Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-25092
INSIGHT ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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86-0766246 |
(State or other jurisdiction of
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(I.R.S. Employer Identification Number) |
incorporation or organization) |
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1305 West Auto Drive, Tempe, Arizona 85284
(Address of principal executive offices) (Zip Code)
(480) 902-1001
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ
No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o
No þ
The number of shares outstanding of the issuers common stock as of November 3, 2008 was
45,584,578.
INSIGHT ENTERPRISES, INC.
QUARTERLY REPORT ON FORM 10-Q
Three Months Ended September 30, 2008
TABLE OF CONTENTS
INSIGHT ENTERPRISES, INC.
FORWARD-LOOKING INFORMATION
Certain statements in this Quarterly Report on Form 10-Q, including statements in
Managements Discussion and Analysis of Financial Condition and Results of Operations in Part I,
Item 2 of this report, are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements may include: projections of
matters that affect net sales, gross profit, operating expenses, earnings or losses from continuing
operations, non-operating income and expenses, net earnings or losses or cash flows, the
recoverability of deferred tax assets, the payment of accrued expenses and liabilities and costs or
gains that may result from post-closing adjustments pertaining to business acquisitions or
dispositions; effects of acquisitions or dispositions and our intentions about additional
acquisitions; projections of capital expenditures; our effective tax rate and earnings or losses
per share in 2008; hiring plans; plans for future operations; the availability of financing and our
needs or plans relating thereto; plans relating to our products and services; the effect of new
accounting principles or changes in accounting policies; the effect of guaranty and indemnification
obligations and off balance sheet arrangements; the outcome of ongoing tax audits and litigation;
statements related to accounting estimates, including estimated stock option and other equity award
forfeitures, and deferred compensation cost amortization periods; statements of belief; and
statements of assumptions underlying any of the foregoing. Forward-looking statements are
identified by such words as believe, anticipate, expect, estimate, intend, plan,
project, will, may and variations of such words and similar expressions, and are inherently
subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated by, or underlying
the forward-looking statements. There can be no assurances that the events discussed in the
forward-looking statements will occur, and actual results could differ materially from those
suggested by the forward-looking statements. Some of the important factors that could cause our
actual results to differ materially from those projected in any forward-looking statements include,
but are not limited to, the following:
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changes in the information technology industry and/or the economic environment; |
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our reliance on partners for product availability, marketing funds, purchasing
incentives and competitive products to sell; |
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disruptions in our information technology systems and voice and data networks, including
our system upgrade and the migration of acquired businesses to our information technology
systems and voice and data networks; |
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the integration and operation of acquired businesses, including our ability to achieve
expected benefits of the acquisitions; |
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actions of our competitors, including manufacturers and publishers of products we sell; |
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the risks associated with international operations; |
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seasonal changes in demand for sales of software licenses; |
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increased debt and interest expense and lower availability on our financing facilities
and changes in the overall capital markets that could increase our borrowing costs or
reduce future availability of financing; |
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exposure to currency exchange risks and volatility in the U.S. dollar exchange rate; |
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our dependence on key personnel; |
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risk that purchased goodwill or intangible assets become impaired; |
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failure to comply with the terms and conditions of our public sector contracts; |
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rapid changes in product standards; and |
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intellectual property infringement claims and challenges to our registered trademarks
and trade names. |
Additionally, there may be other risks that are otherwise described from time to time in the
reports that we file with the SEC. Any forward-looking statements in this report should be
considered in light of various important factors, including the risks and uncertainties listed
above, as well as others. We assume no obligation to update, and do not intend to update, any
forward-looking statements. We do not endorse any projections regarding future performance that
may be made by third parties.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
INSIGHT ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
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September 30, |
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December 31, |
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2008 |
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2007 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
72,451 |
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$ |
56,718 |
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Accounts
receivable, net of allowances for doubtful accounts of $21,070 and $22,831, respectively |
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892,910 |
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1,072,612 |
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Inventories |
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89,374 |
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98,863 |
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Inventories not available for sale |
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18,411 |
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21,450 |
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Deferred income taxes |
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23,344 |
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22,020 |
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Other current assets |
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28,166 |
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38,916 |
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Total current assets |
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1,124,656 |
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1,310,579 |
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Property and equipment, net of accumulated depreciation of
$127,599 and $107,577, respectively |
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165,883 |
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158,467 |
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Goodwill |
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86,760 |
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306,742 |
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Intangible assets, net of accumulated amortization of $23,209 and
$12,262, respectively |
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100,123 |
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80,922 |
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Deferred income taxes |
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109,825 |
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392 |
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Other assets |
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18,346 |
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10,076 |
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$ |
1,605,593 |
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$ |
1,867,178 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
517,185 |
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$ |
685,578 |
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Accrued expenses and other current liabilities |
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113,393 |
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113,891 |
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Current portion of long-term debt |
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168,374 |
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15,000 |
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Deferred revenue |
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25,652 |
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42,885 |
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Total current liabilities |
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824,604 |
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857,354 |
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Long-term debt |
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162,653 |
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187,250 |
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Deferred income taxes |
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29,807 |
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27,305 |
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Other liabilities |
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24,988 |
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20,075 |
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1,042,052 |
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1,091,984 |
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Commitments and contingencies (Note 11) |
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Stockholders equity: |
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Preferred stock, $0.01 par value, 3,000 shares authorized;
no shares issued |
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Common stock, $0.01 par value, 100,000 shares authorized;
45,581 shares at September 30, 2008 and 48,458 shares at
December 31, 2007 issued and outstanding |
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456 |
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485 |
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Additional paid-in capital |
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368,394 |
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386,139 |
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Retained earnings |
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161,501 |
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340,641 |
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Accumulated other comprehensive income foreign currency
translation adjustments |
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33,190 |
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47,929 |
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Total stockholders equity |
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563,541 |
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775,194 |
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$ |
1,605,593 |
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$ |
1,867,178 |
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See accompanying notes to consolidated financial statements.
1
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Net sales |
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$ |
1,168,916 |
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$ |
1,109,705 |
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$ |
3,674,427 |
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$ |
3,517,129 |
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Costs of goods sold |
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1,014,844 |
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959,859 |
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3,165,458 |
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3,029,295 |
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Gross profit |
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154,072 |
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149,846 |
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508,969 |
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487,834 |
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Selling and administrative expenses |
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139,198 |
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130,820 |
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424,061 |
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398,902 |
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Goodwill impairment |
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313,949 |
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Severance and restructuring expenses |
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5,408 |
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2,841 |
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Earnings (loss) from operations |
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14,874 |
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19,026 |
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(234,449 |
) |
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86,091 |
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Non-operating (income) expense: |
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Interest income |
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(440 |
) |
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(432 |
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(1,741 |
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(1,486 |
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Interest expense |
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3,085 |
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2,860 |
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9,749 |
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10,146 |
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Net foreign currency exchange loss (gain) |
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3,307 |
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849 |
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3,425 |
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(2,807 |
) |
Other expense, net |
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297 |
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428 |
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|
787 |
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1,141 |
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Earnings (loss) from continuing operations
before income taxes |
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8,625 |
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15,321 |
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(246,669 |
) |
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79,097 |
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Income tax expense (benefit) |
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1,912 |
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6,225 |
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(89,625 |
) |
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30,896 |
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Net earnings (loss) from continuing operations |
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6,713 |
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9,096 |
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(157,044 |
) |
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48,201 |
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Net earnings from a discontinued operation |
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4,972 |
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Net earnings (loss) |
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$ |
6,713 |
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$ |
9,096 |
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$ |
(157,044 |
) |
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$ |
53,173 |
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Net earnings (loss) per share Basic: |
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Net earnings (loss) from continuing operations |
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$ |
0.15 |
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$ |
0.18 |
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$ |
(3.35 |
) |
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$ |
0.98 |
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Net earnings from a discontinued operation |
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0.10 |
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Net earnings (loss) per share |
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$ |
0.15 |
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$ |
0.18 |
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$ |
(3.35 |
) |
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$ |
1.08 |
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Net earnings (loss) per share Diluted: |
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Net earnings (loss) from continuing operations |
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$ |
0.15 |
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$ |
0.18 |
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$ |
(3.35 |
) |
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$ |
0.97 |
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Net earnings from a discontinued operation |
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0.10 |
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Net earnings (loss) per share |
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$ |
0.15 |
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$ |
0.18 |
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$ |
(3.35 |
) |
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$ |
1.07 |
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Shares used in per share calculations: |
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Basic |
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45,569 |
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49,530 |
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46,901 |
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49,213 |
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Diluted |
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45,719 |
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50,711 |
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46,901 |
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49,801 |
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See accompanying notes to consolidated financial statements.
2
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Nine Months Ended September 30, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net (loss) earnings from continuing operations |
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$ |
(157,044 |
) |
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$ |
48,201 |
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Plus: net earnings from a discontinued operation |
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4,972 |
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Net (loss) earnings |
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(157,044 |
) |
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53,173 |
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Adjustments to reconcile net (loss) earnings to net cash provided by
operating activities: |
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Goodwill impairment |
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313,949 |
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Depreciation and amortization |
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30,287 |
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25,960 |
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Provision for losses on accounts receivable |
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2,185 |
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|
1,725 |
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Write-downs of inventories |
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5,829 |
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5,744 |
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Non-cash stock-based compensation |
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7,556 |
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8,927 |
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Gain on sale of a discontinued operation |
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(7,937 |
) |
Excess tax benefit from employee gains on stock-based compensation |
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(108 |
) |
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(445 |
) |
Deferred income taxes |
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(108,593 |
) |
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|
2,355 |
|
Changes in assets and liabilities: |
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Decrease in accounts receivable |
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201,010 |
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|
186,033 |
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Decrease (increase) in inventories |
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6,294 |
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(2,509 |
) |
Decrease in other current assets |
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18,300 |
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|
12,704 |
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Decrease (increase) in other assets |
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2,877 |
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(1,944 |
) |
Decrease in accounts payable |
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(253,561 |
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(142,794 |
) |
Decrease in deferred revenue |
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(18,845 |
) |
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(15,175 |
) |
Increase (decrease) in accrued expenses and other liabilities |
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11,985 |
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(26,788 |
) |
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Net cash provided by operating activities |
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62,121 |
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99,029 |
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Cash flows from investing activities: |
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Acquisition of Calence, net of cash acquired |
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(124,671 |
) |
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Acquisition of MINX, net of cash acquired |
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(957 |
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Proceeds from sale of a discontinued operation, net of direct expenses |
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(900 |
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28,631 |
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Purchases of property and equipment |
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(23,994 |
) |
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(27,611 |
) |
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Net cash (used in) provided by investing activities |
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(150,522 |
) |
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1,020 |
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Cash flows from financing activities: |
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Borrowings on senior revolving credit facility |
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712,089 |
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Repayments on senior revolving credit facility |
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(549,176 |
) |
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Borrowings on accounts receivable securitization financing facility |
|
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466,874 |
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|
540,000 |
|
Repayments on accounts receivable securitization financing facility |
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(444,500 |
) |
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(601,000 |
) |
Repayments on term loan |
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(56,250 |
) |
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(11,250 |
) |
Net
borrowings under inventory financing facility |
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18,213 |
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Net
repayments on short-term line of credit |
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(15,000 |
) |
Repayments on assumed debt |
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(10,978 |
) |
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|
|
|
Deferred financing fees |
|
|
(3,355 |
) |
|
|
|
|
Proceeds from sales of common stock under employee stock plans |
|
|
5,031 |
|
|
|
24,342 |
|
Excess tax benefit from employee gains on stock-based compensation |
|
|
108 |
|
|
|
445 |
|
Payment of payroll taxes on stock-based compensation through shares
withheld |
|
|
(2,097 |
) |
|
|
|
|
Repurchases of common stock |
|
|
(50,000 |
) |
|
|
(22,336 |
) |
Increase (decrease) in book overdrafts |
|
|
21,633 |
|
|
|
(23,856 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
107,592 |
|
|
|
(108,655 |
) |
|
|
|
|
|
|
|
Foreign currency exchange effect on cash flows |
|
|
(3,458 |
) |
|
|
6,995 |
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
15,733 |
|
|
|
(1,611 |
) |
Cash and cash equivalents at beginning of period |
|
|
56,718 |
|
|
|
54,697 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
72,451 |
|
|
$ |
53,086 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
3
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation and Recently Issued Accounting Pronouncements
We are a leading provider of brand-name information technology (IT) hardware, software and
services to large enterprises, small- to medium-sized businesses (SMB) and public sector
institutions in North America, Europe, the Middle East, Africa and Asia-Pacific. The Company is
organized in the following three operating segments, which are primarily defined by their related
geographies:
|
|
|
Operating Segment |
|
Geography |
North America
|
|
United States and Canada |
EMEA
|
|
Europe, Middle East and Africa |
APAC
|
|
Asia-Pacific |
Currently, our offerings in North America and the United Kingdom include brand-name IT
hardware, software and services. Our offerings in the remainder of our EMEA segment and in APAC
currently only include software and select software-related services.
On July 10, 2008, we acquired MINX Limited (MINX), a United Kingdom-based networking
services company with annual net sales of approximately $25,000,000 for an initial cash purchase
price of approximately $1,500,000 and the assumption of approximately $3,900,000 of existing debt.
Up to an additional $678,000 may be due if MINX achieves certain performance targets over a
one-year period.
On April 1, 2008, we completed the acquisition of Calence, LLC (Calence) for a cash purchase
price of $125,000,000 plus a preliminary working capital adjustment of $4,032,000, offset by a
final post-closing working capital adjustment of $383,000. Up to an additional $35,000,000 of
purchase price consideration may be due if Calence achieves certain performance targets over the
next four years. During the three and nine months ended September 30, 2008, we accrued an
additional $1,755,000 and $2,471,000, respectively, of purchase price consideration as a result of
Calence achieving certain performance targets during the respective periods. Such amounts were
recorded as additional goodwill (see Note 3). We also assumed Calences existing debt totaling
approximately $7,300,000, of which $7,100,000 was repaid by us at closing. The Calence acquisition
was funded, in part, using borrowings under our senior revolving credit facility.
In the opinion of management, the accompanying unaudited consolidated financial statements
contain all adjustments necessary to present fairly our financial position as of September 30,
2008, our results of operations for the three and nine months ended September 30, 2008 and 2007 and
our cash flows for the nine months ended September 30, 2008 and 2007. The consolidated balance
sheet as of December 31, 2007 was derived from the audited consolidated balance sheet at such date.
The accompanying unaudited consolidated financial statements and notes have been prepared in
accordance with the rules and regulations promulgated by the Securities and Exchange Commission
(SEC) and consequently do not include all of the disclosures normally required by United States
generally accepted accounting principles (GAAP).
The results of operations for such interim periods are not necessarily indicative of results
for the full year, due in part to the seasonal nature of the business. These unaudited
consolidated financial statements should be read in conjunction with the audited consolidated
financial statements, including the related notes thereto, in our Annual Report on Form 10-K for
the year ended December 31, 2007.
The preparation of consolidated financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements. Additionally, these estimates and assumptions affect the reported amounts of
net sales and expenses during the reported period. Actual results could differ from those
estimates. On an on-going basis, we evaluate our estimates, including those related to
allowances for doubtful accounts, write-downs of inventories, litigation-related obligations,
valuation allowances for deferred tax assets and impairment of goodwill, intangible assets and
other long-lived assets if indicators of potential impairment exist.
4
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The consolidated financial statements include the accounts of Insight Enterprises, Inc. and
its wholly-owned subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation. References to the Company, we, us, our and other similar
words refer to Insight Enterprises, Inc. and its consolidated subsidiaries, unless the context
suggests otherwise.
