e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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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: June 30, 2007
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 o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer 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 |
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 August 2, 2007 was 49,100,749.
INSIGHT ENTERPRISES, INC.
QUARTERLY REPORT ON FORM 10-Q
Three Months Ended June 30, 2007
TABLE OF CONTENTS
2
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 from continuing
operations, non-operating income and expenses, earnings from discontinued operations or net
earnings; effects of acquisitions or dispositions; projections of capital expenditures and growth;
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; 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. 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, which are discussed in
Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31,
2006:
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changes in the information technology industry and/or the economic environment; |
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our reliance on suppliers for product availability, marketing funds, purchasing
incentives and competitive products to sell; |
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disruptions in our information technology and voice and data networks, including
migration of Software Spectrum to our information technology and voice and data networks; |
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the integration and operation of Software Spectrum, including our ability to achieve the
expected benefits of the acquisition; |
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actions of our competitors, including manufacturers of products we sell; |
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the informal inquiry from the Securities and Exchange Commission (SEC) and the fact
that we could be subject to stockholder litigation related to the investigation by the
Options Subcommittee of our Board of Directors into our historical stock option granting
practices and the related restatement of our consolidated financial statements; |
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the recently enacted changes in securities laws and regulations, including potential
risk resulting from our evaluation of internal controls under the Sarbanes-Oxley Act of
2002; |
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the risks associated with international operations; |
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sales of software licenses are subject to seasonal changes in demand; |
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increased debt and interest expense and lower availability on our financing facilities; |
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increased exposure to currency exchange risks; |
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our dependence on key personnel; |
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risk that purchased goodwill or amortizable intangible assets become impaired; |
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our failure to comply with the terms and conditions of our public sector contracts; |
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risks associated with our very limited experience in outsourcing business functions to India; |
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rapid changes in product standards; and |
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intellectual property infringement claims. |
Additionally, there may be other risks that are otherwise described from time to time in the
reports that we file with the SEC.
In addition, these forward-looking statements include statements regarding the informal
inquiry commenced by the SEC and a stockholders demand to inspect our books and records pursuant
to Section 220 of the Delaware General Corporation Law. There can be no assurances that
forward-looking statements will be achieved, and actual results could differ materially from those
suggested by the forward-looking statements.
3
INSIGHT ENTERPRISES, INC.
Important factors that could cause actual results to differ materially include: adjustments to the
consolidated financial statements that may be required related to the SEC informal inquiry; and
risks of litigation and governmental or other regulatory inquiries or proceedings arising out of or
related to the Companys historical stock option granting practices. Therefore, 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.
4
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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June 30, |
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December 31, |
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2007 |
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2006 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
46,144 |
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$ |
54,697 |
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Accounts receivable, net of allowances for doubtful
accounts of $23,450 and $23,211, respectively |
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1,029,215 |
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994,892 |
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Inventories |
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98,419 |
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97,751 |
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Inventories not available for sale |
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20,040 |
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31,112 |
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Deferred income taxes |
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13,812 |
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15,583 |
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Other current assets |
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20,923 |
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32,359 |
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Total current assets |
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1,228,553 |
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1,226,394 |
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Property and equipment, net of accumulated depreciation of $92,000
and $87,046, respectively |
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137,546 |
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129,256 |
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Buildings held for lease, net of accumulated depreciation of $4,926
and $4,543, respectively |
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16,139 |
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16,522 |
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Goodwill |
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300,133 |
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296,781 |
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Intangible assets, net of accumulated amortization of $9,309 and
$3,976, respectively |
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82,834 |
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86,929 |
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Deferred income taxes |
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2,908 |
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Other long-term assets |
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18,618 |
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18,269 |
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$ |
1,786,731 |
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$ |
1,774,151 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
708,542 |
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$ |
611,367 |
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Accrued expenses and other current liabilities |
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116,797 |
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136,401 |
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Current portion of long-term debt |
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15,000 |
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15,000 |
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Deferred revenue |
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27,618 |
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40,728 |
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Line of credit |
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42,000 |
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15,000 |
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Total current liabilities |
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909,957 |
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818,496 |
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Long-term debt |
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84,500 |
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224,250 |
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Long-term deferred income taxes |
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17,787 |
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19,403 |
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Other long-term liabilities |
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25,574 |
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21,652 |
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1,037,818 |
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1,083,801 |
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Commitments and contingencies (Note 10) |
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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, $0.01 par value, 100,000 shares authorized;
49,101 shares at June 30, 2007 and 48,868 shares at
December 31, 2006 issued and outstanding |
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491 |
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489 |
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Additional paid-in capital |
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371,424 |
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363,308 |
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Retained earnings |
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341,741 |
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297,664 |
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Accumulated other comprehensive income foreign currency
translation adjustment |
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35,257 |
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28,889 |
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Total stockholders equity |
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748,913 |
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690,350 |
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$ |
1,786,731 |
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$ |
1,774,151 |
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See accompanying notes to consolidated financial statements.
