2011. As a percentage of net sales, gross margin increased to 13.5% from 12.5% year over year, due primarily to a 35 basis point increase in margin from a higher mix of agency fees for enterprise software agreements, a 23 basis point increase in product margin, which includes vendor funding and freight, a 20 basis point improvement in margin generated by services due to increased profitability on new engagements and a 16 basis point increase in margin due to a decrease in the write-downs of inventories year to year. The increase in product margin was primarily due to business and client mix in the quarter and the effect of our initiatives to improve profitability. For the nine months ended September 30, 2012, gross profit increased 1% compared to the nine months ended September 30, 2011. As a percentage of net sales, gross margin increased to 13.3% compared to 13.0% for the nine months ended September 30, 2011, reflecting a 16 basis point improvement in margin generated by services due to the year over year comparison being positively affected by large client deployments in the prior year period that were at lower margins and increased profitability on new engagements year over year and a 14 basis point increase in margin due to a decrease in the write-downs of inventories year to year.


Table of Contents

INSIGHT ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

EMEA's gross profit increased 3% in U.S. dollars for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Excluding the effects of foreign currency movements, gross profit was up 9% compared to the third quarter of last year. As a percentage of net sales, gross margin increased to 15.7% from 14.6% year over year, due primarily to an increase in product margin, which includes vendor funding and freight, of 123 basis points, primarily driven by higher margin hardware sales associated with the acquisition of Inmac in 2012, offset partially by a decrease in margin contributed by services sales of 29 basis points. For the nine months ended September 30, 2012, gross profit increased 3% compared to the nine months ended September 30, 2011. Excluding the effects of foreign currency movements, gross profit increased 9% compared to the first nine months of last year. As a percentage of net sales, gross margin for the nine month periods decreased to 14.1% from 14.5% year to year, due primarily to a 58 basis point decline in margin from agency fees for enterprise software agreements due to lower volume and the effect of program changes from our largest software partner that became effective in the fourth quarter of 2011 and a decrease in margin contributed by services sales of 11 basis points. These decreases in gross margin were offset partially by a 25 basis point increase in product margin, which includes vendor funding and freight, primarily driven by higher margin hardware sales associated with the acquisition of Inmac in 2012.

APAC's gross profit increased 9% for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Excluding the effects of foreign currency movements, gross profit increased 10.0% compared to the third quarter of last year. As a percentage of net sales, gross margin increased to 20.4% from 19.1% year over year, due primarily to higher partner funding and an increase in fees from enterprise software agreements. For the nine months ended September 30, 2012, gross profit increased 2% compared to the nine months ended September 30, 2011. Excluding the effects of foreign currency movements, gross profit increased 4% compared to the first nine months of last year. As a percentage of net sales, gross margin remained flat at 16.7% year over year.

Operating Expenses.

Selling and Administrative Expenses. Selling and administrative expenses increased $1.2 million, or less than 1%, for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. For the nine months ended September 30, 2012, selling and administrative expenses increased $2.7 million, or less than 1%, compared to the nine months ended September 30, 2011. Our selling and administrative expenses as a percent of net sales by operating segment were as follows (dollars in thousands):

                                               Three Months Ended September 30,                              Nine Months Ended September 30,
                                                    % of                           % of                           % of                           % of
                                     2012         Net Sales         2011         Net Sales         2012         Net Sales         2011         Net Sales
North America                      $  87,779            10.1 %    $  89,539             9.8 %    $ 270,105             9.9 %    $ 277,114            10.1 %
EMEA                                  42,088            15.2 %       39,372            13.6 %      134,412            12.4 %      125,030            12.2 %
APAC                                   6,392            17.7 %        6,160            17.5 %       18,737            12.4 %       18,414            12.4 %

Consolidated                       $ 136,259            11.5 %    $ 135,071            10.9 %    $ 423,254            10.7 %    $ 420,558            10.7 %