Recently Issued Accounting Pronouncements
Other than the partial adoption of Statement of Financial Accounting Standard No. 157 Fair
Value Measurements (SFAS No. 157) effective January 1, 2008, as discussed in Note 8, there have
been no material changes or additions to the recently issued accounting pronouncements as
previously reported in Note 1 to our Consolidated Financial Statements in Part II, Item 8 of our
Annual Report on Form 10-K for the year ended December 31, 2007 which affect or may affect our
financial statements.
2. Net Earnings (Loss) from Continuing Operations Per Share (EPS)
Basic EPS is computed by dividing net earnings (loss) from continuing operations available to
common stockholders by the weighted-average number of common shares outstanding during each
quarter. Diluted EPS is computed on the basis of the weighted average number of shares of common
stock plus the effect of dilutive potential common shares outstanding during the period using the
treasury stock method. Dilutive potential common shares include outstanding stock options,
restricted stock awards and restricted stock units. A reconciliation of the denominators of the
basic and diluted EPS calculations follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from continuing operations |
|
$ |
6,713 |
|
|
$ |
9,096 |
|
|
$ |
(157,044 |
) |
|
$ |
48,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute basic EPS |
|
|
45,569 |
|
|
|
49,530 |
|
|
|
46,901 |
|
|
|
49,213 |
|
Dilutive potential common shares due to dilutive
options and restricted stock, net of tax effect |
|
|
150 |
|
|
|
1,181 |
|
|
|
|
|
|
|
588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute diluted EPS |
|
|
45,719 |
|
|
|
50,711 |
|
|
|
46,901 |
|
|
|
49,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from continuing operations per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.15 |
|
|
$ |
0.18 |
|
|
$ |
(3.35 |
) |
|
$ |
0.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.15 |
|
|
$ |
0.18 |
|
|
$ |
(3.35 |
) |
|
$ |
0.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No potential common shares were included in the diluted EPS computation for the nine months
ended September 30, 2008 because of the net loss from continuing operations in that period, which
would result in an antidilutive per share amount. The following weighted-average outstanding stock
options were not included in the diluted EPS calculations because the exercise prices of these
options were greater than the average market price of our common stock during the respective
periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Weighted-average
outstanding stock
options excluded from
the diluted EPS
calculation |
|
|
2,607 |
|
|
|
82 |
|
|
|
|
|
|
|
1,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
3. Impairment
Goodwill
SFAS No. 142, Goodwill and Other Intangible Assets, requires that goodwill be tested for
impairment at the reporting unit level on an annual basis and between annual tests if an event
occurs or circumstances change that would more likely than not reduce the fair value of the
reporting unit below its carrying value. Multiple valuation techniques can be used to assess the
fair value of the reporting unit. All of these techniques include the use of estimates and
assumptions that are inherently uncertain. Changes in these estimates and assumptions could
materially affect the determination of fair value or goodwill impairment, or both. The Company has
three reporting units which are the same as our operating segments. At December 31, 2007, our
goodwill balance was $306,742,000 allocated among all three of our operating segments, which
represented the purchase price in excess of the net amount assigned to assets acquired and
liabilities assumed by Insight in connection with previous acquisitions, adjusted for changes in
foreign currency exchange rates. We tested goodwill for impairment during the fourth quarter of
2007. At that time, we concluded that the fair value of each of our reporting units was in excess
of the carrying value.
On April 1, 2008, we acquired Calence, which has been integrated into our North America
business. Under the purchase method of accounting, the purchase price of $139,639,000 was
allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based
on their estimated fair values. The excess purchase price over fair value of net assets acquired
of $93,709,000 was recorded as goodwill (see Note 13). The primary driver of the acquisition was to
enhance our technical capabilities around networking, advanced communications and managed services
and to help accelerate our transformation to a broad-based technology solutions advisor and
provider. During the three and nine months ended September 30, 2008, we accrued an additional
$1,755,000 and $2,471,000, respectively, of purchase price consideration (the earnout) as a
result of Calence achieving certain performance targets during the respective periods. Such
amounts were recorded as additional goodwill. The Calence acquisition and resulting additional
goodwill of $96,180,000, including the earnout amounts, was recorded as part of the North America
reporting unit.
In consideration of market conditions and the decline in our overall market capitalization
resulting from decreases in the market price of Insights publicly traded common stock during the
three months ended June 30, 2008, we evaluated whether an event (a triggering event) had occurred
during the second quarter that would require us to perform an interim period goodwill impairment
test in accordance with SFAS No. 142. Subsequent to the first quarter of 2008, the Company
experienced a relatively consistent decline in market capitalization due to deteriorating market
conditions and a significant decline subsequent to our announcement of preliminary first quarter
2008 results on April 23, 2008. During the first quarter of 2008, the market price of Insights
publicly traded common stock ranged from a high of $19.00 to a low of $15.49, ending the quarter at
$17.50 on March 31, 2008. During the second quarter of 2008, the market price of Insights
publicly traded common stock ranged from a high of $18.20 to a low of $11.00 on April 24, 2008,
when the price dropped by 22.5% and did not return to levels above that single day drop through the
end of the quarter. Based on the sustained significant decline in the market price of our common
stock during the second quarter of 2008, we concluded that a triggering event had occurred
subsequent to March 31, 2008, which would more likely than not reduce the fair value of one or more
of our reporting units below its respective carrying value.
6
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
As a result, we performed the first step of the two-step goodwill impairment test in the
second quarter of 2008 in accordance with SFAS No. 142 and compared the fair values of our
reporting units to their carrying values. The fair values of our reporting units were determined
using established valuation techniques, specifically the market and income approaches. We
determined that the fair value of the North America reporting unit was less than the carrying value
of the net assets of the reporting unit, and thus, we performed step two of the impairment test for
the North America reporting unit. The results of the first step of the two-step goodwill
impairment test indicated that the fair value of each of our EMEA and APAC reporting units was in
excess of the carrying value, and thus, we did not perform step two of the impairment test for EMEA
or APAC.
In step two of the impairment test, we determined the implied fair value of the goodwill in
our North America reporting unit and compared it to the carrying value of the goodwill. We
allocated the fair value of the North America reporting unit to all of its assets and liabilities
as if the reporting unit had been acquired in a business combination and the fair value of the
North America reporting unit was the price paid to acquire the reporting unit. The excess of the
fair value of the reporting unit over the amounts assigned to its assets and liabilities is the
implied fair value of goodwill. Our step two analysis resulted in no implied fair value of
goodwill for the North America reporting unit, and therefore, we recognized a non-cash goodwill
impairment charge of $313,949,000, $201,167,000 net of taxes, which represented the entire goodwill
balance recorded in our North America operating segment as of June 30, 2008, including the entire
amount of the goodwill recorded in connection with the Calence acquisition, including the earnout
through June 30, 2008. The charge is included in earnings (loss) from continuing operations for
the nine months ended September 30, 2008. This non-cash charge will not affect our debt covenant
compliance, cash flows or ongoing results of operations. The goodwill balance in our North America
operating segment as of September 30, 2008 represents the earnout accrual for Calence during the
third quarter of 2008.
During the three months ended September 30, 2008, our overall market capitalization increased
with increases in the market price of Insights publicly traded common stock. Subsequent to the
announcement of our results of operations for the second quarter of 2008 on August 11, 2008, the
Company experienced a relatively consistent increase in market capitalization. During the third
quarter of 2008, the market price of Insights publicly traded common stock ranged from a low of
$10.70 to a high of $17.11, ending the quarter at $13.41 on September 30, 2008. Based on the
increase in the market price of our common stock during the third quarter of 2008 as well as the
decline in the carrying value due to the write-off of goodwill during the second quarter of 2008,
we concluded that a triggering event had not occurred subsequent to June 30, 2008, which would more
likely than not reduce the fair value of one or more of our reporting units below its respective
carrying value. We will perform our annual review of goodwill in the fourth quarter.
The changes in the carrying amount of goodwill for the nine months ended September 30, 2008
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
EMEA |
|
|
APAC |
|
|
Consolidated |
|
Balance at December
31, 2007 |
|
$ |
219,909 |
|
|
$ |
68,725 |
|
|
$ |
18,108 |
|
|
$ |
306,742 |
|
Goodwill recorded
in connection with
the acquisition of
Calence |
|
|
96,180 |
|
|
|
|
|
|
|
|
|
|
|
96,180 |
|
Goodwill recorded
in connection with
the acquisition of
MINX |
|
|
|
|
|
|
3,500 |
|
|
|
|
|
|
|
3,500 |
|
Impairment charge |
|
|
(313,949 |
) |
|
|
|
|
|
|
|
|
|
|
(313,949 |
) |
Other adjustments |
|
|
(385 |
) |
|
|
(4,142 |
) |
|
|
(1,186 |
) |
|
|
(5,713 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
September 30, 2008 |
|
$ |
1,755 |
|
|
$ |
68,083 |
|
|
$ |
16,922 |
|
|
$ |
86,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The other adjustments to goodwill primarily consist of foreign currency translation
adjustments. During the nine months ended September 30, 2008, the adjustments in EMEA also include
the reversal of a valuation
allowance of $2,079,000 against our United Kingdom net operating loss carryforward deferred
tax asset (see Note 5).
7
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Intangible Assets
Our intangible assets of $100,123,000 at September 30, 2008 consist principally of customer
relationships acquired in the September 2006 acquisition of Software Spectrum and identifiable
intangible assets acquired in the acquisitions of Calence and MINX of $29,190,000 and $2,874,000,
respectively (see Note 13). All of our intangible assets are subject to amortization. In
connection with completing our goodwill impairment analysis in the second quarter of 2008, we
considered the potential impairment of our other intangibles assets in accordance with SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, as applicable. In
accordance with SFAS No. 144, we determined that the carrying amount of our intangible assets was
recoverable as the carrying amount of the assets was greater than the sum of the undiscounted cash
flows expected from the use and disposition of these assets. Accordingly, we concluded that no
impairment was indicated.
Other Assets
In connection with completing our goodwill impairment analysis in the second quarter of 2008,
we also assessed the current fair values of our other significant assets, primarily property and
equipment, including capitalized costs of software developed for internal use, IT equipment and
software licenses. In accordance with SFAS No. 144, we determined that the carrying amount of our
other long-lived assets was recoverable as the carrying amount of the assets was greater than the
sum of the undiscounted cash flows expected from the use and disposition of these assets.
Accordingly, we concluded that no impairment was indicated.
4. Debt and Inventory Financing Facility
Debt
Our long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Senior revolving credit facility |
|
$ |
162,653 |
|
|
$ |
|
|
Term loan |
|
|
|
|
|
|
56,250 |
|
Accounts receivable securitization financing facility |
|
|
168,374 |
|
|
|
146,000 |
|
|
|
|
|
|
|
|
Total |
|
|
331,027 |
|
|
|
202,250 |
|
Less: current portion |
|
|
(168,374 |
) |
|
|
(15,000 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
162,653 |
|
|
$ |
187,250 |
|
|
|
|
|
|
|
|
On April 1, 2008, we entered into a new five-year $300,000,000 senior revolving credit
facility, which replaced our existing revolving credit facility and our term loan facility. The
Calence acquisition was funded, in part, using borrowings under the new facility. Amounts
outstanding under the new senior revolving credit facility bear interest, payable quarterly, at a
floating rate equal to the prime rate or, at our option, a LIBOR rate plus a pre-determined spread
of 0.75% to 1.75%. The weighted average interest rate on amounts outstanding under our senior
revolving credit facility was 4.02% during the three months ended September 30, 2008. In addition,
we pay a commitment fee on the unused portion of the facility of 0.175% to 0.35%. As of September
30, 2008, $137,087,000 was available under the senior revolving credit facility. The senior
revolving credit facility matures on April 1, 2013.
8
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
In connection with the new inventory financing facility discussed below, on September 17,
2008, we amended certain provisions in the senior revolving credit facility to, among other
provisions, permit up to $100,000,000 in outstanding indebtedness under the new inventory financing
facility and the liens securing such indebtedness.
Also on September 17, 2008, we amended certain provisions of our accounts receivable
securitization facility, which was to have expired on September 7, 2009, including, among other
provisions, (i) a reduction in the facility amount effective December 17, 2008 from $225,000,000 to
$150,000,000, (ii) an increase in the permissible delinquency ratio, and (iii) the creation of a
new one-year term through September 17, 2009. The weighted average interest rate on amounts
outstanding under our accounts receivable securitization facility during the three months ended
September 30, 2008 was 3.51%, and no amounts are available at September 30, 2008. Amounts
outstanding under the accounts receivable securitization facility at September 30, 2008 are
reflected as the current portion of long-term debt in the accompanying Consolidated Balance Sheet.
Our financing facilities contain various covenants. If we fail to comply with these
covenants, the lenders would be able to demand payment within a specified period of time. At
September 30, 2008, we were in compliance with all such covenants.
Inventory Financing Facility
On September 17, 2008, we entered into an agreement which provides for a new facility to
purchase inventory from a list of approved vendors. The aggregate availability for vendor
purchases under the inventory financing facility is $90,000,000, and the facility matures on
April 1, 2013 but may be cancelled with 90 days notice. Additionally, the facility may be renewed
under certain circumstances described in the agreement for successive twelve month periods.
Interest does not accrue on accounts payable under this facility provided the accounts payable are
paid within stated vendor terms (ranging from 30 to 60 days). If balances are not paid within
stated vendor terms, they will accrue interest at prime plus 1.25%. The facility is guaranteed by
the Company and each of its material domestic subsidiaries and is secured by a lien on
substantially all of the Companys domestic assets that is of equal priority to the liens securing
borrowings under our senior revolving credit facility. The facility replaced an existing agreement
that the Company assumed in connection with the acquisition of Calence on April 1, 2008. As of
September 30, 2008, $50,228,000 was included in accounts payable related to this facility.
5. Income Taxes
Our effective tax rate for the three months ended September 30, 2008 was 22.2% on $8,625,000
of earnings from continuing operations. Our effective tax rate for the nine months ended September
30, 2008 was 36.3% on a $246,669,000 loss from continuing operations. The effective tax rate for
the three months ended September 30, 2008 differed from the United States federal statutory rate of
35.0% due primarily to the benefit of federal and state research and development credits of $1.1
million recorded during the quarter when the credits were identified and appropriate returns were
filed, state income taxes, net of federal tax, and lower taxes on income earned in foreign
jurisdictions. The effective tax rate for the nine months ended September 30, 2008 differed from
the United States federal statutory rate of 35.0% due primarily to state income taxes, net of
federal tax, and lower taxes on income earned in foreign jurisdictions, offset by the
non-deductible portion of the goodwill impairment charge during the nine months ended September 30,
2008.
Our effective tax rate from continuing operations for the three and nine months ended
September 30, 2007 was 40.6% and 39.1%, respectively. The effective tax rate for both periods was
higher than the United States federal statutory rate of 35.0% due primarily to state income taxes,
net of federal tax, as well as non-deductible expenses related to executive compensation.
9
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
We believe it is more likely than not that forecasted income, including income that may be
generated as a result of prudent and feasible tax planning strategies, together with the tax
effects of deferred tax liabilities, will be sufficient to fully recover our deferred tax assets.
In the future, if we determine that realization of the deferred tax asset is not more likely than
not, we will need to increase our valuation allowance and record additional income tax expense. As
a result of income generated through June 30, 2008 and near-term income forecasts, during the
second quarter of 2008 we determined that we had sufficient positive evidence to recognize our
deferred tax asset related to our United Kingdom net operating loss (NOL) carryforward.
