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NSIT > SEC Filings for NSIT > Form 10-Q on 2-May-2013All Recent SEC Filings

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Form 10-Q for INSIGHT ENTERPRISES INC


2-May-2013

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 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"). 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 March 31, 2013, a decrease of $62.6 million compared to the three months ended March 31, 2012. Consolidated gross profit declined 7% year to year to $158.1 million, with gross margin declining 30 basis points year to year to 13.4%. These first quarter results were primarily driven by (1) lower revenues in North America, and (2) a decrease in gross margin of approximately 190 basis points in EMEA. Our first quarter financial results were weaker than expected as we continued to experience lower volume in the large enterprise space in North America, which significantly impacted our financial performance during the quarter. While EMEA grew top line revenue, gross margin declined due to changes in client sales mix and the mix of hardware, software and services net sales in the quarter. The decrease in gross profit more than offset a year to year decrease in selling and administrative expenses of 2%, resulting in a 44% decline in earnings from operations during the first quarter of 2013 compared to the first quarter of 2012. On a consolidated basis, we reported earnings from operations of $14.4 million, net earnings of $9.1 million and diluted earnings per share of $0.20 for the first quarter of 2013. This compares to earnings from operations of $25.6 million, net earnings of $17.4 million and diluted earnings per share of $0.39 for the first quarter of 2012.

Our consolidated results of operations for the first quarter of 2013 include $2.7 million, $1.9 million net of tax, of severance expense, compared to $1.4 million, $921,000 net of tax, recorded during the first quarter of 2012.

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 11 to the Consolidated Financial Statements in Part I, Item 1 of this report.

Our discussion and analysis of financial condition and results of operations is intended to assist in the understanding of our consolidated financial statements, the changes in certain key items in those consolidated financial statements from period to period and the primary factors that contributed to those changes, as well as how certain critical accounting estimates affect our consolidated financial statements.

Critical Accounting Estimates

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, 2012. 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.


Table of Contents

INSIGHT ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

There have been no changes to the items disclosed as critical accounting estimates in "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, 2012.

                             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, 2013 and 2012:



                                                    Three Months Ended
                                                        March  31,
                                                    2013           2012
           Net sales                                  100.0 %       100.0 %
           Costs of goods sold                         86.6          86.3

           Gross profit                                13.4          13.7
           Selling and administrative expenses         11.9          11.5
           Severance and restructuring expenses         0.3           0.1

           Earnings from operations                     1.2           2.1
           Non-operating expense (income), net          0.1          (0.1 )

           Earnings before income taxes                 1.1           2.2
           Income tax expense                           0.3           0.8

           Net earnings                                 0.8 %         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.


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 March 31, 2013 decreased 5% compared to the three months ended March 31, 2012. Our net sales by operating segment were as follows (dollars in thousands):

                                    Three Months Ended
                                         March 31,                 %
                                   2013            2012          Change
                North America   $   747,004     $   856,327          (13 %)
                EMEA                386,911         348,834           11 %
                APAC                 47,707          39,021           22 %

                Consolidated    $ 1,181,622     $ 1,244,182           (5 %)

Net sales in North America decreased 13%, or $109.3 million, for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Net sales of hardware, software and services decreased 12%, 17%, and 1%, respectively, from the prior year period. Hardware and software sales comparisons reflect a lower volume of sales, primarily to large enterprise clients, during the current quarter. Additionally, we saw a higher mix of software maintenance sales this year compared to last year, which were recorded net of related costs within the net sales line item in our financial statements.

Net sales in EMEA increased 11%, or $38.1 million, in U.S. dollars, for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Excluding the effects of foreign currency movements, net sales increased 12% compared to the first quarter of last year. Net sales of software and services increased 22% and 32%, respectively, year over year, while net sales of hardware declined 4% year to year, all in U.S. dollars. Excluding the effects of foreign currency movements, software and services net sales increased 22% and 33%, respectively, while net sales of hardware declined 3% compared to the first quarter of 2012. The decrease in hardware net sales was due primarily to reduced volume in sales to mid-market clients. The increase in software net sales was due primarily to higher volume with existing clients, primarily large enterprise clients. The increase in net sales of services was due primarily to higher volume and new client engagements.

