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NSIT > SEC Filings for NSIT > Form 10-Q on 31-Oct-2013All Recent SEC Filings

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Form 10-Q for INSIGHT ENTERPRISES INC


31-Oct-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 3% to $1.15 billion in the three months ended September 30, 2013, a decrease of $30.4 million compared to the three months ended September 30, 2012. Third quarter sales results were primarily driven by a decline in hardware and software sales in our EMEA segment and a decline in hardware and services sales in our North America segment, as well as a decline in software and services sales in APAC. Consolidated gross profit increased 1% year over year to $168.7 million, with gross margin increasing approximately 50 basis points year over year to 14.7%. The gross margin increase was driven by our North America business, which optimized funding under programs with strategic partners, drove double digit growth in fees earned on software enterprise agreements and improved profitability through sales of higher margin services offerings year over year. Our North America segment's solid results in the third quarter were offset by the performance of our EMEA business, where we continued to see weakness in our mid-market hardware business and lower spending for software products by public sector clients. Although we have completed the roll out of our new IT system and expect productivity improvement over the coming quarters, our hardware business in the United Kingdom is significantly underperforming due to weak sales execution and systems integration challenges affecting productivity. Throughout the quarter, on a global basis we continued our focus on tight cost control, specifically on reducing our operating costs in EMEA. All of this resulted in a 14% decline in earnings from operations during the third quarter of 2013 compared to the third quarter of 2012. On a consolidated basis, we reported earnings from operations of $26.3 million, net earnings of $15.0 million and diluted earnings per share of $0.35 for the third quarter of 2013. This compares to 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.

Our consolidated results of operations for the third quarter of 2013 include severance expense, net of adjustments, totaling $2.4 million, $1.7 million net of tax, compared to $705,000, $428,000 net of tax, recorded during the third 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.

As previously disclosed, our largest software partner has changed its channel incentive program beginning in October 2013. The changes vary in substance and timing across this partner's offerings, with some of the changes becoming effective in the fourth quarter and some becoming effective as client contracts renew under their stated terms over the next few years. We continue to analyze the program changes related to our portfolio of contracts and currently believe that we will receive between $15 and $20 million less in incentives from this partner in 2014. We are working to take the necessary strategic steps to preserve our profitability and have identified actions associated with new business and cost reduction measures in 2014 that we expect will offset the adverse effect of these changes.


Table of Contents

INSIGHT ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

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

Critical Accounting Estimates

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

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 nine months ended September 30,
2013 and 2012:



                                          Three Months Ended           Nine Months Ended
                                             September 30,               September 30,
                                          2013           2012          2013          2012
 Net sales                                  100.0 %       100.0 %        100.0 %      100.0 %
 Costs of goods sold                         85.3          85.8           86.2         86.4

 Gross profit                                14.7          14.2           13.8         13.6
 Selling and administrative expenses         12.2          11.5           11.3         10.7
 Severance and restructuring expenses         0.2           0.1            0.2          0.1

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

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

 Net earnings                                 1.3 %         1.6 %          1.3 %        1.8 %

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.


Table of Contents

INSIGHT ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

Throughout this "Results of Operations" section, 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.

Net Sales. Net sales for the three months ended September 30, 2013 decreased 3% compared to the three months ended September 30, 2012. Net sales for the nine months ended September 30, 2013 decreased 5% compared to the nine months ended September 30, 2012. Our net sales by operating segment were as follows (dollars in thousands):

                                      Three Months Ended                              Nine Months Ended
                                         September 30,               %                  September 30,               %
                                     2013            2012          Change           2013            2012         Change
North America                     $   857,935     $   868,765           (1 %)    $ 2,528,002     $ 2,718,062          (7 %)
EMEA                                  263,551         276,621           (5 %)      1,071,578       1,085,169          (1 %)
APAC                                   29,534          36,023          (18 %)        149,609         151,535          (1 %)

Consolidated                      $ 1,151,020     $ 1,181,409           (3 %)    $ 3,749,189     $ 3,954,766          (5 %)

Net sales in North America decreased 1%, or $10.8 million, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. Net sales of software increased 9% year over year. Net sales of hardware and services both decreased 5%, year to year. The increase in software sales was driven by strong execution related to enterprise software agreement sales during the quarter due to particularly strong sales of business productivity products to U.S. federal government clients and higher sales of software enterprise agreements in the commercial space. Lower hardware sales to large enterprise clients more than offset increased hardware sales in the public sector during the current quarter.

Net sales in North America decreased 7%, or $190.1 million, for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. On a year to date basis, net sales of hardware, software and services decreased 9%, 4% and 2%, respectively, year to year.