Therefore, the valuation allowance of $2,079,000 against our United Kingdom NOL deferred tax asset
was released. Since the NOL related to activity prior to the acquisition of Software Spectrum, the
reversal was recorded as a reduction of goodwill (see Note 3) and had no effect on income tax
expense during the nine months ended September 30, 2008.
We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No.
48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
(FIN 48), on January 1, 2007. The adoption of FIN 48 resulted in no cumulative effect adjustment
to our retained earnings. As of September 30, 2008 and December 31, 2007, we had approximately
$4,000,000 and $13,500,000, respectively, of unrecognized tax benefits. Of these amounts,
approximately $500,000 and $2,600,000, respectively, relate to accrued interest. During the second
quarter of 2008, we reversed approximately $9,700,000 of unrecognized tax benefits upon settlement
of an audit. The balance arose from a business combination and upon reversal was recorded as an
adjustment to a receivable from the seller with no effect on our effective tax rate.
As of September 30, 2008, if recognized, $2,900,000 of the liability associated with uncertain
tax positions would affect our effective tax rate. The remaining $1,100,000 balance arose from
business combinations that, if recognized during 2008, would be recorded as an adjustment to
goodwill or a receivable with no effect on our effective tax rate. Upon our January 1, 2009
adoption of SFAS No. 141R, Business Combinations (SFAS No. 141R), changes in deferred tax asset
valuation allowances and income tax uncertainties after the acquisition date generally will affect
income tax expense, including those associated with acquisitions that closed prior to the effective
date of SFAS No. 141R.
Several of our subsidiaries are currently under audit for the 2002 through 2007 tax years. It
is reasonably possible that the examination phase of these audits may conclude in the next twelve
months, and the related unrecognized tax benefits for uncertain tax positions will decrease.
However, based on the status of the examinations, an estimate of the range of reasonably possible
outcomes cannot be made at this time.
We, including our subsidiaries, file income tax returns in the U.S. federal jurisdiction, and
many state and local and non-U.S. jurisdictions. In the U.S., federal income tax returns for 2004
through 2007 remain open to examination. For U.S. state and local as well as non-U.S.
jurisdictions, the statute of limitations generally varies between three and ten years.
6. Severance, Restructuring and Acquisition Integration Activities
Severance Costs Expensed in 2008
During the nine months ended September 30, 2008, North America, EMEA and APAC recorded
severance expense totaling $2,290,000, $3,079,000 and $39,000, respectively, related to on-going
restructuring efforts to reduce operating expenses related to support and management functions.
The following table details the changes in these liabilities during the nine months ended September
30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
EMEA |
|
|
APAC |
|
|
Consolidated |
|
Severance costs |
|
$ |
2,290 |
|
|
$ |
3,079 |
|
|
$ |
39 |
|
|
$ |
5,408 |
|
Foreign currency
translation
adjustments |
|
|
|
|
|
|
(175 |
) |
|
|
|
|
|
|
(175 |
) |
Cash payments |
|
|
(1,996 |
) |
|
|
(1,131 |
) |
|
|
(39 |
) |
|
|
(3,166 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
September 30, 2008 |
|
$ |
294 |
|
|
$ |
1,773 |
|
|
$ |
|
|
|
$ |
2,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
All remaining outstanding obligations are expected to be paid during the year ending December
31, 2008 and are therefore included in accrued expenses and other current liabilities.
Severance Costs Expensed in 2007
During the year ended December 31, 2007, North America, EMEA and APAC recorded severance
expense of $2,960,000, $177,000 and $64,000, respectively, primarily associated with the retirement
of our former chief financial officer. Of the severance amounts expensed in 2007, EMEA paid
$177,000 during 2007.
The following table details the changes in these liabilities during the nine months ended
September 30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
APAC |
|
|
Consolidated |
|
Balance at December 31, 2007 |
|
$ |
2,960 |
|
|
$ |
64 |
|
|
$ |
3,024 |
|
Cash payments |
|
|
(2,960 |
) |
|
|
(64 |
) |
|
|
(3,024 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-Related Costs Capitalized in 2006 as a Cost of Acquisition of Software Spectrum
In 2006, we recorded $9,738,000 of employee termination benefits and $1,676,000 of facility
based costs in connection with the integration of Software Spectrum. These costs were accounted
for under EITF Issue No. 95-3, Recognition of Liabilities in Connection with Purchase Business
Combinations, and were based on the integration plans that were committed to by management.
Accordingly, these costs were recognized as a liability assumed in the purchase business
combination and included in the allocation of the cost to acquire Software Spectrum.
The employee termination benefits relate to severance payments for Software Spectrum teammates
in North America and EMEA who have been terminated in connection with integration plans. The
facilities based costs relate to future lease payments or lease termination costs associated with
vacating certain Software Spectrum facilities in EMEA.
The following table details the changes in these liabilities during the nine months ended
September 30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
EMEA |
|
|
Consolidated |
|
Balance at December 31, 2007 |
|
$ |
543 |
|
|
$ |
4,395 |
|
|
$ |
4,938 |
|
Foreign currency translation
adjustments |
|
|
|
|
|
|
(168 |
) |
|
|
(168 |
) |
Cash payments |
|
|
(202 |
) |
|
|
(230 |
) |
|
|
(432 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008 |
|
$ |
341 |
|
|
$ |
3,997 |
|
|
$ |
4,338 |
|
|
|
|
|
|
|
|
|
|
|
11
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
In the accompanying consolidated balance sheet at September 30, 2008, $2,038,000 is expected
to be paid by September 30, 2009 and is therefore included in accrued expenses and other current
liabilities, and $2,300,000 is expected to be paid after September 30, 2009 and is therefore
included in other liabilities (long-term).
Restructuring Costs Expensed in 2005
During the year ended December 31, 2005, Insight UK moved into a new facility and recorded
facilities-based restructuring costs of $7,458,000.
The following table details the changes in this liability during the nine months ended
September 30, 2008 (in thousands):
|
|
|
|
|
|
|
EMEA |
|
Balance at December 31, 2007 |
|
$ |
2,425 |
|
Adjustments |
|
|
(81 |
) |
Cash payments |
|
|
(899 |
) |
|
|
|
|
Balance at September 30, 2008 |
|
$ |
1,445 |
|
|
|
|
|
The remaining accrual of $1,445,000 is expected to be paid by September 30, 2009 and is
therefore included in accrued expenses and other current liabilities in the accompanying
consolidated balance sheet at September 30, 2008.
7. Stock-Based Compensation
We recorded the following pre-tax amounts, by operating segment, for stock-based compensation
related to stock options and restricted stock, as detailed below, in the accompanying consolidated
financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
North America |
|
$ |
1,576 |
|
|
$ |
2,889 |
|
|
$ |
5,542 |
|
|
$ |
7,754 |
|
EMEA |
|
|
298 |
|
|
|
612 |
|
|
|
1,839 |
|
|
|
1,456 |
|
APAC |
|
|
44 |
|
|
|
45 |
|
|
|
175 |
|
|
|
83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated |
|
$ |
1,918 |
|
|
$ |
3,546 |
|
|
$ |
7,556 |
|
|
$ |
9,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Stock Options
For the three months ended September 30, 2008 and 2007, we recorded stock-based compensation
expense related to stock options, net of an estimate of forfeitures, of $112,000 and $1,024,000,
respectively. For the nine months ended September 30, 2008 and 2007, we recorded stock-based
compensation expense related to stock options, net of an estimate of forfeitures, of $389,000 and
$3,065,000, respectively. As of September 30, 2008, total compensation cost related to nonvested
stock options not yet recognized is $832,000, which is expected to be recognized over the next 1.21
years on a weighted-average basis. The following table summarizes our stock option activity during
the nine months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
|
Remaining |
|
|
|
Number |
|
|
Weighted Average |
|
|
Intrinsic Value |
|
|
Contractual |
|
|
|
Outstanding |
|
|
Exercise Price |
|
|
(in-the-money options) |
|
|
Life (in years) |
|
Outstanding at the beginning of period |
|
|
3,621,130 |
|
|
$ |
19.33 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(345,565 |
) |
|
|
14.56 |
|
|
$ |
1,077,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(663,387 |
) |
|
|
19.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of period |
|
|
2,612,178 |
|
|
|
19.46 |
|
|
$ |
1,508 |
|
|
|
1.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at the end of period |
|
|
2,390,824 |
|
|
|
19.61 |
|
|
$ |
1,508 |
|
|
|
1.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest |
|
|
2,588,773 |
|
|
|
19.48 |
|
|
$ |
1,508 |
|
|
|
1.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value at the end of period in the preceding table represents the total
pre-tax intrinsic value, based on our closing stock price of $13.41 as of September 30, 2008, which
would have been received by the option holders had all option holders exercised in-the-money
options and sold the underlying shares on that date.
The following table summarizes the status of outstanding stock options as of September 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
Range of |
|
Number of |
|
|
Remaining |
|
|
Exercise |
|
|
Number of |
|
|
Exercise |
|
Exercise |
|
Options |
|
|
Contractual |
|
|
Price Per |
|
|
Options |
|
|
Price Per |
|
Prices |
|
Outstanding |
|
|
Life (in years) |
|
|
Share |
|
|
Exercisable |
|
|
Share |
|
$8.89 18.53 |
|
|
750,380 |
|
|
|
2.14 |
|
|
$ |
17.62 |
|
|
|
548,880 |
|
|
$ |
17.57 |
|
18.54 19.72 |
|
|
672,876 |
|
|
|
1.25 |
|
|
|
19.20 |
|
|
|
653,122 |
|
|
|
19.21 |
|
19.79 20.36 |
|
|
768,810 |
|
|
|
1.17 |
|
|
|
20.05 |
|
|
|
768,810 |
|
|
|
20.05 |
|
20.56 40.29 |
|
|
419,937 |
|
|
|
0.62 |
|
|
|
22.11 |
|
|
|
419,937 |
|
|
|
22.11 |
|
41.00 |
|
|
75 |
|
|
|
1.74 |
|
|
|
41.00 |
|
|
|
75 |
|
|
|
41.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,612,078 |
|
|
|
1.38 |
|
|
|
19.46 |
|
|
|
2,390,824 |
|
|
|
19.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
For the three months ended September 30, 2008 and 2007, we recorded stock-based compensation
expense, net of estimated forfeitures, related to restricted stock shares and RSUs of $1,806,000
and $2,522,000, respectively. For the nine months ended September 30, 2008 and 2007, we recorded
stock-based compensation expense, net of estimated forfeitures, related to restricted stock shares
and RSUs of $7,167,000 and $6,228,000, respectively. As of September 30, 2008, total compensation
cost related to nonvested restricted stock shares and RSUs not yet recognized is $18,181,000, which
is expected to be recognized over the next 1.24 years on a weighted-average basis.
On January 23, 2008, the Compensation Committee of our Board of Directors approved a special
long-term incentive award for the Chief Executive Officer, the President of our North America/APAC
operating segments and the President of our EMEA operating segment. The approved grant level
targets were as follows:
|
|
|
Richard A. Fennessy, President and Chief Executive Officer 300,000 RSUs; |
|
|
|
|
Mark T. McGrath, President, North America/APAC 150,000 RSUs; and |
|
|
|
|
Stuart A. Fenton, President, EMEA 100,000 RSUs. |
13
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The plan provides for the award of RSUs that will be issued based upon achievement of
specific stock price hurdles within specific timeframes (the 20-day average closing price of
Insight stock must be at or above a stock price hurdle and within the defined timeframes for any
tranche to be awarded):
|
|
|
20% awarded if stock price hurdle of $25.00 is achieved by February 15, 2009; |
|
|
|
|
30% awarded if stock price hurdle of $30.00 is achieved between February 16,
2009 and February 15, 2010; and |
|
|
|
|
50% awarded if stock price hurdle of $35.00 is achieved between February 16,
2010 and February 15, 2011. |
If all or some hurdles are not achieved, 33% of the remaining award (i.e., any shares not
issued for achievement of the stock price hurdles set forth above) will be made on February 15,
2013, assuming continued employment. Vesting of the RSUs awarded will occur 50% at the time of
the award and 50% on the first anniversary of the award date. If a change in control as defined
in the 2007 Omnibus Plan occurs, all units that have been issued by achievement of stock price
hurdles will automatically vest, and units that have not been issued will be forfeited. For the
three and nine months ended September 30, 2008, we recorded stock-based compensation expense
related to these RSUs of $257,000 and $704,000, respectively, which is included in the stock-based
compensation expense amounts discussed above. As of September 30, 2008, total compensation cost
not yet recognized related to these RSUs was $5,735,000 of the $18,181,000 total discussed above.
Such compensation expense is expected to be recognized through February 2014.
The following table summarizes our restricted stock activity, including restricted stock
shares and RSUs, during the nine months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Number |
|
|
Grant Date Fair Value |
|
|
Fair Value |
|
Nonvested at the beginning of period |
|
|
1,108,857 |
|
|
$ |
20.29 |
|
|
|
|
|
Granted |
|
|
767,450 |
|
|
|
12.63 |
|
|
|
|
|
Vested, including shares withheld to
cover taxes |
|
|
(428,389 |
) |
|
|
20.36 |
|
|
$ |
7,627,814 |
(a) |
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(141,748 |
) |
|
|
19.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at the end of period |
|
|
1,306,170 |
|
|
|
15.85 |
|
|
$ |
17,515,740 |
(b) |
|
|
|
|
|
|
|
|
|
|
|
Expected to vest |
|
|
1,238,712 |
|
|
|
|
|
|
$ |
16,611,128 |
(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The fair value of vested restricted stock shares and RSUs represents the
total pre-tax fair value, based on the closing
stock price on the day of vesting, which would have been received by holders of restricted
stock shares and RSUs had all such holders sold their underlying shares on that date. |
|
(b) |
|
The aggregate fair value of the nonvested restricted stock shares and the RSUs
expected to vest represents the total pre-tax fair value, based on our closing stock price
of $13.41 as of September 30, 2008, which would have been received by holders of restricted
stock shares and RSUs had all such holders sold their underlying shares on that date. |
During the nine months ended September 30, 2008, the restricted stock shares and RSUs that
vested for teammates in the United States were net-share settled such that we withheld shares with
value equivalent to the teammates minimum statutory United States tax obligation for the
applicable income and other employment taxes and remitted the cash to the appropriate taxing
authorities. The total shares withheld during the nine months ended September 30, 2008 of 117,193
was based on the value of the restricted stock shares or RSUs on their vesting date as determined
by our closing stock price on such date. For the nine months ended September 30, 2008, total
payments for the employees tax obligations to the taxing authorities were $2,097,000 and are
reflected as a financing activity within the Consolidated Statements of Cash Flows. These
net-share settlements had the effect of repurchases of common stock as they reduced and retired
the number of shares that would have otherwise been issued as a result of the vesting and did not
represent an expense to us.
14
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
8. Fair Value Measurements
In September 2006, FASB issued SFAS No. 157, which provides guidance for determining fair
value to measure assets and liabilities. SFAS No. 157 will apply whenever another standard
requires (or permits) assets or liabilities to be measured at fair value. The standard does not
expand the use of fair value to any new circumstances. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. On February 12, 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2,
which delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until fiscal years beginning after November
15, 2008 and interim periods within those fiscal years for items within the scope of the FSP. As
such, we did not apply the fair value measurement requirements of SFAS No. 157 for nonfinancial
assets and liabilities when performing our goodwill and other asset impairment tests as discussed
in Note 3.
