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NSIT > SEC Filings for NSIT > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for INSIGHT ENTERPRISES INC


9-Aug-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 7% to $1.4 billion in the three months ended June 30, 2013, a decrease of $112.6 million compared to the three months ended June 30, 2012. Second quarter sales results were primarily driven by a decline in hardware and software sales in our North America and EMEA segments. Consolidated gross profit declined 5% year to year to $190.9 million, with gross margin increasing 30 basis points year over year to 13.5%. The gross margin increase was driven by increased vendor funding from key strategic partners and increased services sales year over year. Additionally, we continued our focus on tight cost control. All of this resulted in a 19% decline in earnings from operations during the second quarter of 2013 compared to the second quarter of 2012. On a consolidated basis, we reported 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. This compares to earnings from operations of $55.3 million, net earnings of $35.3 million and diluted earnings per share of $0.79 for the second quarter of 2012.

Our consolidated results of operations for the second quarter of 2013 include severance expense, net of adjustments, totaling $3.2 million, $2.6 million net of tax, compared to $2.4 million, $1.6 million net of tax, recorded during the second 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, 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 11 to the Consolidated Financial Statements in Part I, Item 1 of this report.

We have recently been notified that our largest software partner intends to make changes to its channel incentive program in October 2013. We are working diligently with that partner to finalize the details and timing of all of the changes and to quantify the impact on our business. We believe that certain of the changes could become effective as multi-year contracts renew under the new program and that some of the changes could become effective as early as October 1, 2013. The program is complex, with many dynamic elements under review, and we will determine the impact as the program details are finalized. At this time, we anticipate that these changes will result in reduced incentives from this partner in future periods. Over the coming months, we will actively work to identify actions available to us to mitigate the impact of these program changes.

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 and six months ended June 30, 2013
and 2012:



                                           Three Months Ended           Six Months Ended
                                                June  30,                   June  30,
                                           2013           2012          2013         2012
  Net sales                                  100.0 %       100.0 %       100.0 %      100.0 %
  Costs of goods sold                         86.5          86.8          86.6         86.6

  Gross profit                                13.5          13.2          13.4         13.4
  Selling and administrative expenses         10.1           9.4          10.9         10.4
  Severance and restructuring expenses         0.3           0.2           0.2          0.1

  Earnings from operations                     3.1           3.6           2.3          2.9
  Non-operating expense (income), net          0.0           0.1           0.1          0.0

  Earnings before income taxes                 3.1           3.5           2.2          2.9
  Income tax expense                           1.2           1.2           0.8          1.0

  Net earnings                                 1.9 %         2.3 %         1.4 %        1.9 %

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 June 30, 2013 decreased 7% compared to the three months ended June 30, 2012. Net sales for the six months ended June 30, 2013 decreased 6% compared to the six months ended June 30, 2012. Our net sales by operating segment were as follows (dollars in thousands):

                                      Three Months Ended                             Six Months Ended
                                           June 30,                  %                   June 30,                  %
                                     2013            2012         Change           2013            2012          Change
North America                     $   923,063     $   992,970          (7 %)    $ 1,670,067     $ 1,849,297          (10 %)
EMEA                                  421,116         459,714          (8 %)        808,027         808,548           -
APAC                                   72,368          76,491          (5 %)        120,075         115,512            4 %

Consolidated                      $ 1,416,547     $ 1,529,175          (7 %)    $ 2,598,169     $ 2,773,357           (6 %)

Net sales in North America decreased 7%, or $69.9 million, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. Net sales of hardware and software decreased 10% and 4%, respectively, year to year. Net sales of services remained flat year to year. The hardware sales decline was primarily due to lower sales to large enterprise and public sector 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 North America decreased 10%, or $179.2 million, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. On a year to date basis, net sales of hardware and software decreased 11% and 9%, respectively, year to year, while net sales of services remained flat year to year.

Net sales in EMEA decreased 8%, or $38.6 million, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. Excluding the effects of foreign currency movements, net sales decreased 9% compared to the second quarter of last year. Net sales of services increased 42% year over year, while net sales of hardware and software decreased 21% and 4%, respectively, year to year, all in U.S. dollars. Excluding the effects of foreign currency movements services net sales increased 41%, while net sales of hardware and software declined 19% and 6%, respectively, compared to the second quarter of 2012. The decrease in hardware net sales was due primarily to reduced volume in sales across all client groups, particularly in the United Kingdom. The decrease in software net sales was due primarily to lower volume with existing clients, primarily large enterprise and mid-market clients. The increase in net sales of services was due primarily to new client engagements and higher volume with existing clients.