5
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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As Restated (1) |
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Net sales |
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$ |
1,283,449 |
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$ |
780,346 |
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$ |
2,407,424 |
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$ |
1,513,170 |
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Costs of goods sold |
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1,098,636 |
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678,200 |
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2,069,436 |
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1,313,918 |
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Gross profit |
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184,813 |
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102,146 |
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337,988 |
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199,252 |
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Selling and administrative expenses |
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138,323 |
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79,534 |
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268,081 |
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155,639 |
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Severance and restructuring expenses |
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2,841 |
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2,841 |
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Earnings from operations |
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43,649 |
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22,612 |
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67,066 |
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43,613 |
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Non-operating (income) expense: |
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Interest income |
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(2,182 |
) |
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(1,086 |
) |
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(4,294 |
) |
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(2,008 |
) |
Interest expense |
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4,767 |
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272 |
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10,526 |
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1,069 |
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Net foreign currency exchange (gain) loss |
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(3,002 |
) |
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(7 |
) |
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(3,656 |
) |
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24 |
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Other expense, net |
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496 |
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|
158 |
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713 |
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320 |
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Earnings from continuing operations before income
taxes |
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43,570 |
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23,275 |
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63,777 |
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44,208 |
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Income tax expense |
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16,761 |
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8,106 |
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24,672 |
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15,597 |
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Net earnings from continuing operations |
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26,809 |
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15,169 |
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39,105 |
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28,611 |
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Earnings from discontinued operations, net of taxes of
$0, $1,005, $111 and $1,870, respectively |
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1,574 |
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171 |
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2,956 |
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Gain on sale of discontinued operations, net of taxes of
$0, $5,978, $3,135 and $5,978, respectively |
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9,144 |
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4,801 |
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9,144 |
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Net earnings from discontinued operations |
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10,718 |
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4,972 |
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12,100 |
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Net earnings |
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$ |
26,809 |
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$ |
25,887 |
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$ |
44,077 |
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$ |
40,711 |
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Net earnings per share Basic: |
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Net earnings from continuing operations |
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$ |
0.55 |
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$ |
0.32 |
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$ |
0.80 |
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$ |
0.60 |
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Net earnings from discontinued operations |
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0.22 |
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0.10 |
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0.25 |
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Net earnings per share |
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$ |
0.55 |
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$ |
0.54 |
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$ |
0.90 |
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$ |
0.85 |
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Net earnings per share Diluted: |
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Net earnings from continuing operations |
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$ |
0.54 |
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$ |
0.31 |
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$ |
0.79 |
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$ |
0.59 |
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Net earnings from discontinued operations |
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0.22 |
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0.10 |
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0.25 |
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Net earnings per share |
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$ |
0.54 |
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$ |
0.53 |
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$ |
0.89 |
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$ |
0.84 |
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Shares used in per share calculations: |
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Basic |
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49,099 |
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|
48,277 |
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49,054 |
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|
48,140 |
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Diluted |
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49,402 |
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48,352 |
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49,346 |
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48,234 |
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(1) |
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See Note 2 Restatement of Consolidated Financial Statements. |
See accompanying notes to consolidated financial statements.