Our partial adoption of SFAS No. 157 on January 1, 2008, for financial assets and liabilities
and for nonfinancial assets or liabilities that are measured on a recurring basis, did not have any
effect on our consolidated financial statements. As of September 30, 2008, we have no nonfinancial
assets or liabilities that are measured on a recurring basis and our financial assets or
liabilities generally consist of cash and cash equivalents, accounts receivable, accounts payable
and accrued expenses and other current liabilities. The estimated fair values of our cash and cash
equivalents is determined based on quoted prices in active markets for identical assets. The fair
value of the other financial assets and liabilities is based on the value that would be received or
paid in an orderly transaction between market participants and approximates the carrying value due
to their nature and short duration.
9. Comprehensive (Loss) Income
Comprehensive (loss) income for the three and nine months ended September 30, 2008 and 2007
includes the following component (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
6,713 |
|
|
$ |
9,096 |
|
|
$ |
(157,044 |
) |
|
$ |
53,173 |
|
Other comprehensive (loss) income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(22,649 |
) |
|
|
9,659 |
|
|
|
(14,739 |
) |
|
|
16,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss) income |
|
$ |
(15,936 |
) |
|
$ |
18,755 |
|
|
$ |
(171,783 |
) |
|
$ |
69,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. Share Repurchase Program
On November 14, 2007, we announced that our Board of Directors had authorized the purchase of
up to $50,000,000 of our common stock through September 30, 2008. During the nine months ended
September 30, 2008, we purchased in open market transactions 3,493,500 shares of our common stock
at a total cost of approximately $50,000,000 (an average price of $14.31 per share), which
completed the program. All shares repurchased were retired as of June 30, 2008.
15
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. Commitments and Contingencies
Contractual
In July 2007, we signed a statement of work with a third party that was engaged to assist us
in a company-wide integration of our hardware, services and software distribution operations into
our IT systems. During the quarter ended March 31, 2008, we renegotiated the contract to include a
new scope of work, whereby we agreed to engage the third party on current and future IT related
projects. As a result of this renegotiation, previously reported commitments as of December 31,
2007 totaling $14,400,000 over the next two years were settled with a $3,100,000 payment made in
April 2008, which had been fully accrued as of March 31, 2008. The new commitments approximate
$4,000,000 over 18 to 24 months.
In the ordinary course of business, we issue performance bonds to secure our performance under
certain contracts or state tax requirements. As of September 30, 2008 and December 31, 2007, we
had approximately $20,184,000 and $794,000, respectively, of performance bonds outstanding. These
bonds are issued on our behalf by a surety company on an unsecured basis; however, if the surety
company is ever required to pay out under the bonds, we have contractually agreed to reimburse the
surety company.
Employment Contracts
We have employment contracts with certain officers and management teammates under which
severance payments would become payable and accelerated vesting of stock-based compensation would
occur in the event of specified terminations without cause or terminations under certain
circumstances after a change in control. If such persons were terminated without cause or under
certain circumstances after a change of control, and the severance payments under the current
employment agreements were to become payable, the severance payments would generally range from
three months of the teammates salary up to two times the teammates annual salary and bonus.
Guaranties
In the ordinary course of business, we may guarantee the indebtedness of our subsidiaries to
vendors and clients. We have not recorded specific liabilities for these guaranties in the
consolidated financial statements because we have recorded the underlying liabilities associated
with the guaranties. In the event we are required to perform under the related contracts, we
believe the cost of such performance would not have a material adverse effect on our consolidated
financial position or results of operations.
Indemnifications
From time to time, in the ordinary course of business, we enter into contractual arrangements
under which we agree to indemnify either our clients or third-party service providers from certain
losses incurred relating to services performed on our behalf or for losses arising from defined
events, which may include litigation or claims relating to past performance. These arrangements
include, but are not limited to, the indemnification of our landlords for certain claims arising
from our use of leased facilities and the indemnification of the lenders that provide our credit
facilities for certain claims arising from their extension of credit to us. Such indemnification
obligations may not be subject to maximum loss clauses.
In connection with our sale of Direct Alliance in June 2006 and PC Wholesale in March 2007,
the sale agreements contain certain indemnification provisions pursuant to which we are required to
indemnify the respective buyer for a limited period of time for liabilities, losses or expenses
arising out of breaches of covenants and certain breaches of representations and warranties
relating to the condition of the respective business prior to and at the time of sale.
16
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Management believes that payments, if any, related to these indemnifications are not probable
at September 30, 2008 and, if incurred, would not be material. Accordingly, we have not accrued
any liabilities related to such indemnifications in our consolidated financial statements.
Legal Proceedings
We are party to various legal proceedings arising in the ordinary course of business,
including preference payment claims asserted in client bankruptcy proceedings, claims of alleged
infringement of patents, trademarks, copyrights and other intellectual property rights, claims of
alleged non-compliance with contract provisions and claims related to alleged violations of laws
and regulations.
In accordance with SFAS No. 5, Accounting for Contingencies (SFAS No. 5), we make a
provision for a liability when it is both probable that a liability has been incurred and the
amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly
and are adjusted to reflect the effects of negotiations, settlements, rulings, advice of legal
counsel and other information and events pertaining to a particular claim. Although litigation is
inherently unpredictable, we believe that we have adequate provisions for probable and estimable
losses. It is possible, nevertheless, that the results of our operations, our financial position
or our cash flows could be materially and adversely affected in any particular period by the
resolution of a legal proceeding. Legal expenses related to defense, negotiations, settlements,
rulings and advice of outside legal counsel are expensed as incurred.
In October 2006, we received a letter of informal inquiry from the SEC requesting certain
documents relating to our historical stock option grants and practices. On August 12, 2008, the
staff of the SEC notified the Company that the SECs investigation into the Companys stock option
grant practices has been completed and that the staff does not intend to recommend any enforcement
action by the SEC against the Company.
Software Spectrum, Inc., as successor to CS&T, is party to litigation brought in the Belgian
courts regarding a dispute over the terms of a tender awarded by the Belgian Ministry of Defence
(MOD) in November 2000. In February 2001, CS&T brought a breach of contract suit against MOD in
the Court of First Instance in Brussels and claimed breach of contract damages in the amount of
approximately $150,000. MOD counterclaimed against CS&T in the amount of approximately $2,700,000,
and CS&T added two European subsidiaries of Microsoft as defendants. We have filed a defense to
the counterclaim. The proceedings are currently stayed, and we are in negotiations to settle the
dispute with all parties.
On March 10, 2008, TeleTech Holdings, Inc. (Teletech) sent us a demand for arbitration
pursuant to the Stock Purchase Agreement (SPA) entered into between the parties, whereby TeleTech
acquired Direct Alliance Corporation (DAC), a former subsidiary of Insight, effective June 30,
2006. TeleTech claims that it is entitled to a $5,000,000 clawback under the SPA relating to the
non-renewal of an agreement between DAC and one of its clients. We dispute Teletechs allegations
and intend to vigorously defend this matter. In recording the disposition of DAC on June 30, 2006,
we deferred $5,000,000 as a contingent gain on sale related to this clawback.
On April 1, 2008, we completed the acquisition of Calence pursuant to an agreement and plan of
merger (the Merger Agreement), a related support agreement (the Support Agreement) and other
ancillary agreements. In April 2008, in connection with an investigation being conducted by the
United States Department of Justice (the DOJ), Calence received a subpoena from the Office of the
Inspector General of the Federal Communications Commission (the FCC) requesting documents related
to the award, by the Universal Service Administration Company (USAC), of funds under the E-Rate
program to a participating school district. The E-Rate program provides schools and libraries with
discounts to obtain affordable telecommunications and internet access. No allegations have been
made against Calence, and we are cooperating with the FCC, USAC and the DOJ and are in the process
of responding to the subpoena. Pursuant to the Merger Agreement and the Support
Agreement, the former owners of Calence have agreed to indemnify us for certain losses and
damages that may arise out of or result from this matter, including our fees and expenses for
responding to the subpoena.
Management believes that the ultimate outcome of these legal proceedings will not have a
material effect on our results of operations.
17
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Contingencies Related to Third-Party Review
From time to time, we are subject to potential claims and assessments from third parties. We
are also subject to various governmental, client and vendor audits. We continually assess whether
or not such claims have merit and warrant accrual under the probable and estimable criteria of
SFAS No. 5. Where appropriate, we accrue estimates of anticipated liabilities in the consolidated
financial statements. Such estimates are subject to change and may affect our results of
operations and our cash flows.
12. Discontinued Operation
On March 1, 2007, we completed the sale of PC Wholesale, a division of our North America
operating segment. The net assets sold generated net cash proceeds of $27,731,000, after the
resolution of post-closing contingencies. For the nine months ended September 30, 2007, the gain
on sale of PC Wholesale of $7,937,000, $4,801,000 net of taxes, and PC Wholesales earnings during
the period of $282,000, $171,000 net of taxes, are classified as net earnings from a discontinued
operation. We resolved certain post-closing contingencies and recognized an additional gain on the
sale of PC Wholesale of $350,000, $264,000 net of taxes, in the fourth quarter of 2007. This
resolution required a cash payment of $900,000 during the first quarter of 2008.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144), we have reported the results of operations of PC Wholesale as a
discontinued operation in the consolidated statements of operations for all periods presented. We
did not allocate interest or general corporate overhead expense to the discontinued operation.
13. Acquisitions
MINX Limited
On July 10, 2008, we acquired MINX, a United Kingdom-based networking services company with
annual net sales of approximately $25,000,000 for an initial cash purchase price of approximately
$1,500,000 and the assumption of approximately $3,900,000 of existing debt. Up to an additional
$678,000 may be due if MINX achieves certain performance targets over a one-year period. Founded
in 2002 and headquartered in Elstree, Hertfordshire, MINX is a European network integrator with
Cisco Gold Partner accreditation. We believe this acquisition will significantly enhance our
capabilities in the sale, implementation and management of network infrastructure services and
solutions in our EMEA operating segment and will compliment our April 1, 2008 acquisition of
Calence in our North America operating segment, accelerating Insights transformation to a
broad-based global technology solutions advisor and provider.
18
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes the purchase price and the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition (in thousands):
|
|
|
|
|
|
|
|
|
Purchase price paid as: |
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
$ |
1,497 |
|
Assumed debt |
|
|
|
|
|
|
3,895 |
|
Acquisition costs |
|
|
|
|
|
|
116 |
|
|
|
|
|
|
|
|
|
Total purchase price |
|
|
|
|
|
|
5,508 |
|
Fair value of net assets acquired: |
|
|
|
|
|
|
|
|
Current assets |
|
$ |
7,740 |
|
|
|
|
|
Identifiable intangible assets see description below |
|
|
2,874 |
|
|
|
|
|
Property and equipment |
|
|
357 |
|
|
|
|
|
Current liabilities |
|
|
(8,158 |
) |
|
|
|
|
Other liabilities |
|
|
(805 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value of net assets acquired |
|
|
|
|
|
|
2,008 |
|
|
|
|
|
|
|
|
|
Excess purchase price over fair value of net assets acquired (goodwill) |
|
|
|
|
|
$ |
3,500 |
|
|
|
|
|
|
|
|
|
Under the purchase method of accounting, the purchase price as shown in the table above is
allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based
on their estimated fair values. The excess purchase price over fair value of net assets acquired
was recorded as goodwill. The purchase price was allocated using the information currently
available, and we may adjust the purchase price allocation after obtaining more information
regarding, among other things, asset valuations, liabilities assumed, restructuring activities and
revisions of preliminary estimates. We may accrue additional charges in connection with the
acquisition of MINX, but the amounts cannot be reasonably estimated at present.
The estimated values of current assets and liabilities were based upon their historical costs
on the date of acquisition due to their short-term nature. Property and equipment were also
estimated based upon unamortized costs as they most closely approximated fair value.
Identified intangible assets acquired in the acquisition of MINX totaled approximately
$2,874,000 and consist primarily of customer relationships which are being amortized using the
straight-line method over their estimated economic life of 8.5 years. Amortization expense
recognized for the period from the acquisition date through September 30, 2008 was $123,000.
Amortization expense is estimated to be approximately $500,000 per year through 2010.
Goodwill of $3,500,000 represents the excess of the purchase price over the estimated fair
value assigned to tangible and identifiable intangible assets acquired and liabilities assumed from
MINX. We have consolidated the results of operations for MINX since its acquisition on July 10,
2008. Our historical results would not have been materially affected by the acquisition of MINX
and, accordingly, we have not presented pro forma information as if the acquisition had been
completed at the beginning of each period presented in our statements of operations.
Calence, LLC
On April 1, 2008, we completed our acquisition of Calence for a cash purchase price of
$125,000,000 plus a preliminary working capital adjustment of $4,032,000, offset by a final
post-closing working capital adjustment of $383,000. Up to an additional $35,000,000 of purchase
price consideration may be due if Calence achieves certain performance targets over the next four
years. Founded in 1993 and headquartered in Tempe, Arizona, Calence is a leading provider of Cisco
networking solutions in the United States, with strong regional presence in the Southwest,
Northwest and Midwest, as well as New York, North Carolina and Texas. We believe this acquisition
significantly enhances Insights technical capabilities around networking and communications, as
well as managed services and security, accelerating Insights transformation to a broad-based
technology solutions advisor and provider.
19
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes the purchase price and the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition (in thousands):
|
|
|
|
|
|
|
|
|
Purchase price paid as: |
|
|
|
|
|
|
|
|
Cash and borrowings on senior revolving credit facility |
|
|
|
|
|
$ |
128,649 |
|
Assumed debt |
|
|
|
|
|
|
7,311 |
|
Acquisition costs |
|
|
|
|
|
|
3,679 |
|
|
|
|
|
|
|
|
|
Total purchase price |
|
|
|
|
|
|
139,639 |
|
Fair value of net assets acquired: |
|
|
|
|
|
|
|
|
Current assets |
|
$ |
64,815 |
|
|
|
|
|
Identifiable intangible assets see description below |
|
|
29,190 |
|
|
|
|
|
Property and equipment |
|
|
6,192 |
|
|
|
|
|
Other assets |
|
|
946 |
|
|
|
|
|
Current liabilities |
|
|
(54,499 |
) |
|
|
|
|
Other liabilities |
|
|
(714 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value of net assets acquired |
|
|
|
|
|
|
45,930 |
|
|
|
|
|
|
|
|
|
Excess purchase price over fair value of net assets acquired (goodwill) |
|
|
|
|
|
$ |
93,709 |
|
|
|
|
|
|
|
|
|
Under the purchase method of accounting, the purchase price as shown in the table above is
allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based
on their estimated fair values. The excess purchase price over fair value of net assets acquired
was recorded as goodwill. The purchase price was allocated using the information currently
available, and we may adjust the purchase price allocation after obtaining more information
regarding, among other things, asset valuations, liabilities assumed, restructuring activities and
revisions of preliminary estimates. We may accrue additional charges in connection with the
acquisition of Calence, but the amounts cannot be reasonably estimated at present. During the
three and nine months ended September 30, 2008, we accrued an additional $1,755,000 and $2,471,000,
respectively, of purchase price consideration as a result of Calence achieving certain performance
targets during the respective periods. Such amounts were recorded as additional goodwill (see Note
3).
The estimated values of current assets and liabilities were based upon their historical costs
on the date of acquisition due to their short-term nature. Property and equipment were also
estimated based upon unamortized costs as they most closely approximated fair value. The estimated
value of deferred revenue, of which $3,359,000 is included in current liabilities and $652,000 is
included in other liabilities in the table above, was based upon the guidance in EITF 01-03,
"Accounting in a Business Combination for Deferred Revenue of an Acquiree, and was calculated as
the estimated cost to fulfill the contractual obligations acquired under various customer contracts
plus a fair value profit margin.