Net sales in EMEA remained relatively flat for the six months ended June 30, 2013 compared to the six months ended June 30, 2012, both in U.S. dollars and excluding the effects of foreign currency movements. On a year to date basis, net sales of software and services were up 6% and 37%, respectively, year over year in U.S. dollars, while net sales of hardware declined 12% year to year. Net sales of software and services were up 4% and 37%, respectively, while net sales of hardware declined 11% year to year, excluding the effects of foreign currency movements.

Net sales in APAC decreased 5%, or $4.1 million, for the three months ended June 30, 2013, compared to the three months ended June 30, 2012. Excluding the effects of foreign currency movements, net sales decreased 2% compared to the second quarter of last year. The decrease primarily resulted from the effect of a higher mix of software maintenance sales, which are recorded net of related costs within the net sales line item, in the second quarter of 2013 compared to the second quarter of 2012.

Our APAC segment recognized net sales of $120.1 million for the six months ended June 30, 2013, an increase of 4% compared to the six months ended June 30, 2012 in U.S. dollars, 7% excluding the effects of foreign currency movements. The increase primarily resulted from an increase in sales to public sector and commercial clients in the Australian market.


Table of Contents

INSIGHT ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

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 June 30, 2013 and 2012:

                     North America                    EMEA                         APAC
                  Three Months Ended           Three Months Ended           Three Months Ended
                       June 30,                     June 30,                     June 30,
    Sales Mix     2013            2012         2013            2012         2013            2012
    Hardware          58 %           59 %          26 %           30 %           3 %            2 %
    Software          36 %           35 %          72 %           69 %          95 %           96 %
    Services           6 %            6 %           2 %            1 %           2 %            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, 2013 and 2012:

                     North America                    EMEA                        APAC
                   Six Months  Ended           Six Months  Ended           Six Months  Ended
                        June 30,                    June 30,                    June 30,
     Sales Mix     2013           2012         2013           2012         2013           2012
     Hardware          60 %          61 %          31 %          35 %           2 %           2 %
     Software          33 %          33 %          67 %          63 %          95 %          95 %
     Services           7 %           6 %           2 %           2 %           3 %           3 %

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

Gross Profit. Gross profit for the three months ended June 30, 2013 decreased 5% compared to the three months ended June 30, 2012, with gross margin increasing 30 basis points to 13.5% for the three months ended June 30, 2013 compared to 13.2% for the three months ended June 30, 2012. For the six months ended June 30, 2013, gross profit decreased 6% compared to the six months ended June 30, 2012, with gross margin remaining flat at 13.4% for both the six months ended June 30, 2013 and 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 June 30,                                    Six Months Ended June 30,
                                                    % of                           % of                           % of                           % of
                                     2013         Net Sales         2012         Net Sales         2013         Net Sales         2012         Net Sales
North America                      $ 124,664            13.5 %    $ 130,357            13.1 %    $ 227,191            13.6 %    $ 243,993            13.2 %
EMEA                                  54,238            12.9 %       59,249            12.9 %      102,848            12.7 %      109,663            13.6 %
APAC                                  12,025            16.6 %       11,680            15.3 %       19,025            15.8 %       18,002            15.6 %

Consolidated                       $ 190,927            13.5 %    $ 201,286            13.2 %    $ 349,064            13.4 %    $ 371,658            13.4 %

North America's gross profit for the three months ended June 30, 2013 decreased 4% compared to the three months ended June 30, 2012. As a percentage of net sales, gross margin increased approximately 40 basis points to 13.5% from 13.1% year over year. A 43 basis point increase in product margin, which includes vendor funding and freight, resulted from the effect of the increase in software maintenance sales recorded on a net basis and an increase in vendor funding from improvements in the mix of hardware sales with key strategic partners year over year. A 17 basis point improvement in margin generated by services resulted from a higher mix of services sales in the three months ended June 30, 2013, which are generally transacted at higher gross margins. These increases in gross margin were partially offset by a 21 basis point decrease in margin from a lower mix of agency fees for enterprise software agreements.


Table of Contents

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, 2013, decreased 7% compared to the six months ended June 30, 2012. As a percentage of net sales, gross margin increased approximately 40 basis points to 13.6% from 13.2%, year over year, reflecting a 22 basis point improvement in margin generated by services due to a higher mix of higher margin services sales in the six months ended June 30, 2013. In addition, year to date product margin, which includes vendor funding and freight, increased 12 basis points driven primarily by increased vendor funding year over year.

EMEA's gross profit decreased 8% in U.S. dollars for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. Excluding the effects of foreign currency movements, gross profit was down 9% compared to the second quarter of last year. As a percentage of net sales, gross margin remained consistent at 12.9% in both periods. An increase in gross margin from sales of services of 39 basis points due to new client wins and higher volume to existing clients was partially offset by a 14 basis point decrease in margin resulting from lower agency fees for enterprise software agreements and a net decrease in product margin, which includes vendor funding and freight, of 13 basis points, primarily driven by changes in product mix. The decline in higher margin hardware sales and a reduction in partner funding as a result of decreased volume and program changes year to year were partially offset by an increase in software product margin as a result of high dollar, lower margin transactions in the prior year quarterly comparison period. Additionally, gross margin was negatively affected by 9 basis points due to lower supplier discounts year to year.