6
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Six Months Ended June 30, |
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2007 |
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2006 |
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As Restated (1) |
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Cash flows from operating activities: |
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Net earnings from continuing operations |
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$ |
39,105 |
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$ |
28,611 |
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Plus: net earnings from discontinued operations |
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|
4,972 |
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|
12,100 |
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Net earnings |
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|
44,077 |
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|
40,711 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
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Depreciation and amortization |
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|
17,641 |
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|
9,086 |
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Provision for losses on accounts receivable |
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|
1,459 |
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|
1,483 |
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Write-downs of inventories |
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|
2,841 |
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|
4,748 |
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Non-cash stock-based compensation |
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|
5,663 |
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|
6,254 |
|
Gain on sale of discontinued operation |
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(7,937 |
) |
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|
(15,122 |
) |
Excess tax benefit from employee gains on stock-based compensation |
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(45 |
) |
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|
(895 |
) |
Deferred income taxes |
|
|
(2,753 |
) |
|
|
(6,724 |
) |
Changes in assets and liabilities: |
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(Increase) decrease in accounts receivable |
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(42,488 |
) |
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|
20,048 |
|
Decrease in inventories |
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|
484 |
|
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|
39,379 |
|
Decrease (increase) in other current assets |
|
|
11,759 |
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(2,120 |
) |
Increase in other assets |
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(2,221 |
) |
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(14,625 |
) |
Increase in accounts payable |
|
|
105,175 |
|
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|
55,459 |
|
Decrease in inventories financing facility |
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(4,281 |
) |
Decrease in deferred revenue |
|
|
(12,937 |
) |
|
|
(6,521 |
) |
Decrease in accrued expenses and other liabilities |
|
|
(17,172 |
) |
|
|
(95 |
) |
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|
Net cash provided by operating activities |
|
|
103,546 |
|
|
|
126,785 |
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Cash flows from investing activities: |
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|
|
|
|
|
|
Proceeds from sale of discontinued operation |
|
|
28,631 |
|
|
|
46,500 |
|
Purchases of property and equipment |
|
|
(18,867 |
) |
|
|
(17,187 |
) |
|
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|
|
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Net cash provided by investing activities |
|
|
9,764 |
|
|
|
29,313 |
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|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Repayments on short-term financing facility |
|
|
|
|
|
|
(45,000 |
) |
Borrowings on long-term financing facility |
|
|
262,000 |
|
|
|
|
|
Repayments on long-term financing facility |
|
|
(398,000 |
) |
|
|
|
|
Repayments on term loan |
|
|
(3,750 |
) |
|
|
|
|
Net repayments on line of credit |
|
|
27,000 |
|
|
|
(21,309 |
) |
Proceeds from sales of common stock under employee stock plans |
|
|
2,475 |
|
|
|
7,391 |
|
Excess tax benefit from employee gains on stock-based compensation |
|
|
45 |
|
|
|
895 |
|
Decrease in book overdrafts |
|
|
(15,606 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(125,836 |
) |
|
|
(58,023 |
) |
|
|
|
|
|
|
|
Cash flows from discontinued operation: |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
|
|
|
|
(8,885 |
) |
Net cash provided by investing activities |
|
|
|
|
|
|
11,710 |
|
Net cash used in financing activities |
|
|
|
|
|
|
(2,696 |
) |
|
|
|
|
|
|
|
Net cash provided by discontinued operation |
|
|
|
|
|
|
129 |
|
|
|
|
|
|
|
|
Foreign currency exchange effect on cash flow |
|
|
3,973 |
|
|
|
4,903 |
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
|
|
(8,553 |
) |
|
|
103,107 |
|
Cash and cash equivalents at beginning of period |
|
|
54,697 |
|
|
|
35,145 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
46,144 |
|
|
$ |
138,252 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 2 Restatement of Consolidated Financial Statements. |
See accompanying notes to consolidated financial statements
7
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 and public sector institutions in
North America, Europe, the Middle East, Africa and Asia-Pacific. We operate in three reportable
geographic operating segments: 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.