Identified intangible assets acquired in the acquisition of Calence totaled $29,190,000 and
consist of the following (in thousands):
|
|
|
|
|
Customer relationships |
|
$ |
21,800 |
|
Backlog Managed services |
|
|
4,500 |
|
Backlog Consulting |
|
|
2,600 |
|
Trade name |
|
|
150 |
|
Non-compete agreements |
|
|
140 |
|
|
|
|
|
|
|
|
29,190 |
|
Accumulated amortization |
|
|
(3,173 |
) |
|
|
|
|
Intangible assets, net at September 30, 2008 |
|
$ |
26,017 |
|
|
|
|
|
20
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Amortization is provided using the straight-line method over the following estimated economic
lives of the intangible assets:
|
|
|
|
|
|
|
Estimated Economic Life |
|
Customer relationships |
|
10.75 Years |
Backlog Managed services |
|
4.75 Years |
Backlog Consulting |
|
10 Months |
Trade name |
|
10 Months |
Non-compete agreements |
|
2 Years |
Amortization expense recognized for the period from the acquisition date through September 30,
2008 was $3,173,000. Amortization expense is estimated to be as follows (in thousands):
|
|
|
|
|
Years Ending December 31, |
|
|
|
|
2008 |
|
$ |
4,759 |
|
2009 |
|
|
3,320 |
|
2010 |
|
|
2,993 |
|
2011 |
|
|
2,975 |
|
2012 |
|
|
2,975 |
|
2013 |
|
|
2,028 |
|
Thereafter |
|
|
10,140 |
|
|
|
|
|
Total estimated amortization expense |
|
$ |
29,190 |
|
|
|
|
|
Goodwill of $93,709,000 represents the excess of the purchase price over the estimated fair
value assigned to tangible and identifiable intangible assets acquired and liabilities assumed from
Calence. During the three and nine months ended September 30, 2008, we accrued an additional
$1,755,000 and $2,471,000, respectively, of purchase price consideration as a result of Calence
achieving certain performance targets during the respective periods. Such amounts were recorded as
additional goodwill. As discussed in Note 3, we recorded a non-cash goodwill impairment charge
during the second quarter of 2008 which represented the entire goodwill balance recorded in our
North America operating segment, including the entire amount of the goodwill recorded in connection
with the Calence acquisition as of June 30, 2008.
21
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
We have consolidated the results of operations for Calence since its acquisition on April 1,
2008. The following table reports pro forma information as if the acquisition of Calence had been
completed at the beginning of each period presented (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net sales |
|
As reported |
|
$ |
1,168,916 |
|
|
$ |
1,109,705 |
|
|
$ |
3,674,427 |
|
|
$ |
3,517,129 |
|
|
|
Pro forma |
|
$ |
1,168,916 |
|
|
$ |
1,186,322 |
|
|
$ |
3,746,452 |
|
|
$ |
3,758,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
from continuing
operations |
|
As reported |
|
$ |
6,713 |
|
|
$ |
9,096 |
|
|
$ |
(157,044 |
) |
|
$ |
48,201 |
|
|
|
Pro forma |
|
$ |
6,713 |
|
|
$ |
8,922 |
|
|
$ |
(156,837 |
) |
|
$ |
44,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
As reported |
|
$ |
6,713 |
|
|
$ |
9,096 |
|
|
$ |
(157,044 |
) |
|
$ |
53,173 |
|
|
|
Pro forma |
|
$ |
6,713 |
|
|
$ |
8,922 |
|
|
$ |
(156,837 |
) |
|
$ |
49,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net
earnings (loss) per
share |
|
As reported |
|
$ |
0.15 |
|
|
$ |
0.18 |
|
|
$ |
(3.35 |
) |
|
$ |
1.07 |
|
|
|
Pro forma |
|
$ |
0.15 |
|
|
$ |
0.18 |
|
|
$ |
(3.34 |
) |
|
$ |
1.00 |
|
14. Segment Information
We operate in three reportable geographic operating segments: North America; EMEA; and APAC.
Currently, our offerings in North America and the United Kingdom include brand-name IT hardware,
software and services. Our offerings in the remainder of our EMEA segment and in APAC currently
only include software and select software-related services.
SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information
(SFAS No. 131), requires disclosures of certain information regarding operating segments,
products and services, geographic areas of operation and major clients. The method for determining
what information to report under SFAS No. 131 is based upon the management approach, or the way
that management organizes the operating segments within a company, for which separate financial
information is evaluated regularly by the Chief Operating Decision Maker (CODM) in deciding how
to allocate resources. Our CODM is our Chief Executive Officer.
All intercompany transactions are eliminated upon consolidation, and there are no differences
between the accounting policies used to measure profit and loss for our segments and on a
consolidated basis. Net sales are defined as net sales to external clients.
A portion of our operating segments selling and administrative expenses arise from shared
services and infrastructure that we have historically provided to them in order to realize
economies of scale and to use resources efficiently. These expenses, collectively identified as
corporate charges, include senior management expenses, internal audit, legal, tax, insurance
services, treasury and other corporate infrastructure expenses. Charges are allocated to our
operating segments, and the allocations have been determined on a basis that we considered to be a
reasonable reflection of the utilization of services provided to or benefits received by the
operating segments.
22
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The tables below present information about our reportable operating segments as of and for the
three and nine months ended September 30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2008 |
|
|
|
North America |
|
|
EMEA |
|
|
APAC |
|
|
Consolidated |
|
Net sales |
|
$ |
854,729 |
|
|
$ |
281,366 |
|
|
$ |
32,821 |
|
|
$ |
1,168,916 |
|
Costs of goods sold |
|
|
747,530 |
|
|
|
239,471 |
|
|
|
27,843 |
|
|
|
1,014,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
107,199 |
|
|
|
41,895 |
|
|
|
4,978 |
|
|
|
154,072 |
|
Selling and administrative expenses |
|
|
98,427 |
|
|
|
36,441 |
|
|
|
4,330 |
|
|
|
139,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations |
|
$ |
8,772 |
|
|
$ |
5,454 |
|
|
$ |
648 |
|
|
|
14,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before
income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,625 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,713 |
|
Net earnings from a discontinued operation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at period end |
|
$ |
1,363,670 |
|
|
$ |
438,463 |
|
|
$ |
57,099 |
|
|
$ |
1,605,593 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Consolidated total assets include corporate assets and intercompany eliminations for a net reduction of $253,639. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2007 |
|
|
|
North America |
|
|
EMEA |
|
|
APAC |
|
|
Consolidated |
|
Net sales |
|
$ |
817,747 |
|
|
$ |
264,679 |
|
|
$ |
27,279 |
|
|
$ |
1,109,705 |
|
Costs of goods sold |
|
|
708,729 |
|
|
|
228,965 |
|
|
|
22,165 |
|
|
|
959,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
109,018 |
|
|
|
35,714 |
|
|
|
5,114 |
|
|
|
149,846 |
|
Selling and administrative expenses |
|
|
93,742 |
|
|
|
33,165 |
|
|
|
3,913 |
|
|
|
130,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations |
|
$ |
15,276 |
|
|
$ |
2,549 |
|
|
$ |
1,201 |
|
|
|
19,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before
income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,321 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,096 |
|
Net earnings from a discontinued operation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at period end |
|
$ |
2,198,755 |
|
|
$ |
393,211 |
|
|
$ |
39,393 |
|
|
$ |
1,590,637 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Consolidated total assets include corporate assets and intercompany eliminations for a net reduction of $1,040,722. |
23
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008 |
|
|
|
North America |
|
|
EMEA |
|
|
APAC |
|
|
Consolidated |
|
Net sales |
|
$ |
2,578,098 |
|
|
$ |
981,859 |
|
|
$ |
114,470 |
|
|
$ |
3,674,427 |
|
Costs of goods sold |
|
|
2,230,942 |
|
|
|
838,263 |
|
|
|
96,253 |
|
|
|
3,165,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
347,156 |
|
|
|
143,596 |
|
|
|
18,217 |
|
|
|
508,969 |
|
Selling and administrative expenses |
|
|
295,978 |
|
|
|
114,043 |
|
|
|
14,040 |
|
|
|
424,061 |
|
Goodwill impairment |
|
|
313,949 |
|
|
|
|
|
|
|
|
|
|
|
313,949 |
|
Severance and restructuring expenses |
|
|
2,290 |
|
|
|
3,079 |
|
|
|
39 |
|
|
|
5,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from operations |
|
$ |
(265,061 |
) |
|
$ |
26,474 |
|
|
$ |
4,138 |
|
|
|
(234,449 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income
taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(246,669 |
) |
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(89,625 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(157,044 |
) |
Net earnings from a discontinued operation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(157,044 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at period end |
|
$ |
1,363,670 |
|
|
$ |
438,463 |
|
|
$ |
57,099 |
|
|
$ |
1,605,593 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Consolidated total assets include corporate assets and intercompany eliminations for a net reduction of $253,639. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007 |
|
|
|
North America |
|
|
EMEA |
|
|
APAC |
|
|
Consolidated |
|
Net sales |
|
$ |
2,518,847 |
|
|
$ |
923,958 |
|
|
$ |
74,324 |
|
|
$ |
3,517,129 |
|
Costs of goods sold |
|
|
2,163,724 |
|
|
|
804,733 |
|
|
|
60,838 |
|
|
|
3,029,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
355,123 |
|
|
|
119,225 |
|
|
|
13,486 |
|
|
|
487,834 |
|
Selling and administrative expenses |
|
|
289,605 |
|
|
|
98,646 |
|
|
|
10,651 |
|
|
|
398,902 |
|
Severance and restructuring expenses |
|
|
2,841 |
|
|
|
|
|
|
|
|
|
|
|
2,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations |
|
$ |
62,677 |
|
|
$ |
20,579 |
|
|
$ |
2,835 |
|
|
|
86,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,097 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,201 |
|
Net earnings from a discontinued operation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
53,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at period end |
|
$ |
2,198,755 |
|
|
$ |
393,211 |
|
|
$ |
39,393 |
|
|
$ |
1,590,637 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Consolidated total assets include corporate assets and intercompany eliminations for a net reduction of $1,040,722. |
24
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
We recorded the following pre-tax amounts, by operating segment, for depreciation and
amortization, in the accompanying consolidated financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
North America |
|
$ |
8,951 |
|
|
$ |
6,537 |
|
|
$ |
24,548 |
|
|
$ |
20,262 |
|
EMEA |
|
|
1,753 |
|
|
|
1,645 |
|
|
|
5,198 |
|
|
|
5,166 |
|
APAC |
|
|
175 |
|
|
|
137 |
|
|
|
541 |
|
|
|
532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated |
|
$ |
10,879 |
|
|
$ |
8,319 |
|
|
$ |
30,287 |
|
|
$ |
25,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Item 2. Managements 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
The Company
We are a leading provider of brand-name information technology (IT) hardware, software and
services to large enterprises, small- to medium-sized businesses (SMB) and public sector
institutions in North America, EMEA (Europe, the Middle East and Africa) and APAC (Asia-Pacific).
Currently, our offerings in North America and the United Kingdom include brand name IT hardware,
software and services. Our offerings in the remainder of our EMEA segment and in APAC currently
only include software and select software-related services.
Acquisition
On July 10, 2008, we acquired MINX Limited (MINX), a United Kingdom-based networking
services company with annual net sales of approximately $25.0 million, for an initial cash purchase
price of approximately $1.5 million and the assumption of approximately $3.9 million of existing
debt. Up to an additional $678,000 may be due if MINX achieves certain performance targets over a
one-year period. Founded in 2002 and headquartered in Elstree, Hertfordshire, MINX is a European
network integrator with Cisco Gold Partner accreditation. We believe this acquisition will
significantly enhance our capabilities in the sale, implementation and management of network
infrastructure services and solutions in our EMEA operating segment and will compliment our April
1, 2008 acquisition of Calence in our North America operating segment.
This acquisition, along with the Calence acquisition in the second quarter, is consistent with
our vision and strategy to become a global value added reseller (G-VAR) through continued
investment in certain key technology categories, including networking and advanced communications.
Quarterly Results
On a consolidated basis, net sales for the three months ended September 30, 2008 increased 5%
to $1.17 billion compared to the three months ended September 30, 2007. Gross profit also grew at
a rate of 3% to $154.1 million for the three months ended September 30, 2008. Net earnings from
continuing operations for the three months ended September 30, 2008 decreased 26% and diluted
earnings per share from continuing operations decreased 17% compared to the three months ended
September 30, 2007. The 2008 results include $3.3 million of net foreign currency losses primarily
resulting from the strengthening of the U.S. dollar against the Euro and British Pound Sterling and
the volatility of those exchange rates during the quarter. The 2007 results included $849,000 of
net foreign currency losses. The 2008 results also include $1.1 million of tax benefit related to
federal and state research and development credits recorded during the quarter. Results of
continuing operations for the three months ended September 30, 2007 include expenses of $2.5
million for professional fees and costs associated with our stock option review.
Net sales in North America increased 5% to $854.7 million primarily due to 63% growth in our
networking and connectivity sales with the acquisition of Calence on April 1, 2008. This increase
more than offset declines in our legacy hardware business such that overall hardware net sales in
North America for the three months ended September 30, 2008 increased 1% year over year. Hardware
net sales, other than networking and connectivity, declined 12% during the quarter reflecting the
continuation of the effects of the difficult market we are faced with in 2008. Software net sales
for the three months ended September 30, 2008 increased 2% compared to the three months ended
September 30, 2007, and we continue to attribute this growth in software net sales to the sales and
marketing initiatives we implemented early in the second quarter of 2008. Net
26
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
sales from
services, which also benefited from the acquisition of Calence, increased 126% for the three
months ended September 30, 2008 compared to the three months ended September 30, 2007, which
includes 16% growth in the legacy services business in North America. Gross margin in North
America decreased by 80 basis points from the third quarter of 2007 primarily due to market pricing
pressures and general economic conditions, which have driven decreases in product margin, which
includes vendor funding, decreases in agency fees for Microsoft enterprise software agreement
renewals and decreases in freight margin. Including Calence, North America kept selling and
administrative expenses as a percentage of net sales flat at 11.5% and reported earnings from
operations of $8.8 million during the third quarter of 2008 compared to $15.3 million for the third
quarter of 2007. However, the third quarter 2007 results include $2.5 million in professional fees
and costs associated with our stock option review.
Net sales in EMEA increased 6% to $281.4 million, in part reflecting a 13% increase in
software sales during the three months ended September 30, 2008 compared the three months ended
September 30, 2007. Gross margin in EMEA increased 140 basis points from the three months ended
September 30, 2007 as a result of strong software and services category performance and a continued
migration to fee based software programs. Earnings from operations in the EMEA segment increased
114% compared to the third quarter of 2007 to $5.5 million reflecting higher gross profit partially
offset by increases in selling and administrative expenses from increased labor costs.
Net sales in APAC increased 20% to $32.8 million with gross margin on these sales of 15.2%, a
decline from 18.7% during the three months ended September 30, 2007. Earnings from operations from
this segment were $648,000 during the three months ended September 30, 2008, a decrease from $1.2
million during the three months ended September 30, 2007 due primarily to the decrease in gross
margin year over year resulting from a decrease in Microsoft enterprise agreement renewals.
Reconciliations of segment results of operations to consolidated results of operations can be
found in Note 14 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.
Guidance
We expect the demand environment to continue to be soft in the fourth quarter. As a result,
we expect fourth quarter 2008 diluted earnings per share to be between $0.27 and $0.34. This
estimate includes no severance, restructuring or other one-time charges. The reason for such a
wide range is that, worldwide, the current environment is quite unprecedented, making forecasting
more difficult. As such, this guidance reflects managements expectations for the balance of 2008,
but the factors that could affect performance are numerous.