Net sales in EMEA decreased 5%, or $13.1 million, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. Excluding the effects of foreign currency movements, net sales decreased 6% compared to the third quarter of last year. Net sales of services increased 33% year over year, while net sales of hardware and software decreased 4% and 7%, respectively, year to year, all in U.S. dollars. Excluding the effects of foreign currency movements services net sales increased 31%, while net sales of hardware and software declined 4% and 9%, respectively, compared to the third quarter of 2012. The decline in hardware net sales was due primarily to reduced volume in sales to large enterprise as well as mid-market clients, particularly in the United Kingdom. The decline in software net sales was due primarily to lower volume with our existing public sector clients, partially offset by higher volume with 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 decreased 1%, or $13.6 million, for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012, in U.S. dollars and decreased 2% year to year excluding the effects of foreign currency movements. On a year to date basis, net sales of software and services were up 3% and 36%, respectively, year over year in U.S. dollars, while net sales of hardware declined 10% year to year. Net sales of software and services were up 1% and 35%, respectively, while net sales of hardware declined 9% year to year, excluding the effects of foreign currency movements.


Table of Contents

INSIGHT ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

Net sales in APAC decreased 18%, or $6.5 million, for the three months ended September 30, 2013, compared to the three months ended September 30, 2012. Excluding the effects of foreign currency movements, net sales decreased 11% compared to the third quarter of last year. The decrease primarily resulted from lower volume with mid-market and public sector clients.

Our APAC segment recognized net sales of $149.6 million for the nine months ended September 30, 2013, a decrease of 1% compared to the nine months ended September 30, 2012 in U.S. dollars. Excluding the effects of foreign currency movements, net sales increased 3% year over year. The increase primarily resulted from an increase in sales to public sector and commercial clients in the Australian market.

The percentage of net sales by category for North America, EMEA and APAC were as follows for the three months ended September 30, 2013 and 2012:

                     North America                    EMEA                         APAC
                  Three Months Ended           Three Months Ended           Three Months Ended
                     September 30,                September 30,                September 30,
    Sales Mix      2013           2012         2013            2012         2013            2012
    Hardware            64 %         66 %          46 %           46 %           4 %            2 %
    Software            30 %         28 %          51 %           52 %          91 %           92 %
    Services             6 %          6 %           3 %            2 %           5 %            6 %

                       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, 2013 and 2012:

                     North America                    EMEA                        APAC
                   Nine Months Ended           Nine Months Ended           Nine Months Ended
                     September 30,               September 30,               September 30,
     Sales Mix      2013          2012         2013           2012         2013           2012
     Hardware            61 %        62 %          35 %          38 %           3 %           2 %
     Software            32 %        32 %          63 %          60 %          94 %          94 %
     Services             7 %         6 %           2 %           2 %           3 %           4 %

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

Gross Profit. Gross profit for the three months ended September 30, 2013 increased 1% compared to the three months ended September 30, 2012, with gross margin increasing approximately 50 basis points to 14.7% for the three months ended September 30, 2013 compared to 14.2% for the three months ended September 30, 2012. For the nine months ended September 30, 2013, gross profit decreased 4% compared to the nine months ended September 30, 2012, with gross margin increasing approximately 20 basis points to 13.8% for the nine months ended September 30, 2013 compared to 13.6% for the nine months ended September 30, 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 September 30,                              Nine Months Ended September 30,
                                                    % of                           % of                           % of                           % of
                                     2013         Net Sales         2012         Net Sales         2013         Net Sales         2012         Net Sales
North America                      $ 122,944            14.3 %    $ 116,975            13.5 %    $ 350,135            13.9 %    $ 360,968            13.3 %
EMEA                                  39,343            14.9 %       43,308            15.7 %      142,191            13.3 %      152,971            14.1 %
APAC                                   6,381            21.6 %        7,342            20.4 %       25,406            17.0 %       25,344            16.7 %

Consolidated                       $ 168,668            14.7 %    $ 167,625            14.2 %    $ 517,732            13.8 %    $ 539,283            13.6 %

North America's gross profit for the three months ended September 30, 2013 increased 5% compared to the three months ended September 30, 2012. As a percentage of net sales, gross margin increased approximately 80 basis points to 14.3% from 13.5% year over year. The increase was primarily attributable to a 45 basis point increase in product margin, which includes vendor funding and freight, resulting from the effect of an increase in vendor funding from improvements in the mix of hardware sales with key strategic partners year over year, and a 34 basis point increase in margin resulting from a higher 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 nine months ended September 30, 2013, decreased 3% compared to the nine months ended September 30, 2012. As a percentage of net sales, gross margin increased approximately 60 basis points to 13.9% from 13.3%, year over year, reflecting a 24 basis point increase in product margin, which includes vendor funding and freight, driven primarily by increased vendor funding year over year, a 17 basis point improvement in margin generated by services due to a higher mix of higher margin services sales in the nine months ended September 30, 2013 and a 15 basis point increase in margin resulting from a higher mix of agency fees for enterprise software agreements. Services gross profit also improved this quarter compared to the same period last year.