North America's selling and administrative expenses decreased 2%, or $1.8 million, for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 and, as a percentage of net sales, increased 30 basis points to 10.1%. The decrease in selling and administrative expenses is primarily due to a reduction in legal expenses of approximately $2.0 million associated with the recovery of costs incurred in previous periods. For the nine months ended September 30, 2012, selling and administrative expenses decreased 3%, or $7.0 million, compared to the nine months ended September 30, 2011. During the nine months ended September 30, 2012, we continued our focus on control of selling and administrative expenses and also recognized the $2.0 million reduction in legal expenses during the third quarter, as discussed above, and a gain of $1.2 million on the sale of a portfolio of non-core service contracts during the second quarter. In addition, the year over year comparison was affected by a non-cash charge of approximately $1.4 million during the nine months ended September 30, 2011 to write-off certain computer software development costs that were not placed into service as a result of the North America IT systems integration project.


Table of Contents

INSIGHT ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

EMEA's selling and administrative expenses increased 7%, or $2.7 million in U.S. dollars, for the three months ended September 30, 2012 compared to the three months ended September 30, 2011, and increased approximately 160 basis points year over year as a percent of net sales to 15.2%. Excluding the effects of foreign currency movements, selling and administrative expenses increased 15% compared to the third quarter of last year. The year over year increase was primarily driven by increases in salaries and benefits due to investments in headcount and the addition of Inmac teammates. For the nine months ended September 30, 2012, selling and administrative expenses increased 8%, or $9.4 million, in U.S. dollars, compared to the nine months ended September 30, 2011. Excluding the effects of foreign currency movements, selling and administrative expenses increased 14% compared to the first nine months of last year. The year to date increase in selling and administrative expenses is attributable to increases in salaries and benefits due to investments in headcount to support the roll-out of our hardware sales capability in the Netherlands and France and the acquisition of Inmac in February 2012.

APAC's selling and administrative expenses increased 4%, or $232,000, in U.S. dollars, for the three months ended September 30, 2012 compared to the three months ended September 30, 2011, increasing year over year as a percent of net sales by approximately 20 basis points to 17.7%. Excluding the effects of foreign currency movements, selling and administrative expenses increased 5% compared to the third quarter of last year. The increase year over year was primarily driven by increases in salaries and benefits due to investments in headcount associated with specialty sales positions. For the nine months ended September 30, 2012, selling and administrative expenses increased 2% in U.S. dollars, compared to the nine months ended September 30, 2011. Excluding the effects of foreign currency movements, selling and administrative expenses also increased 2% compared to the first nine months of last year.

Severance and Restructuring Expenses. During the three months ended September 30, 2012, North America recorded severance expense of $916,000 due primarily to organizational restructuring efforts associated with the integration of our IT systems in North America onto a single platform, and EMEA recorded a reduction to severance and restructuring expenses of $211,000 due to changes in estimates as cash payments were made relating to accruals associated with previous restructuring actions. During the nine months ended September 30, 2012, North America and EMEA recorded severance expense, net of adjustments, totaling $2.3 million and $2.2 million, respectively. These charges in North America and EMEA were related to the elimination of certain positions in a re-alignment of roles and responsibilities. Comparatively, during the three months ended September 30, 2011, North America and EMEA recorded severance expense of $476,000 and $53,000, respectively, and during the nine months ended September 30, 2011, North America and EMEA recorded severance expense, net of adjustments, totaling $1.9 million and $2.5 million, respectively.

Non-Operating (Income) Expense.

Interest Income. Interest income for the three and nine months ended September 30, 2012 and 2011 was generated through cash equivalent short-term investments. Interest income decreased year to year due to lower interest rates.

Interest Expense. Interest expense for the three and nine months ended September 30, 2012 and 2011 primarily relates to borrowings under our financing facilities and capital lease obligation and imputed interest under our inventory financing facility. Interest expense for the three and nine months ended September 30, 2012 declined 3%, or $51,000, and 9%, or $459,000, respectively, . . .

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