Critical Accounting Estimates
Our consolidated financial statements have been prepared in accordance with U.S. generally
accepted accounting principles (GAAP). For a summary of significant accounting policies, see
Note 1 to the Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form
10-K for the year ended December 31, 2007. 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. See discussion about
critical accounting estimates relating to goodwill in Note 3 to the Consolidated Financial
Statements in Part I, Item 1 of this report.
27
INSIGHT ENTERPRISES, INC.
MANAGEMENTS 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
Managements 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, 2007.
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, 2008 and 2007. As
discussed in Note 12 to the Consolidated Financial Statements in Part I, Item 1 of this report, we
have reported the results of operations of PC Wholesale, which we sold on March 1, 2007, along with
the gain on sale of PC Wholesale, as a discontinued operation in the Consolidated Statements of
Operations for the nine months ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Costs of goods sold |
|
|
86.8 |
|
|
|
86.5 |
|
|
|
86.2 |
|
|
|
86.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
13.2 |
|
|
|
13.5 |
|
|
|
13.8 |
|
|
|
13.9 |
|
Selling and administrative expenses |
|
|
11.9 |
|
|
|
11.8 |
|
|
|
11.5 |
|
|
|
11.3 |
|
Goodwill impairment |
|
|
|
|
|
|
|
|
|
|
8.6 |
|
|
|
|
|
Severance and restructuring expenses |
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
|
1.3 |
|
|
|
1.7 |
|
|
|
(6.4 |
) |
|
|
2.5 |
|
Non-operating expense, net |
|
|
0.6 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations before income taxes |
|
|
0.7 |
|
|
|
1.4 |
|
|
|
(6.7 |
) |
|
|
2.3 |
|
Income tax expense (benefit) |
|
|
0.1 |
|
|
|
0.6 |
|
|
|
(2.4 |
) |
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from
continuing operations |
|
|
0.6 |
|
|
|
0.8 |
|
|
|
(4.3 |
) |
|
|
1.4 |
|
Net earnings from a discontinued
operation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
|
0.6 |
% |
|
|
0.8 |
% |
|
|
(4.3 |
%) |
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales. Net sales for the three months ended September 30, 2008 increased 5% compared to
the three months ended September 30, 2007. Net sales for the nine months ended September 30, 2008
increased 4% compared to the nine months ended September 30, 2007. Our net sales by operating
segment were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
September 30, |
|
|
% |
|
|
September 30, |
|
|
% |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
North America |
|
$ |
854,729 |
|
|
$ |
817,747 |
|
|
|
5 |
% |
|
$ |
2,578,098 |
|
|
$ |
2,518,847 |
|
|
|
2 |
% |
EMEA |
|
|
281,366 |
|
|
|
264,679 |
|
|
|
6 |
% |
|
|
981,859 |
|
|
|
923,958 |
|
|
|
6 |
% |
APAC |
|
|
32,821 |
|
|
|
27,279 |
|
|
|
20 |
% |
|
|
114,470 |
|
|
|
74,324 |
|
|
|
54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
1,168,916 |
|
|
$ |
1,109,705 |
|
|
|
5 |
% |
|
$ |
3,674,427 |
|
|
$ |
3,517,129 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Net sales in North America increased $37.0 million or 5% for the three months ended September
30, 2008 compared to the three months ended September 30, 2007, primarily due to 63% growth in our
networking and connectivity sales with the acquisition of Calence on April 1, 2008. This increase
more than offset declines in our legacy hardware business such that overall hardware net sales in
North America for the three months ended
September 30, 2008 increased 1% year over year. Hardware net sales, other than networking and
connectivity, declined 12% during the quarter reflecting the continuation of the effects of the
difficult market we are faced with in 2008. Software net sales for the three months ended
September 30, 2008 increased 2% compared to the three months ended September 30, 2007, and we
continue to attribute the growth in software net sales to the sales and marketing initiatives we
implemented early in the second quarter of 2008. Net sales from services, which also benefited
from the acquisition of Calence, increased 126% for the three months ended September 30, 2008
compared to the three months ended September 30, 2007, which includes 16% growth in the legacy
services business in North America.
Net sales in North America increased $59.3 million for the nine months ended September 30,
2008 compared to the nine months ended September 30, 2007, primarily due to the acquisition of
Calence. North America had 1,439 account executives at September 30, 2008, an increase from 1,362
at September 30, 2007. However, net sales per average number of account executives in North
America decreased to $590,700 for the three months ended September 30, 2008 from $606,200 for the
three months ended September 30, 2007.
Net sales in EMEA increased $16.7 million or 6% for the three months ended September 30, 2008
compared to the three months ended September 30, 2007. The increase resulted from increased
software net sales, which increased 13% year over year and increased services net sales, which
increased 57% year over year. Although hardware net sales decreased 1% year over year, hardware
net sales increased 6% in local currency. Excluding the negative effects of foreign currency
translation during the quarter, net sales in EMEA would have increased by 7% year over year.
Net sales in EMEA increased $57.9 million or 6% for the nine months ended September 30, 2008
compared to the nine months ended September 30, 2007. The positive year to date results also came
from increases in software and services, which grew 11% and 29% respectively, year over year,
offset partially by the less than 1% decline in hardware sales. The results were also affected
significantly by the foreign currency benefit of the weak U.S. dollar. Excluding the positive
effects of foreign currency translation during the nine months ended September 30, 2008, net sales
in EMEA would have increased by 1% year over year. It should be noted that EMEA had one more
shipping day in both the three months and nine months ended September 30, 2008 compared to the
three months and nine months ended September 30, 2007. EMEA had 665 account executives at
September 30, 2008, an increase from 563 at September 30, 2007, in part as a result of the
acquisition of MINX. Net sales per average number of account executives in EMEA decreased to
$429,200 for the three months ended September 30, 2008 compared to $478,200 for the three months
ended September 30, 2007.
Our APAC segment recognized net sales of $32.8 million and $114.5 million for the three and
nine months ended September 30, 2008, respectively, an increase of 20% and 54%, respectively, year
over year as the segment has benefited from the hiring of incremental experienced software sales
and support teammates earlier in the year.
29
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Percentage of net sales by category for North America, EMEA and APAC were as follows for the
three months ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
EMEA |
|
|
APAC |
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
Sales Mix |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Networking and connectivity |
|
|
18 |
% |
|
|
12 |
% |
|
|
6 |
% |
|
|
5 |
% |
|
|
|
|
|
|
|
|
Notebooks and PDAs |
|
|
9 |
% |
|
|
12 |
% |
|
|
9 |
% |
|
|
11 |
% |
|
|
|
|
|
|
|
|
Servers and storage |
|
|
9 |
% |
|
|
11 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
|
|
|
|
|
|
Desktops |
|
|
7 |
% |
|
|
6 |
% |
|
|
6 |
% |
|
|
5 |
% |
|
|
|
|
|
|
|
|
Printers |
|
|
4 |
% |
|
|
6 |
% |
|
|
3 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
|
Memory and processors |
|
|
2 |
% |
|
|
4 |
% |
|
|
1 |
% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
Supplies and accessories |
|
|
4 |
% |
|
|
4 |
% |
|
|
4 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
|
Monitors and video |
|
|
5 |
% |
|
|
5 |
% |
|
|
5 |
% |
|
|
5 |
% |
|
|
|
|
|
|
|
|
Miscellaneous |
|
|
9 |
% |
|
|
9 |
% |
|
|
3 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware |
|
|
67 |
% |
|
|
69 |
% |
|
|
44 |
% |
|
|
47 |
% |
|
|
|
|
|
|
|
|
Software |
|
|
27 |
% |
|
|
28 |
% |
|
|
55 |
% |
|
|
52 |
% |
|
|
100 |
% |
|
|
100 |
% |
Services |
|
|
6 |
% |
|
|
3 |
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
<1 |
% |
|
|
<1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net sales by category for North America, EMEA and APAC were as follows for the
nine months ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
EMEA |
|
|
APAC |
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
Sales Mix |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Networking and connectivity |
|
|
16 |
% |
|
|
11 |
% |
|
|
5 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
|
Notebooks and PDAs |
|
|
10 |
% |
|
|
11 |
% |
|
|
8 |
% |
|
|
9 |
% |
|
|
|
|
|
|
|
|
Servers and storage |
|
|
9 |
% |
|
|
11 |
% |
|
|
6 |
% |
|
|
7 |
% |
|
|
|
|
|
|
|
|
Desktops |
|
|
7 |
% |
|
|
6 |
% |
|
|
4 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
|
Printers |
|
|
4 |
% |
|
|
5 |
% |
|
|
3 |
% |
|
|
3 |
% |
|
|
|
|
|
|
|
|
Memory and processors |
|
|
3 |
% |
|
|
4 |
% |
|
|
1 |
% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
Supplies and accessories |
|
|
3 |
% |
|
|
5 |
% |
|
|
4 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
|
Monitors and video |
|
|
4 |
% |
|
|
5 |
% |
|
|
4 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
|
Miscellaneous |
|
|
8 |
% |
|
|
8 |
% |
|
|
3 |
% |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware |
|
|
64 |
% |
|
|
66 |
% |
|
|
38 |
% |
|
|
40 |
% |
|
|
|
|
|
|
|
|
Software |
|
|
31 |
% |
|
|
31 |
% |
|
|
61 |
% |
|
|
59 |
% |
|
|
100 |
% |
|
|
100 |
% |
Services |
|
|
5 |
% |
|
|
3 |
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
<1 |
% |
|
|
<1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currently, our offerings in North America and the United Kingdom include brand name IT
hardware, software and services. Our offerings in the remainder of our EMEA segment and in APAC
currently only include software and select software-related services. Beginning in 2008, we have
combined servers with storage in reporting our sales mix and are reporting desktops separately to
conform with how we internally analyze our results. All prior period information has been
reclassified for comparative purposes. The increase in networking and connectivity sales as a
percentage of net sales in North America is due to the acquisition of Calence.
30
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Gross Profit. Gross profit grew at a rate of 3% to $154.1 million for the three months ended
September 30, 2008, with a 30 basis point decrease in gross margin. Our gross profit and gross
profit as a percentage of net sales by operating segment for the three and nine months ended
September 30, 2008 and 2007 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Net |
|
|
|
2008 |
|
|
Sales |
|
|
2007 |
|
|
Sales |
|
|
2008 |
|
|
Sales |
|
|
2007 |
|
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
107,199 |
|
|
|
12.5 |
% |
|
$ |
109,018 |
|
|
|
13.3 |
% |
|
$ |
347,156 |
|
|
|
13.5 |
% |
|
$ |
355,123 |
|
|
|
14.1 |
% |
EMEA |
|
|
41,895 |
|
|
|
14.9 |
% |
|
|
35,714 |
|
|
|
13.5 |
% |
|
|
143,596 |
|
|
|
14.6 |
% |
|
|
119,225 |
|
|
|
12.9 |
% |
APAC |
|
|
4,978 |
|
|
|
15.2 |
% |
|
|
5,114 |
|
|
|
18.7 |
% |
|
|
18,217 |
|
|
|
15.9 |
% |
|
|
13,486 |
|
|
|
18.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
154,072 |
|
|
|
13.2 |
% |
|
$ |
149,846 |
|
|
|
13.5 |
% |
|
$ |
508,969 |
|
|
|
13.9 |
% |
|
$ |
487,834 |
|
|
|
13.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Americas gross profit decreased for the three months ended September 30, 2008 by 2%
compared to the three months ended September 30, 2007. Gross profit per account executive
decreased 8% to $74,100 for the three months ended September 30, 2008 from $80,800 for the three
months ended September 30, 2007. As a percentage of net sales, gross profit decreased by 80 basis
points from the third quarter of 2007 primarily due to market pricing pressures which have driven
decreases in product margin, which includes vendor funding, of 94 basis points and decreases in
agency fees for Microsoft enterprise software agreement renewals of 44 basis points. Additionally,
due to increased transportation costs that were not able to be fully passed on to clients, 31 basis
points of the decline is attributable to decreases in margin generated by freight. These decreases
were offset partially by an 87 basis point improvement in gross margin resulting from increased
sales of higher margin services, primarily from our acquisition of Calence.
North Americas gross profit decreased for the nine months ended September 30, 2008 by 2%
compared to the nine months ended September 30, 2007. As a percentage of net sales, gross profit
decreased by 60 basis points from the nine months ended September 30, 2007 due primarily to
decreases in product margin, which includes vendor funding, primarily driven by market pricing
pressures.
EMEAs gross profit increased for the three months ended September 30, 2008 by 17% compared to
the three months ended September 30, 2007. Gross profit per account executive decreased 1% to
$63,900 for the three months ended September 30, 2008 from $64,500 for the three months ended
September 30, 2007. As a percentage of net sales, gross profit increased 140 basis points from the
three months ended September 30, 2007 due primarily to increases in product margin, which includes
vendor funding, of over 90 basis points as well as an increase in agency fees for Microsoft
enterprise agreement renewals of over 50 basis points.
EMEAs gross profit increased for the nine months ended September 30, 2008 by 20% compared to
the nine months ended September 30, 2007. As a percentage of net sales, gross profit increased by
approximately 170 basis points from the nine months ended September 30, 2007 due primarily to
increases in product margin, which includes vendor funding, of over 110 basis points as well as an
increase in agency fees for Microsoft enterprise agreement renewals of over 60 basis points. More
specifically with regard to vendor funding, we have enjoyed an increase in amounts earned under
rebate programs with our hardware distributors as well as some of our non-Microsoft publishers in
EMEA. Additionally, we have experienced an increase in vendor funding of the type that is
classified as a reduction of costs of goods sold as opposed to a reduction in operating expenses.
APACs gross profit for the three months ended September 30, 2008 decreased by $136,000 or 3%
compared to the three months ended September 30, 2007. APACs gross profit increased for the nine
months ended September 30, 2008 by $4.7 million or 35% compared to the nine months ended September
30, 2007.
31
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Operating Expenses.
Selling and Administrative Expenses. Selling and administrative expenses increased
approximately 6% for both the three months ended September 30, 2008 compared to the three months
ended September 30, 2007 and the nine months ended September 30, 2008 compared to the nine months
ended September 30, 2007. Selling and
administrative expenses as a percent of net sales by operating segment for the three and nine
months ended September 30, 2008 and 2007 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Net |
|
|
|
2008 |
|
|
Sales |
|
|
2007 |
|
|
Sales |
|
|
2008 |
|
|
Sales |
|
|
2007 |
|
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
98,427 |
|
|
|
11.5 |
% |
|
$ |
93,742 |
|
|
|
11.5 |
% |
|
$ |
295,978 |
|
|
|
11.5 |
% |
|
$ |
289,605 |
|
|
|
11.5 |
% |
EMEA |
|
|
36,441 |
|
|
|
13.0 |
% |
|
|
33,165 |
|
|
|
12.5 |
% |
|
|
114,043 |
|
|
|
11.6 |
% |
|
|
98,646 |
|
|
|
10.7 |
% |
APAC |
|
|
4,330 |
|
|
|
13.2 |
% |
|
|
3,913 |
|
|
|
14.3 |
% |
|
|
14,040 |
|
|
|
12.3 |
% |
|
|
10,651 |
|
|
|
14.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
139,198 |
|
|
|
11.9 |
% |
|
$ |
130,820 |
|
|
|
11.8 |
% |
|
$ |
424,061 |
|
|
|
11.5 |
% |
|
$ |
398,902 |
|
|
|
11.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Americas selling and administrative expenses increased $4.7 million or 5% for the three
months ended September 30, 2008 compared to the three months ended September 30, 2007. The
increase in selling and administrative expenses is primarily attributable to incremental selling
and administrative expenses as a result of the acquisition of Calence of approximately $13.0
million during the three months ended September 30, 2008. The additional expenses resulting from
Calence were partially offset by decreases in selling and administrative expenses in the legacy
Insight business as a result of our expense management initiatives, reduced performance-based
compensation expense and the effect on the year over year comparison of the professional fees
associated with the review of our historical stock option practices of $2.5 million in the three
months ended September 30, 2007.