Net sales in APAC increased 22%, or $8.7 million, in U.S. dollars, for the three months ended March 31, 2013, compared to the three months ended March 31, 2012. Excluding the effects of foreign currency movements, net sales increased 24% compared to the first quarter of last year. The increase primarily resulted from higher volume with new and existing clients and a higher percentage of software sales being recognized on a gross basis in the first quarter of 2013 compared to the first quarter of 2012.

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.

The percentage of net sales by category for North America, EMEA and APAC were as follows for the three months ended March 31, 2013 and 2012:

                     North America                    EMEA                         APAC
                  Three Months Ended           Three Months Ended           Three Months Ended
                      March  31,                   March  31,                   March  31,
    Sales Mix      2013           2012         2013            2012         2013            2012
    Hardware            63 %         63 %          37 %           42 %           2 %            3 %
    Software            30 %         31 %          61 %           56 %          95 %           93 %
    Services             7 %          6 %           2 %            2 %           3 %            4 %

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


Table of Contents

INSIGHT ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

Gross Profit. Gross profit for the three months ended March 31, 2013 decreased 7% compared to the three months ended March 31, 2012, with gross margin decreasing 30 basis points to 13.4% for the three months ended March 31, 2013 compared to 13.7% for the three months ended March 31, 2012. Our gross profit and gross profit as a percentage of net sales by operating segment were as follows (dollars in thousands):

                                        Three Months Ended March 31,
                                           % of                           % of
                            2013         Net Sales         2012         Net Sales
          North America   $ 102,527            13.7 %    $ 113,636            13.3 %
          EMEA               48,610            12.6 %       50,414            14.5 %
          APAC                7,000            14.7 %        6,322            16.2 %

          Consolidated    $ 158,137            13.4 %    $ 170,372            13.7 %

North America's gross profit for the three months ended March 31, 2013 decreased 10% compared to the three months ended March 31, 2012. As a percentage of net sales, gross margin increased to 13.7% from 13.3% year over year, due primarily to a 36 basis point increase in margin from a higher mix of agency fees for enterprise software agreements and a 29 basis point improvement in margin generated by services due to a higher mix of services sales in the three months ended March 31, 2013, which are generally transacted at higher gross margins. These increases in gross margin were partially offset by a 23 basis point decrease in product margin, which includes vendor funding and freight, due to lower sales volume of hardware products year to year.

EMEA's gross profit decreased 4% in U.S. dollars for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Excluding the effects of foreign currency movements, gross profit was down 3% compared to the first quarter of last year. As a percentage of net sales, gross margin decreased approximately 190 basis points to 12.6% from 14.5% year to year, due primarily to a decrease in product margin, which includes vendor funding and freight, of 180 basis points, primarily driven by changes in client sales mix, including a decline in hardware sales to mid-market clients, and a reduction in partner funding as a result of program changes year to year. Additionally, gross margin was negatively affected by 9 basis points as a result of a lower mix of agency fees for enterprise software agreements, which also resulted from a reduction in partner funding based on program changes year to year.

APAC's gross profit increased 11% for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Excluding the effects of foreign currency movements, gross profit increased 12% compared to the first quarter of last year. As a percentage of net sales, gross margin decreased to 14.7% from 16.2% year to year, due primarily to a higher percentage of software sales being recognized on a gross basis in the first quarter of 2013 compared to the first quarter of 2012.

Operating Expenses.