The accompanying unaudited consolidated financial statements contain all adjustments necessary
to present fairly our financial position as of June 30, 2007, our results of operations for the
three and six months ended June 30, 2007 and 2006 and our cash flows for the six months ended June
30, 2007 and 2006. The consolidated balance sheet as of December 31, 2006 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, 2006.
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.
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
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, 2006 which effect the
Companys financial statements.
8
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
2. Restatement of Consolidated Financial Statements
The following table presents the effect of the financial statement restatement adjustments on
the Companys previously reported consolidated statements of earnings for the six months ended June
30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2006 |
|
|
|
|
|
|
|
Discontinued |
|
|
|
|
|
|
|
|
|
As Reported |
|
|
Operation(B) |
|
|
Adjustments |
|
|
As Restated |
|
Net sales |
|
$ |
1,626,007 |
|
|
$ |
(112,837 |
) |
|
$ |
|
|
|
$ |
1,513,170 |
|
Costs of goods sold |
|
|
1,422,702 |
|
|
|
(108,784 |
) |
|
|
|
|
|
|
1,313,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
203,305 |
|
|
|
(4,053 |
) |
|
|
|
|
|
|
199,252 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
159,263 |
|
|
|
(2,624 |
) |
|
|
(1,000 |
)(A) |
|
|
155,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations |
|
|
44,042 |
|
|
|
(1,429 |
) |
|
|
1,000 |
|
|
|
43,613 |
|
Non-operating (income) expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
(2,008 |
) |
|
|
|
|
|
|
|
|
|
|
(2,008 |
) |
Interest expense |
|
|
1,069 |
|
|
|
|
|
|
|
|
|
|
|
1,069 |
|
Net foreign currency exchange loss |
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
24 |
|
Other expense, net |
|
|
320 |
|
|
|
|
|
|
|
|
|
|
|
320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing
operations before income taxes |
|
|
44,637 |
|
|
|
(1,429 |
) |
|
|
1,000 |
|
|
|
44,208 |
|
Income tax expense |
|
|
15,773 |
|
|
|
(566 |
) |
|
|
390 |
(A) |
|
|
15,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing
operations |
|
|
28,864 |
|
|
|
(863 |
) |
|
|
610 |
|
|
|
28,611 |
|
Net earnings from
discontinued operation |
|
|
11,237 |
|
|
|
863 |
|
|
|
|
|
|
|
12,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
40,101 |
|
|
$ |
|
|
|
$ |
610 |
|
|
$ |
40,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing
operations |
|
$ |
0.60 |
|
|
$ |
(0.02 |
) |
|
$ |
0.02 |
|
|
$ |
0.60 |
|
Net earnings from discontinued
operation |
|
|
0.23 |
|
|
|
0.02 |
|
|
|
|
|
|
|
0.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share |
|
$ |
0.83 |
|
|
$ |
|
|
|
$ |
0.02 |
|
|
$ |
0.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing
operations |
|
$ |
0.59 |
|
|
$ |
(0.02 |
) |
|
$ |
0.02 |
|
|
$ |
0.59 |
|
Net earnings from discontinued
operation |
|
|
0.23 |
|
|
|
0.02 |
|
|
|
|
|
|
|
0.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share |
|
$ |
0.82 |
|
|
$ |
|
|
|
$ |
0.02 |
|
|
$ |
0.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
48,140 |
|
|
|
|
|
|
|
|
|
|
|
48,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
48,710 |
|
|
|
|
|
|
|
(476 |
)(C) |
|
|
48,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Adjustment to record a legal settlement expense that was recorded in the first
quarter of 2006, which should have been recorded in the fourth quarter of 2005, as
described in Note 2 to our Consolidated Financial Statements in Part II, Item 8 of our
Annual Report on Form 10-K for the year ended December 31, 2006. |
|
(B) |
|
Adjustment to reclassify the operations of PC Wholesale to discontinued
operations as described in Note 11. |
|
(C) |
|
Effect of adjustment for stock-based compensation expense pursuant to APB No.