North Americas selling and administrative expenses were $296.0 million for the nine months
ended September 30, 2008, approximately 11.5% of net sales for the period, a level that was
consistent with the same period in the prior year. Incremental selling and administrative expenses
resulting from Calence since April 1, 2008 of $26.0 million were partially offset by decreases in
selling and administrative expenses in the legacy Insight business as a result of our expense
management initiatives as well as reduced performance-based compensation expense due to our
financial performance. Additionally, the 2008 period benefited from the fact that there were no
professional fees associated with the review of our historical stock option practices, whereas
selling and administrative expenses in the nine months ended September 30, 2007 included $12.5
million of such professional fees.
EMEAs selling and administrative expenses increased $3.3 million or 10% for the three months
ended September 30, 2008 compared to the three months ended September 30, 2007. The increase in
selling and administrative expenses is primarily attributable to salaries and wages,
employee-related expenses and contract labor, which increased $3.5 million due to increases in
sales incentive programs and employee headcount.
EMEAs selling and administrative expenses increased $15.4 million or 16% for the nine months
ended September 30, 2008 compared to the nine months ended September 30, 2007. The increase in
selling and administrative expenses is primarily attributable to salaries and wages,
employee-related expenses and contract labor, which increased due to increases in sales incentive
programs, increases in recruitment costs and employee headcount. The effect of currency exchange
rates between the weak U.S. dollar as compared to the various European currencies in which we do
business accounted for approximately $5 million of the net year over year increase.
APACs selling and administrative expenses increased 11% for the three months ended September
30, 2008 compared to the three months ended September 30, 2007 and increased 32% for the nine
months ended September 30, 2008 compared to the nine months ended September 30, 2007. These
increases were primarily due to the hiring of experienced software sales and support teammates
during the first quarter of 2008.
32
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Goodwill Impairment. As discussed in Note 3 to the Consolidated Financial Statements in Part
I, Item 1 of this report, we recorded a non-cash goodwill impairment charge during the three months
ended June 30, 2008 of $313.9 million, which represented the entire goodwill balance recorded in
our North America operating segment as of June 30, 2008.
Severance and Restructuring Expenses. During the nine months ended September 30, 2008, North
America, EMEA and APAC recorded severance expense of $2.3 million, $3.1 million, and $39,000,
respectively, related to on-going restructuring efforts. During the nine months ended September
30, 2007, North America recorded severance expense of $2.8 million related to the retirement of our
former chief financial officer.
Interest Income. Interest income for the three and nine months ended September 30, 2008 and
2007 was generated through short-term investments. The increase in interest income year over year
is due to improved cash management, partially offset by decreases in interest rates.
Interest Expense. Interest expense for the three and nine months ended September 30, 2008 and
2007 primarily relates to borrowings under our financing facilities. The increase in interest
expense for the three months ended September 30, 2008 compared to the three months ended September
30, 2007 is primarily a result of the increase in the weighted average borrowings outstanding
subsequent to the acquisition of Calence, partially offset by decreases in interest rates. The
decrease in interest expense for the nine months ended September 30, 2008 compared to the nine
months ended September 30, 2007 is due primarily to decreases in interest rates during the
respective periods, offset partially by an increase in the weighted average borrowings outstanding.
In conjunction with our refinancing of our existing term loan and revolving credit facility on
April 1, 2008 (discussed in Note 4 to the Consolidated Financial Statements in Part I, Item 1 if
this report), we recorded a loss on debt extinguishment of $591,000 in the second quarter of 2008
to write off a portion of our debt issue costs to interest expense.
Net Foreign Currency Exchange Losses (Gains). These losses (gains) result from foreign
currency transactions, including the period end remeasurement of intercompany balances that are not
considered long-term in nature. The changes in these amounts primarily result from software
licenses sold in various foreign currencies and procured in U.S. dollars, changes in the
intercompany balances of our foreign subsidiaries and the volatility of the related foreign
currency exchange rates.
Other Expense, Net. Other expense, net, consists primarily of bank fees associated with our
financing facilities and cash management and were not considered material during the three or nine
months ended September 30, 2008 or 2007.
Income Tax Expense. Our effective tax rate from continuing operations for the three months
ended September 30, 2008 was 22.2% compared to 40.6% for the three months ended September 30, 2007.
The decrease in the effective tax rate from continuing operations was due primarily to the benefit
of federal and state research and development credits of $1.1 million recorded during the three
months ended September 30, 2008 as well as an increase in the percentage of taxable income being
taxed in countries with lower tax rates than the U.S. Our effective tax rate from continuing
operations for the nine months ended September 30, 2008 changed to a benefit of 36.3% from an
expense of 39.1% for the nine months ended September 30, 2007. The change was primarily due to the
impairment charge related to non-deductible goodwill taken during the nine months ended September
30, 2008.
Earnings from a Discontinued Operation. As discussed in Note 12 to the Consolidated
Financial Statements in Part I, Item 1 of this report, we have reported the results of operations
of PC Wholesale, which we sold on March 1, 2007, along with the gain on sale of PC Wholesale, as a
discontinued operation in the Consolidated Statements of Operations for the nine months ended
September 30, 2007.
33
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources
The following table sets forth certain consolidated cash flow information for the nine months
ended September 30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
62,121 |
|
|
$ |
99,029 |
|
Net cash (used in) provided by investing activities |
|
|
(150,522 |
) |
|
|
1,020 |
|
Net cash provided by (used in) financing activities |
|
|
107,592 |
|
|
|
(108,655 |
) |
Foreign currency exchange effect on cash flow |
|
|
(3,458 |
) |
|
|
6,995 |
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
15,733 |
|
|
|
(1,611 |
) |
Cash and cash equivalents at beginning of period |
|
|
56,718 |
|
|
|
54,697 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
72,451 |
|
|
$ |
53,086 |
|
|
|
|
|
|
|
|
Cash and Cash Flow
Our primary uses of cash in the past few years have been to fund acquisitions, working capital
requirements and capital expenditures and to repurchase our common stock. Operating activities provided
$62.1 million in cash, a 37% decrease from the nine months ended September 30, 2007. Our operating
cash flows enabled us to fund $50.0 million of repurchases of our common stock during the
nine months ended September 30, 2008 and still increase our cash balance by $15.7 million. Capital
expenditures were $24.0 million for the nine months ended September 30, 2008, a 13% decrease from
the nine months ended September 30, 2007, primarily related to expenditures for our IT systems
upgrade. We increased our net borrowings by $128.8 million during the nine months ended September
30, 2008 and used those funds to acquire Calence on April 1,
2008. We also utilized our new inventory financing facility to fund
$18.2 million of net inventory purchases during the nine months
ended September 30, 2008. Additionally, the nine months
ended September 30, 2008 included a $3.5 million negative effect of foreign currency exchange rates
on cash flow.
We sold PC Wholesale in March 2007 and have presented it as a discontinued operation. Except
for net earnings, amounts related to the discontinued operation have not been removed from the cash
flow statement for the nine months ended September 30, 2007 because the effect is immaterial. See
Note 12 to the Consolidated Financial Statements in Part I, Item 1 of this report for further
discussion.
Net cash provided by operating activities. Cash flows from operating activities for the nine
months ended September 30, 2008 and 2007 resulted primarily from decreases in accounts receivable,
net earnings before the non-cash goodwill impairment during the nine months ended September 30,
2008, depreciation, amortization, decreases in other current assets, increases in accrued expenses
and other liabilities and non-cash stock-based compensation expense. These increases in operating
cash flows were partially offset by decreases in accounts payable, increases in deferred income tax
assets associated with the goodwill impairment during the nine months ended September 30, 2008 and
decreases in deferred revenue. The decreases in accounts receivable and accounts payable can be
primarily attributed to the seasonal decrease in net sales, offset partially by the effect of the
Calence acquisition, resulting in lower accounts receivable and accounts payable balances at
September 30, 2008 compared to December 31, 2007.
34
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Our consolidated cash flow operating metrics for the three months ended September 30, 2008 and
2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Days sales outstanding in ending accounts receivable (DSOs)(a) |
|
|
70 |
|
|
|
68 |
|
Inventory turns (excluding inventories not available for sale) (b) |
|
|
43 |
|
|
|
38 |
|
Days purchases outstanding in ending accounts payable (DPOs) (c) |
|
|
47 |
|
|
|
46 |
|
|
|
|
(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
92 days. |
|
(b) |
|
Calculated as annualized costs of goods sold divided by average inventories. Average
inventories is calculated as the sum of the balances of inventories at the beginning of the
quarter plus inventories at the end of quarter divided by two. |
|
(c) |
|
Calculated as the balances of accounts payable at the end of the period divided by
daily costs of goods sold. Daily costs of goods sold is calculated as costs of goods sold
for the quarter divided by 92 days. |
The increase in DSOs from the three months ended September 30, 2007 is due primarily to a
higher percentage of accounts receivable in foreign operations with longer net terms. The increase
in DPOs from the three months ended September 30, 2007 continues to reflect enhanced management of
working capital during the 2008 third quarter. These operating metrics include the effect of the
Calence acquisition in higher accounts receivable and accounts payable balances at September 30,
2008 compared to September 30, 2007 as well as higher net sales and costs of goods sold during the
three months ended September 30, 2008.
Assuming sales continue to increase in the future, we expect that cash flow from operating
activities will be used, at least partially, to fund working capital as we typically pay our
partners on average terms that are shorter than the average terms granted to our clients in order
to take advantage of supplier discounts.
Net cash (used in) provided by investing activities. During the nine months ended September
30, 2008, we used $132.3 million, net of cash acquired of $7.6 million, to acquire Calence and used
$957,000, net of cash acquired of $656,000, to acquire MINX. Capital expenditures of $24.0 million
and $27.6 million for the nine months ended September 30, 2008 and 2007, respectively, primarily
related to investments to upgrade our IT systems, including capitalized costs of software developed
for internal use, IT equipment and software licenses. We expect total capital expenditures in 2008
to be between $30.0 million and $35.0 million. During the nine months ended September 30, 2007, we
received net proceeds of $28.6 million from the sale of a discontinued operation. During the nine
months ended September 30, 2008, we made a payment of $900,000 to resolve certain post-closing
contingencies related to that sale.
Net cash provided by (used in) financing activities. During the nine months ended September
30, 2008, net borrowings under our financing facilities totaled $128.8 million. The increase in
our outstanding debt balances primarily related to the acquisition of Calence on April 1, 2008.
Funds provided by new borrowings were utilized, in part, to repay $7.1 million of debt assumed from
Calence at closing. Additionally, $3.9 million in cash was used to repay debt assumed from MINX at
closing. During the nine months ended September 30, 2008, we also funded repurchases of 3.5
million shares of our common stock in open market transactions at a total cost of approximately
$50.0 million (an average price of $14.31 per share). These repurchases completed a program
previously approved by our Board of Directors authorizing the purchase of up to $50.0 million of
our
common stock through September 30, 2008. All shares repurchased had been retired as of June
30, 2008. During the nine months ended September 30, 2007, cash used in financing activities was
primarily for net repayments of outstanding debt of $87.3 million, a decrease in book overdrafts of
$23.9 million and repurchases of 887,000 shares of our common stock in open market transactions at
a total cost of $22.3 million (an averages price of $25.18 per share) under a previous share
repurchase program that was completed in the fourth quarter of 2007. During the nine months ended
September 30, 2007, cash of $24.3 million was provided by common stock issuances as a result of
stock option exercises.
35
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
On April 1, 2008, we entered into a new five-year $300.0 million senior revolving credit
facility, which replaced our existing revolving credit facility and our term loan facility. The
Calence acquisition was funded, in part, using borrowings under the new facility. Amounts
outstanding under the new senior revolving line of credit bear interest, payable quarterly, at a
floating rate equal to the prime rate or, at our option, a LIBOR rate plus a pre-determined spread
of 0.75% to 1.75%. In addition, we pay a commitment fee on the unused portion of the line of
0.175% to 0.35%. As of September 30, 2008, $137.1 million was available under the senior revolving
credit facility. The senior revolving credit facility matures on April 1, 2013.
On September 17, 2008, we entered into an agreement which provides for a new facility to
purchase inventory from a list of approved vendors. The aggregate availability for vendor
purchases under the inventory financing facility is $90.0 million, and the facility matures on
April 1, 2013 but may be cancelled with 90 days notice. Additionally, the facility may be renewed
under certain circumstances described in the agreement for successive twelve month periods.
Interest does not accrue on accounts payable under this facility provided the accounts payable are
paid within stated vendor terms (ranging from 30 to 60 days). If balances are not paid within
stated vendor terms, they will accrue interest at prime plus 1.25%.
Net borrowings under the facility were $18.2 million during the
nine months ended September 30, 2008. Consistent with the
current cash flow presentation, net borrowings of $16.9 million
under a prior inventory financing facility assumed in the acquisition
of Calence during the three months ended June 30, 2008 have been
presented as cash flows from financing activities in this filing.
As of September 30, 2008, $39.8 million was available for
inventory purchases under this facility.
Also,
on September 17, 2008, we amended certain provisions of our accounts receivable securitization
facility, which was to have expired on September 7, 2009, including, among other provisions, (i) a
reduction in the facility amount effective December 17, 2008 from $225.0 million to $150.0 million,
(ii) an increase in the permissible delinquency ratio, and (iii) the creation of a new one-year
term through September 17, 2009. No amounts are available at September 30, 2008.
We anticipate that cash flows from operations, together with the funds available under our
financing facilities will be adequate to support our presently anticipated cash and working capital
requirements for operations over the next twelve months. Additionally, we expect to use any excess
cash primarily to reduce outstanding debt and to fund additional acquisitions and/or repurchases of
our common stock. As part of our long-term growth strategy, we intend to consider additional
acquisition opportunities from time to time, which may require additional debt or equity financing.
Cash and cash equivalents held by foreign subsidiaries are generally subject to U.S. income
taxation upon repatriation to the U.S. For foreign entities not treated as branches for U.S. tax
purposes, we do not provide for U.S. income taxes on the undistributed earnings of these
subsidiaries as earnings are reinvested and, in the opinion of management, will continue to be
reinvested indefinitely outside of the U.S. As of September 30, 2008, we had approximately $66.8
million in cash and cash equivalents resident in our foreign subsidiaries.
Off Balance Sheet Arrangements
We have entered into off-balance sheet arrangements, which include guaranties and
indemnifications, as defined by the SECs Final Rule 67, Disclosure in Managements Discussion and
Analysis About Off-Balance Sheet Arrangements and Aggregate Contractual Obligations. These
guaranties and indemnifications are discussed in Note 11 to our Consolidated Financial Statements
in Part I, Item 1 of this report. We believe that none of our off-balance sheet arrangements has,
or is reasonably likely to have, a material current or future effect on our financial condition,
results of operations, liquidity, capital expenditures or capital resources.
Recently Issued Accounting Pronouncements
Other than the partial adoption of Statement of Financial Accounting Standard No. 157 Fair
Value Measurements (SFAS No. 157) effective January 1, 2008, as discussed in Note 8, there have
been no material changes or additions to the recently issued accounting pronouncements as
previously reported in Note 1 to our Consolidated Financial Statements in Part II, Item 8 of our
Annual Report on Form 10-K for the year ended December 31, 2007 which affect or may affect our
financial statements.