EMEA's gross profit decreased 9% in U.S. dollars for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. Excluding the effects of foreign currency movements, gross profit was down 10% compared to the third quarter of last year. As a percentage of net sales, gross margin decreased approximately 80 basis points to 14.9% from 15.7% year to year. A net decrease in product margin, which includes vendor funding and freight, of 95 basis points was primarily driven by a decrease in hardware product margin of 137 basis points, partially offset by an increase in software product margin of 38 basis points. The decline in hardware product margin was due to changes in client and product mix, as well as efforts to regain market share via selective discounting in a competitive environment. The increase in software product margin primarily resulted from high dollar, lower margin transactions in the prior year quarterly comparison period, partially offset by a reduction in partner funding as a result of decreased volume and program changes year to year. The net decrease in product margin was offset by an increase in gross margin from sales of services of 28 basis points due to new client wins and higher volume with existing clients and an 11 basis point increase in margin resulting from higher agency fees for enterprise software agreements. Additionally, gross margin was negatively affected by 9 basis points due to lower supplier discounts year to year and by 8 basis points due to an increase in the inventory provision as a percentage of net sales year to year.

EMEA's gross profit declined 7% for the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012. Excluding the effects of foreign currency movements, gross profit was also down 7% compared to the first nine months of last year. As a percentage of net sales, gross margin for the nine month periods decreased approximately 80 basis points to 13.3% from 14.1% year to year, due primarily to: a net decrease in product margin, which includes vendor funding and freight, of 88 basis points, primarily driven by changes in product mix; a decline in margin from agency fees for enterprise software agreements of 9 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 9 basis points year to year. These decreases in gross margin were partially offset by an increase in margin generated by services of 28 basis points year over year.

APAC's gross profit decreased 13% for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. Excluding the effects of foreign currency movements, gross profit decreased 5% compared to the third quarter of last year. The decrease was due primarily to the effect of partner program changes and lower product sales volume in the three months ended September 30, 2013. As a percentage of net sales, gross margin increased approximately 120 basis points to 21.6% from 20.4% 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 third quarter of 2013 compared to the third quarter of 2012.

APAC's gross profit remained flat for the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012. 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 increased approximately 30 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 nine months ended September 30, 2013 compared to the first nine 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 increased $3.7 million, or 3%, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. For the nine months ended September 30, 2013, selling and administrative expenses increased $857,000, or less than 1%, compared to the nine months ended September 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 September 30,                              Nine Months Ended September 30,
                                                    % of                           % of                           % of                           % of
                                     2013         Net Sales         2012         Net Sales         2013         Net Sales         2012         Net Sales
North America                      $  93,082            10.8 %    $  87,779            10.1 %    $ 272,573            10.8 %    $ 270,105             9.9 %
EMEA                                  41,232            15.6 %       42,088            15.2 %      133,297            12.4 %      134,412            12.4 %
APAC                                   5,651            19.1 %        6,392            17.7 %       18,241            12.2 %       18,737            12.4 %

Consolidated                       $ 139,965            12.2 %    $ 136,259            11.5 %    $ 424,111            11.3 %    $ 423,254            10.7 %

North America's selling and administrative expenses increased 6%, or $5.3 million for the three months ended September 30, 2013 compared to the three months ended September 30, 2012 and, as a percentage of net sales, increased approximately 70 basis points to 10.8%, due primarily to an increase in professional fees of approximately $3.4 million year over year. In the three months ended September 30, 2013, we incurred certain professional consulting services that were specific to a project that was completed during the quarter. The year over year comparison for professional fees was also affected by a prior year reduction in legal expenses of $2.0 million associated with the recovery during the three months ended September 30, 2012 of costs incurred in previous periods. In addition, the year over year increase in selling and administrative expenses was affected by salaries and wages and employee benefit expenses that were approximately $1.9 million higher year over year due to increased headcount and higher health benefits claims in the three months ended September 30, 2013.

North America's selling and administrative expenses increased 1%, or $2.5 million, for the nine months ended September 30, 2013, due primarily to the increase in professional fees noted above. 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 nine months ended September 30, 2012.

EMEA's selling and administrative expenses decreased 2%, or $856,000, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012 and increased approximately 40 basis points year over year as a percentage of net sales to 15.6%. Excluding the effects of foreign currency movements, selling and administrative expenses decreased 4% compared to the third 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.

EMEA's selling and administrative expenses decreased 1%, or $1.1 million, for . . .

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