25 and the associated income tax benefit, as described in Note 2 to our Consolidated
Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year
ended December 31, 2006. |
9
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table presents the effect of the restatement adjustments on the Companys
previously reported cash flow amounts for the six months ended June 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2006 |
|
|
|
|
|
|
|
Discontinued |
|
|
|
|
|
|
|
|
|
As Reported |
|
|
Operation(B) |
|
|
Adjustments |
|
|
As Restated |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations |
|
$ |
28,864 |
|
|
$ |
(863 |
) |
|
$ |
610 |
(A) |
|
$ |
28,611 |
|
Plus: net earnings from discontinued operations |
|
|
11,237 |
|
|
|
863 |
|
|
|
|
|
|
|
12,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
40,101 |
|
|
|
|
|
|
|
610 |
|
|
|
40,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net earnings to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
9,086 |
|
|
|
|
|
|
|
|
|
|
|
9,086 |
|
Provisions for losses on accounts receivable |
|
|
1,483 |
|
|
|
|
|
|
|
|
|
|
|
1,483 |
|
Write-downs of inventories |
|
|
4,748 |
|
|
|
|
|
|
|
|
|
|
|
4,748 |
|
Non-cash stock-based compensation expense |
|
|
6,254 |
|
|
|
|
|
|
|
|
|
|
|
6,254 |
|
Gain on sale of discontinued operation |
|
|
(15,122 |
) |
|
|
|
|
|
|
|
|
|
|
(15,122 |
) |
Deferred income taxes |
|
|
(6,724 |
) |
|
|
|
|
|
|
|
|
|
|
(6,724 |
) |
Excess tax benefit from employee gains on
stock-based compensation |
|
|
(2,232 |
) |
|
|
|
|
|
|
1,337 |
(C) |
|
|
(895 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in accounts receivable |
|
|
20,048 |
|
|
|
|
|
|
|
|
|
|
|
20,048 |
|
Decrease in inventories |
|
|
39,379 |
|
|
|
|
|
|
|
|
|
|
|
39,379 |
|
Increase in other current assets |
|
|
(2,120 |
) |
|
|
|
|
|
|
|
|
|
|
(2,120 |
) |
Increase in other assets |
|
|
(14,625 |
) |
|
|
|
|
|
|
|
|
|
|
(14,625 |
) |
Increase in accounts payable |
|
|
55,459 |
|
|
|
|
|
|
|
|
|
|
|
55,459 |
|
Decrease in inventories financing facility |
|
|
(4,281 |
) |
|
|
|
|
|
|
|
|
|
|
(4,281 |
) |
Decrease in deferred revenue |
|
|
(6,521 |
) |
|
|
|
|
|
|
|
|
|
|
(6,521 |
) |
Increase (decrease) in accrued expenses and
other liabilities |
|
|
515 |
|
|
|
|
|
|
|
(610 |
)(A) |
|
|
(95 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
125,448 |
|
|
|
|
|
|
|
1,337 |
|
|
|
126,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of discontinued operation |
|
|
46,500 |
|
|
|
|
|
|
|
|
|
|
|
46,500 |
|
Purchases of property and equipment |
|
|
(17,187 |
) |
|
|
|
|
|
|
|
|
|
|
(17,187 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
29,313 |
|
|
|
|
|
|
|
|
|
|
|
29,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments on short-term financing facility |
|
|
(45,000 |
) |
|
|
|
|
|
|
|
|
|
|
(45,000 |
) |
Net repayments on line of credit |
|
|
(21,309 |
) |
|
|
|
|
|
|
|
|
|
|
(21,309 |
) |
Proceeds from sales of common stock under
employee stock plans |
|
|
7,391 |
|
|
|
|
|
|
|
|
|
|
|
7,391 |
|
Excess tax benefit from employee gains on
stock-based compensation |
|
|
2,232 |
|
|
|
|
|
|
|
(1,337 |
)(C) |
|
|
895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(56,686 |
) |
|
|
|
|
|
|
(1,337 |
) |
|
|
(58,023 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
10
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2006 |
|
|
|
|
|
|
|
Discontinued |
|
|
|
|
|
|
|
|
|
As Reported |
|
|
Operation(B) |
|
|
Adjustments |
|
|
As Restated |
|
Cash flows from discontinued operation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(8,885 |
) |
|
|
|
|
|
|
|
|
|
|
(8,885 |
) |
Net cash provided by investing activities |
|
|
11,710 |
|
|
|
|
|
|
|
|
|
|
|
11,710 |
|
Net cash used in financing activities |
|
|
(2,696 |
) |
|
|
|
|
|
|
|
|
|
|
(2,696 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by discontinued operation |
|
|
129 |
|
|
|
|
|
|
|
|
|
|
|