Selling and Administrative Expenses. Selling and administrative expenses
decreased $2.4 million, or 2%, for the three months ended March 31, 2013
compared to the three months ended March 31, 2012. Our selling and
administrative expenses as a percent of net sales by operating segment were as
follows (dollars in thousands):



                                        Three Months Ended March 31,
                                           % of                           % of
                            2013         Net Sales         2012         Net Sales
          North America   $  89,196            11.9 %    $  91,984            10.7 %
          EMEA               45,756            11.8 %       45,392            13.0 %
          APAC                6,036            12.7 %        6,018            15.4 %

          Consolidated    $ 140,988            11.9 %    $ 143,394            11.5 %


Table of Contents

INSIGHT ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

North America's selling and administrative expenses decreased 3%, or $2.8 million, for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 and, as a percentage of net sales, increased 120 basis points to 11.9%. The decrease in selling and administrative expenses is primarily due to a decline in variable compensation as a result of the decline in net sales and gross profit year to year. Although we continued our focus on controlling selling and administrative expenses, fixed selling and administrative costs increased as a percentage of net sales in North America during the three months ended March 31, 2013 due to the decrease in net sales.

EMEA's selling and administrative expenses remained relatively flat, increasing $364,000 for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 and decreased approximately 120 basis points year to year as a percent of net sales to 11.8%. Excluding the effects of foreign currency movements, selling and administrative expenses increased 1% compared to the first quarter of last year. The year over year increase was primarily driven by increases in salaries and benefits due to the addition of Inmac teammates for an additional month in the first quarter of 2013 compared to the prior year period, offset partially by the benefits of cost reduction initiatives implemented in late 2012.

APAC's selling and administrative expenses remained flat at $6.0 million for both the three months ended March 31, 2013 and 2012, decreasing year to year as a percent of net sales by approximately 270 basis points to 12.7%. The decrease as a percentage of net sales year to year was primarily driven by current period top line revenue growth.

Severance and Restructuring Expenses. During the three months ended March 31, 2013, North America and EMEA recorded severance expense, net of adjustments, of approximately $1.1 million and $1.7 million, respectively, related to certain restructuring activities. 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 March 31, 2012, North America and EMEA recorded severance expense, net of adjustments, of $489,000 and $885,000, respectively.

Non-Operating (Income) Expense.

Interest Income. Interest income for the three months ended March 31, 2013 and 2012 was generated through cash equivalent short-term investments. The decrease in interest income year to year is primarily due to lower average invested cash balances during the three months ended March 31, 2013.

Interest Expense. Interest expense for the three months ended March 31, 2013 and 2012 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 months ended March 31, 2013 increased 4%, or $60,000, compared to the three months ended March 31, 2012. The increase was due primarily to lower capitalized interest on internally developed software year to year as our IT system upgrade projects are nearing completion. Imputed interest under our inventory financing facility was $602,000 for the three months ended March 31, 2013, compared to $437,000 for the three months ended March 31, 2012, due to higher average balances and higher interest rates. For a description of our various financing facilities, see Note 3 to our Consolidated Financial Statements in Part I, Item 1 of this report.

Gain on Bargain Purchase. Our EMEA operating segment reported a non-operating gain on bargain purchase of $2.0 million during the first quarter of 2012 as the fair value of the net assets acquired exceeded the purchase price paid by the Company for Inmac.

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.


Table of Contents

INSIGHT ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

Other Expense, Net. Other expense, net, consists primarily of bank fees associated with our cash management activities.

Income Tax Expense. Our effective tax rate for the three months ended March 31, 2013 was 27.8% compared to 35.6% for the three months ended March 31, 2012. Our effective tax rate declined year to year due to the relative effects of discrete items recognized in each period. The effective tax rate for the three months ended March 31, 2013 included the recognition of certain tax benefits related to the re-measurement or settlement of specific uncertain tax positions during the quarter, which decreased the current year rate.