EMEA's gross profit declined 6% for the six months ended June 30, 2013, compared to the six months ended June 30, 2012, both in U.S. dollars and excluding the effects of foreign currency movements. As a percentage of net sales, gross margin for the six month periods decreased to 12.7% from 13.6% year to year, due primarily to a net decrease in product margin, which includes vendor funding and freight, of over 80 basis points, primarily driven by changes in product mix; a decline in margin from agency fees for enterprise software agreements of approximately 20 basis points due to lower volume and the effect of program changes from our largest software partner; and the negative effect of lower supplier discounts of approximately 10 basis points year to year. These decreases in gross margin were partially offset by an increase in margin generated by services of almost 30 basis points year over year.

APAC's gross profit increased 3% for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. Excluding the effects of foreign currency movements, gross profit increased 5% compared to the second quarter of last year. As a percentage of net sales, gross margin increased approximately 130 basis points to 16.6% from 15.3% year over year, due primarily to the effect of a higher mix of software maintenance sales, which are recorded net of related costs within the net sales line item, in the second quarter of 2013 compared to the second quarter of 2012.

APAC's gross profit increased 6% for the six months ended June 30, 2013, compared to the six months ended June 30, 2012. Excluding the effects of foreign currency movements, gross profit increased 8% 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 the effect of a higher mix of software maintenance sales recorded on a net basis in the six months ended June 30, 2013 compared to the first six months of 2012.


Table of Contents

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 decreased $443,000, or less than 1%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. For the six months ended June 30, 2013, selling and administrative expenses decreased $2.8 million, or 1%, compared to the six months ended June 30, 2012. 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,
                                                    % of                           % of                           % of                           % of
                                     2013         Net Sales         2012         Net Sales         2013         Net Sales         2012         Net Sales
North America                      $  90,295             9.8 %    $  90,342             9.1 %    $ 179,491            10.7 %    $ 182,326             9.9 %
EMEA                                  46,309            11.0 %       46,932            10.2 %       92,065            11.4 %       92,324            11.4 %
APAC                                   6,554             9.1 %        6,327             8.3 %       12,590            10.5 %       12,345            10.7 %

Consolidated                       $ 143,158            10.1 %    $ 143,601             9.4 %    $ 284,146            10.9 %    $ 286,995            10.4 %

North America's selling and administrative expenses remained flat, decreasing $47,000 for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 and, as a percentage of net sales, increased approximately 70 basis points to 9.8%. Increases in salaries and wages due to headcount investments were more than offset by lower variable compensation on lower gross profits and reduced spending in other expense categories. 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 June 30, 2013 due to the decrease in net sales. In addition, the year over year comparison was affected by a prior year gain of $1.2 million on the sale of a portfolio of non-core service contracts that we recognized in the three months ended June 30, 2012.

North America's selling and administrative expenses decreased 2%, or $2.8 million, for the six months ended June 30, 2013, due primarily to lower variable compensation on lower gross profits and reduced spending in other expense categories.

EMEA's selling and administrative expenses decreased 1%, or $623,000, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 and increased approximately 80 basis points year over year as a percentage of net sales to 11.0%. Excluding the effects of foreign currency movements, selling and administrative expenses also decreased 1% compared to the second quarter of last year. The year to year decrease was primarily driven by a decrease in salaries and wages due to restructuring actions in prior periods and lower variable compensation due to the decline in gross profit year to year, partially offset by executive recruiting expenses in the 2013 period.

EMEA's selling and administrative expenses remained relatively flat, decreasing $259,000, for the six months ended June 30, 2013, compared to the six months ended June 30, 2012. Excluding the effects of foreign currency movements, selling and administrative expenses were also flat compared to the first six months of last year.

APAC's selling and administrative expenses increased 4%, or $227,000, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012, increasing year over year as a percentage of net sales by approximately 80 basis points to 9.1%. Excluding the effects of foreign currency movements, selling and administrative expenses increased 5% compared to the second quarter of last year. The increase year over year was primarily driven by investments in services headcount.

APAC's selling and administrative expenses increased 2%, or $245,000, for the six months ended June 30, 2013, compared to the six months ended June 30, 2012. Excluding the effects of foreign currency movements, selling and administrative expenses increased 3% compared to the first six months of last year due to investments in sales and services headcount.

Severance and Restructuring Expenses. 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, related to certain restructuring activities. 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. 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, 2012, . . .

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