36
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Contractual Obligations
At September 30, 2008, our contractual obligations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
Less than |
|
|
1-3 |
|
|
3-5 |
|
|
More than 5 |
|
|
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
Long-Term Debt (a) |
|
$ |
331,027 |
|
|
$ |
168,374 |
|
|
$ |
|
|
|
$ |
162,653 |
|
|
$ |
|
|
Inventory
financing facility (b) |
|
|
50,228 |
|
|
|
50,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease obligations (c) |
|
|
62,499 |
|
|
|
13,260 |
|
|
|
19,125 |
|
|
|
14,043 |
|
|
|
16,071 |
|
Severance and restructuring
obligations (d) |
|
|
7,850 |
|
|
|
5,550 |
|
|
|
2,300 |
|
|
|
|
|
|
|
|
|
Other
contractual obligations (e) |
|
|
59,779 |
|
|
|
16,899 |
|
|
|
20,077 |
|
|
|
14,758 |
|
|
|
8,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
511,383 |
|
|
$ |
254,311 |
|
|
$ |
41,502 |
|
|
$ |
191,454 |
|
|
$ |
24,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
On April 1, 2008, we entered into a new five-year $300.0 million senior revolving
credit facility, which replaced our existing revolving credit facility and our term loan
facility. As such, amounts included in our contractual obligations table above have been
updated to reflect the $162.7 million outstanding at September 30, 2008 under our senior
revolving credit facility as due in April 2013, the date at which the new facility matures.
The current portion of our long-term debt also includes our accounts receivable
securitization facility that expires in September 2009. See further discussion in Note 4
to the Consolidated Financial Statements in Part I, Item 1 of this report. |
|
(b) |
|
On September 17, 2008, we entered into an agreement which
provides for a new facility to purchase inventory from a list of
approved vendors. See further discussion in Note 4 to the
Consolidated Financial Statements in Part I, Item 1 of this
report. As of September 30, 2008, $50.2 million was
included in accounts payable related to this facility and has been
included in our contractual obligations table above as being due
within the 30- to 60-day stated vendor terms. |
|
(c) |
|
As there were no material changes in our operating lease obligations during the nine
months ended September 30, 2008, amounts included in the table above reflect our operating
lease obligations as of December 31, 2007 as reported in Part II, Item 7 of our Annual
Report on From 10-K for the year ended December 31, 2007. |
|
(d) |
|
As a result of approved severance and restructuring plans, we expect future cash
expenditures related to employee termination benefits and facilities based costs. See
further discussion in Note 6 to the Consolidated Financial Statements in Part I, Item 1 of
this report. |
|
(e) |
|
The table above includes: |
|
I. |
|
Estimated interest payments of $6.5 million in each of the next four and
a half years, based on the current debt balance of $162.7 million at September 30,
2008 under the senior revolving credit facility, multiplied by the weighted average
interest rate for the three months ended September 30, 2008 of 4.02% per annum. |
|
|
II. |
|
Estimated interest payments of $5.9 million in the next year, based on
the current debt balance of $168.4 million at September 30, 2008 under the asset
backed securitization facility, multiplied by the weighted average interest rate for
the three months ended September 30, 2008 of 3.51% per annum. |
|
|
III. |
|
Amounts totaling $8.4 million over the next six years to the Valley of the Sun Bowl
Foundation for sponsorship of the Insight Bowl and $8.8 million over the next eight years
for advertising and marketing events with the Arizona Cardinals NFL team at the
University of Phoenix stadium. See further discussion in Note 15 to the Consolidated
Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year
ended December 31, 2007. |
37
INSIGHT ENTERPRISES, INC.
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IV. |
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During the year ended December 31, 2005, we adopted FIN No. 47,
Accounting for Conditional Asset Retirement Obligations, which states that
companies must recognize a liability for the fair value of a legal obligation to
perform asset-retirement activities that are conditional on a future event if the
amount can be reasonably estimated. We estimate that we will owe $3.2 million in
future years in connection with these obligations. |
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V. |
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In July 2007, we signed a statement of work with a third party that was
engaged to assist us in integrating into our IT system our hardware, services and
software distribution operations in the U.S., Canada, EMEA and APAC. During the
quarter ended March 31, 2008, we renegotiated the contract to include a new scope of
work, whereby we agreed to engage the third party on current and future IT related
projects. The new commitments approximate $4.0 million over 18 to 24 months. |
The table above excludes $4.0 million of liabilities under FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, as we are unable to reasonably estimate the ultimate
amount or timing of settlement. See further discussion in Note 5 to the Consolidated Financial
Statements in Part I, Item 1 of this report and Note 11 to the Consolidated Financial Statements in
Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2007.
Although we set purchase targets with our partners tied to the amount of supplier
reimbursements we receive, we have no material contractual purchase obligations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in our reported market risks, as described in
Quantitative and Qualitative Disclosures About Market Risk in Part II, Item 7A of our Annual
Report on Form 10-K for the year ended December 31, 2007.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, as of the end of the period covered in this report, evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) and determined that as of September 30, 2008 our disclosure controls and procedures were
effective to ensure that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SECs rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30,
2008 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Inherent Limitations of Disclosure Controls and Internal Control Over Financial Reporting
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Projections of any evaluation of effectiveness to future periods are
subject to risks that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
38
INSIGHT ENTERPRISES, INC.
Part II OTHER INFORMATION
Item 1. Legal Proceedings.
We are party to various legal proceedings arising in the ordinary course of business,
including preference payment claims asserted in client bankruptcy proceedings, claims of alleged
infringement of patents, trademarks, copyrights and other intellectual property rights, claims of
alleged non-compliance with contract provisions and claims related to alleged violations of laws
and regulations.
In accordance with SFAS No. 5, Accounting for Contingencies (SFAS No. 5), we make a
provision for a liability when it is both probable that a liability has been incurred and the
amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly
and are adjusted to reflect the effects of negotiations, settlements, rulings, advice of legal
counsel and other information and events pertaining to a particular claim. Although litigation is
inherently unpredictable, we believe that we have adequate provisions for any probable and
estimable losses. It is possible, nevertheless, that the results of our operations or cash flows
could be materially and adversely affected in any particular period by the resolution of a legal
proceeding. Legal expenses related to defense, negotiations, settlements, rulings and advice of
outside legal counsel are expensed as incurred.
In October 2006, we received a letter of informal inquiry from the SEC requesting certain
documents relating to our historical stock option grants and practices. On August 12, 2008, the
staff of the SEC notified the Company that the SECs investigation into the Companys stock option
grant practices has been completed and that the staff does not intend to recommend any enforcement
action by the SEC against the Company.
Software Spectrum, Inc., as successor to CS&T, is party to litigation brought in the Belgian
courts regarding a dispute over the terms of a tender awarded by the Belgian Ministry of Defence
(MOD) in November 2000. In February 2001, CS&T brought a breach of contract suit against MOD in
the Court of First Instance in Brussels and claimed breach of contract damages in the amount of
approximately $150,000. MOD counterclaimed against CS&T in the amount of approximately $2.7
million, and CS&T added two European subsidiaries of Microsoft as defendants. We have filed a
defense to the counterclaim. The proceedings are currently stayed, and we are in negotiations to
settle the dispute with all parties.
On March 10, 2008, TeleTech Holdings, Inc. (Teletech) sent us a demand for arbitration
pursuant to the Stock Purchase Agreement (SPA) entered into between the parties, whereby TeleTech
acquired Direct Alliance Corporation (DAC), a former subsidiary of Insight, effective June 30,
2006. TeleTech claims that it is entitled to a $5.0 million clawback under the SPA relating to
the non-renewal of an agreement between DAC and one of its clients. We dispute Teletechs
allegations and intend to vigorously defend this matter. In recording the disposition of DAC on
June 30, 2006, we deferred the $5.0 million as a contingent gain on sale related to this clawback.
On April 1, 2008, we completed the acquisition of Calence pursuant to an agreement and plan of
merger (the Merger Agreement), a related support agreement (the Support Agreement) and other
ancillary agreements. In April 2008, in connection with an investigation being conducted by the
United States Department of Justice (the DOJ), Calence received a subpoena from the Office of the
Inspector General of the Federal Communications Commission (the FCC) requesting documents related
to the award, by the Universal Service Administration Company (USAC), of funds under the E-Rate
program to a participating school district. The E-Rate program provides schools and libraries with
discounts to obtain affordable telecommunications and internet access. No allegations have been
made against Calence, and we are cooperating with the FCC, USAC and the DOJ and are in the process
of responding to the subpoena. Pursuant to the Merger Agreement and the Support
Agreement, the former owners of Calence have agreed to indemnify us for certain damages that may
arise out of or result from this matter, including our fees and expenses for responding to the
subpoena. Management believes that the ultimate outcome of these legal proceedings will not have a
material effect on our results of operations.
Management believes that the ultimate outcome of these legal proceedings will not have a
material effect on our results of operations.
39
INSIGHT ENTERPRISES, INC.
Item 1A. Risk Factors.
In addition to the other information set forth in this report, current and potential
stockholders should carefully consider the factors discussed in Part I, Item 1A, Risk Factors, in
our Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect
our business, financial condition or future results. We believe that as of September 30, 2008,
there has been no material change to this information other than the additional risks associated
with the current economic environment described below. The risks described in our Annual Report on
Form 10-K are not the only risks facing our company. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial may also materially adversely
affect our business, financial condition or operating results.
General economic conditions, including concerns regarding a global recession and credit
constraints, or unfavorable economic conditions in a particular region, business or industry
sector, may lead our clients to delay or forgo investments in IT hardware, software and services,
either of which could adversely affect our business, financial condition, operating results and
cash flow.
A general slowdown or recession in the global economy, or in a particular region, or business
or industry sector, or sustained or further tightening of credit markets, could cause our clients
to: have difficulty accessing credit sources; delay contractual payments; or delay or forgo
decisions to (i) upgrade or add to their existing IT environments, (ii) license new software or
(iii) purchase services (particularly with respect to discretionary spending for hardware, software
and services). Such events could adversely affect our business, financial condition, operating
results and cash flow.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of equity securities during the three months ended September
30, 2008.
We have never paid a cash dividend on our common stock, and our financing facilities prohibit
the payment of cash dividends without the lenders consent.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
40
INSIGHT ENTERPRISES, INC.
Item 6. Exhibits.
(a) Exhibits (unless otherwise noted, exhibits are filed herewith).
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Exhibit No. |
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Description |
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3.1 |
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Composite Certificate of Incorporation of Insight Enterprises, Inc. (incorporated
by reference to Exhibit 3.1 of our Annual Report on Form 10-K for the year ended
December 31, 2005 filed on February 17, 2006, File No. 0-25092). |
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3.2 |
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Amended and Restated Bylaws of Insight Enterprises, Inc. (incorporated by
reference to Exhibit 3.1 of our Current Report on Form 8-K filed on January 14,
2008, File No. 0-25092). |
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4.1 |
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Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of
our Registration Statement on Form S-1 (No. 33-86142) declared effective January
24, 1995). |
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4.2 |
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Stockholder Rights Agreement and Exhibits A and B (incorporated by reference to
Exhibit 4.1 of our Current Report on Form 8-K filed on March 17, 1999, File No.
0-25092). |
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10.1 |
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Credit Agreement, dated as of September 17, 2008, among Calence, LLC, Insight
Direct USA, Inc., Insight Public Sector, Inc., Castle Pines Capital LLC, as an
administrative agent, Wells Fargo Foothill, LLC, as an administrative agent, as
syndication agent and as collateral agent, and the lenders party thereto
(incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K
filed on September 23, 2008, File No. 0-25092). |
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10.2 |
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Amendment No. 1 to Second Amended and Restated Credit Agreement, dated as of
September 17, 2008, among Insight Enterprises, Inc., Insight Direct (UK) Ltd.,
Insight Enterprises B.V., JPMorgan Chase Bank, National Association, as
Administrative Agent, and certain lenders identified therein (incorporated by
reference to Exhibit 10.2 of our Current Report on Form 8-K filed on September
23, 2008, File No. 0-25092). |
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10.3 |
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Amendment No. 9 to Receivables Purchase Agreement, dated as of September 17,
2008, among Insight Receivables, LLC, Insight Enterprises, Inc., JPMorgan Chase
Bank, N. A., as Agent, and JS Siloed Trust (incorporated by reference to Exhibit
10.3 of our Current Report on Form 8-K filed on September 23, 2008, File No.
0-25092). |
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10.4 |
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First Amendment to Insight Enterprises, Inc. 2007 Omnibus Plan |
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10.5 |
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Executive Management Separation Plan |
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31.1 |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
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31.2 |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
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32.1 |
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Section 1350 Certification of Chief Executive Officer and Chief Financial Officer. |
41
INSIGHT ENTERPRISES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: November 6, 2008
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INSIGHT ENTERPRISES, INC. |
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By:
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/s/ Richard A. Fennessy |
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Richard A. Fennessy |
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President and Chief Executive Officer |
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(Duly Authorized Officer) |
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By:
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/s/ Glynis A. Bryan |
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Glynis A. Bryan |
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Chief Financial Officer |
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(Principal Financial Officer) |
42
INSIGHT ENTERPRISES, INC.
EXHIBIT INDEX
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Exhibit No. |
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Description |
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3.1 |
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Composite Certificate of Incorporation of Insight Enterprises, Inc. (incorporated
by reference to Exhibit 3.1 of our Annual Report on Form 10-K for the year ended
December 31, 2005 filed on February 17, 2006, File No. 0-25092). |
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3.2 |
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Amended and Restated Bylaws of Insight Enterprises, Inc. (incorporated by
reference to Exhibit 3.1 of our Current Report on Form 8-K filed on January 14,
2008, File No. 0-25092). |
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4.1 |
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Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of
our Registration Statement on Form S-1 (No. 33-86142) declared effective January
24, 1995). |
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4.2 |
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Stockholder Rights Agreement and Exhibits A and B (incorporated by reference to
Exhibit 4.1 of our Current Report on Form 8-K filed on March 17, 1999, File No.
0-25092). |
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10.1 |
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Credit Agreement, dated as of September 17, 2008, among Calence, LLC, Insight
Direct USA, Inc., Insight Public Sector, Inc., Castle Pines Capital LLC, as an
administrative agent, Wells Fargo Foothill, LLC, as an administrative agent, as
syndication agent and as collateral agent, and the lenders party thereto
(incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K
filed on September 23, 2008, File No. 0-25092). |
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10.2 |
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Amendment No. 1 to Second Amended and Restated Credit Agreement, dated as of
September 17, 2008, among Insight Enterprises, Inc., Insight Direct (UK) Ltd.,
Insight Enterprises B.V., JPMorgan Chase Bank, National Association, as
Administrative Agent, and certain lenders identified therein (incorporated by
reference to Exhibit 10.2 of our Current Report on Form 8-K filed on September
23, 2008, File No. 0-25092). |
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10.3 |
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Amendment No. 9 to Receivables Purchase Agreement, dated as of September 17,
2008, among Insight Receivables, LLC, Insight Enterprises, Inc., JPMorgan Chase
Bank, N. A., as Agent, and JS Siloed Trust (incorporated by reference to Exhibit
10.3 of our Current Report on Form 8-K filed on September 23, 2008, File No.
0-25092). |
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10.4 |
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First Amendment to Insight Enterprises, Inc. 2007 Omnibus Plan |
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10.5 |
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Executive Management Separation Plan |
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31.1 |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
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31.2 |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
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32.1 |
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Section 1350 Certification of Chief Executive Officer and Chief Financial Officer. |
43