                        Liquidity and Capital Resources

The following table sets forth certain consolidated cash flow information for
the three months ended March 31, 2013 and 2012 (in thousands):



                                                            Three Months Ended
                                                                March 31,
                                                           2013           2012
   Net cash provided by (used in) operating activities   $  16,283      $ (20,440 )
   Net cash used in investing activities                    (5,670 )      (11,654 )
   Net cash (used in) provided by financing activities      (6,933 )       32,345
   Foreign currency exchange effect on cash flows           (3,473 )        4,022

   Increase in cash and cash equivalents                       207          4,273
   Cash and cash equivalents at beginning of period        152,119        128,336

   Cash and cash equivalents at end of period            $ 152,326      $ 132,609

Cash and Cash Flow

Our primary uses of cash during the three months ended March 31, 2013 were to fund working capital requirements, capital expenditures and repurchases of our common stock. Operating activities in the three months ended March 31, 2013 provided $16.3 million in cash, compared to using $20.4 million during the three months ended March 31, 2012, as the decrease in sales during the three months ended March 31, 2013 resulted in a lower use of working capital during the current year period. We had net combined repayments on our long-term debt under our senior revolving credit facility and our accounts receivable securitization financing facility of $19.0 million and net borrowings under our inventory financing facility of $21.3 million during the three months ended March 31, 2013. Capital expenditures were $5.7 million for the three months ended March 31, 2013, a 28% decrease from the three months ended March 31, 2012, as our IT system upgrade projects are nearing completion. Cash flows for the three months ended March 31, 2013 were negatively affected by $3.5 million as a result of foreign currency exchange rates, whereas cash flows benefited $4.0 million in the three months ended March 31, 2012 from foreign currency exchange rates.

Net cash provided by (used in) operating activities. Cash flow from operations for the three months ended March 31, 2013 and 2012 reflect our net earnings, adjusted for non-cash items such as depreciation, amortization, stock-based compensation expense, gain on bargain purchase and write-offs and write-downs of assets, as well as changes in accounts receivable, accounts payable and other current assets. In both periods, the decreases in accounts receivable and accounts payable can be primarily attributed to the seasonal decrease in net sales, resulting in lower accounts receivable and accounts payable balances as of March 31, compared to December 31. For the 2013 period, the increase in other current assets can be primarily attributed to an overpayment of income taxes resulting in a receivable balance at March 31, 2013 and to the timing of the payment of certain prepaid expenses. For the 2012 period, the decreases in accrued expenses and other liabilities was primarily attributed to decreases in sales taxes payable and accrued payroll as of March 31, compared to December 31, due to the timing of related payments.


Table of Contents

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 March 31, 2013 and 2012 were as follows:

                                                                       2013         2012
Days sales outstanding in ending accounts receivable ("DSOs") (a)         82           80
Days inventory outstanding ("DIOs") (b)                                    9           10
Days purchases outstanding in ending accounts payable ("DPOs") (c)       (66 )        (64 )

Cash conversion cycle (days) (d)                                          25           26

(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 2013 and 91 days in 2012.

(b) Calculated as average inventories divided by daily costs of goods sold. Average inventories is calculated as the sum of the balances of inventories at the beginning of the quarter plus inventories at the end of the quarter divided by two. Daily costs of goods sold is calculated as costs of goods sold for the quarter divided by 90 days in 2013 and 91 days in 2012.

(c) Calculated as the balances of accounts payable, which includes the inventory financing facility, at the end of the period divided by daily costs of goods sold. Daily costs of goods sold is calculated as costs of goods sold for the quarter divided by 90 days in 2013 and 91 days in 2012.

(d) Calculated as DSOs plus DIOs, less DPOs.

Our cash conversion cycle was 25 days in the quarter ended March 31, 2013 compared to 26 days in the quarter ended March 31, 2012. The year over year increase in DSOs was offset by an increase in DPOs period to period. The decrease in our cash conversion cycle was primarily attributable to the 1 day decrease in DIOs resulting from improvements in inventory management.

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 . . .

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