129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange effect on cash flow |
|
|
4,903 |
|
|
|
|
|
|
|
|
|
|
|
4,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
103,107 |
|
|
|
|
|
|
|
|
|
|
|
103,107 |
|
Cash and cash equivalents at beginning of
period |
|
|
35,145 |
|
|
|
|
|
|
|
|
|
|
|
35,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
138,252 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
138,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Adjustment to record a legal settlement expense that was recorded in the first
quarter of 2006, which should have been recorded in the fourth quarter of 2005, as described
in Note 2 to our Consolidated Financial Statements in Part II, Item 8 of our Annual Report on
Form 10-K for the year ended December 31, 2006. |
|
(B) |
|
Adjustment to reclassify the operations of PC Wholesale to discontinued operations
as described in Note 11. |
|
(C) |
|
Adjustment to correct presentation of the excess tax benefit from employee gains on
stock-based compensation. |
3. Earnings Per Share (EPS)
Basic EPS is computed by dividing net earnings from continuing operations available to common
stockholders by the weighted-average number of common shares outstanding during each quarter.
Diluted EPS includes the effect of stock options assumed to be exercised and restricted stock using
the treasury stock method. A reconciliation of the denominators of the basic and diluted EPS
calculations is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Restated (1) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations |
|
$ |
26,809 |
|
|
$ |
15,169 |
|
|
$ |
39,105 |
|
|
$ |
28,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute basic EPS |
|
|
49,099 |
|
|
|
48,277 |
|
|
|
49,054 |
|
|
|
48,140 |
|
Dilutive potential common shares due to dilutive
options and restricted stock, net of tax effect |
|
|
303 |
|
|
|
75 |
|
|
|
292 |
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute diluted
EPS |
|
|
49,402 |
|
|
|
48,352 |
|
|
|
49,346 |
|
|
|
48,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.55 |
|
|
$ |
0.32 |
|
|
$ |
0.80 |
|
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.54 |
|
|
$ |
0.31 |
|
|
$ |
0.79 |
|
|
$ |
0.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 2 Restatement of Consolidated Financial Statements. |
The following weighted-average outstanding stock options during the three and six months ended
June 30, 2007 and 2006 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):
11
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Weighted-average
outstanding stock
options excluded
from the diluted
EPS calculation |
|
|
1,480 |
|
|
|
3,491 |
|
|
|
2,456 |
|
|
|
2,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Goodwill
The changes in the carrying amount of goodwill for the six months ended June 30, 2007 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
EMEA |
|
|
APAC |
|
|
Consolidated |
|
Balance at December 31, 2006 |
|
$ |
217,469 |
|
|
$ |
62,714 |
|
|
$ |
16,598 |
|
|
$ |
296,781 |
|
Foreign currency translation
adjustments |
|
|
990 |
|
|
|
1,432 |
|
|
|
930 |
|
|
|
3,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2007 |
|
$ |
218,459 |
|
|
$ |
64,146 |
|
|
$ |
17,528 |
|
|
$ |
300,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill represents the excess of the purchase price over the estimated fair values assigned
to tangible and identifiable intangible assets acquired and liabilities assumed from previous
acquisitions. In accordance with current accounting standards, goodwill is not amortized and will
be tested for impairment annually in the fourth quarter of our fiscal year, or more frequently if
indicators of potential impairment exist.
5. Debt
Our long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Term loan |
|
$ |
67,500 |
|
|
$ |
71,250 |
|
Accounts receivable securitization financing facility |
|
|
32,000 |
|
|
|
168,000 |
|
|
|
|
|
|
|
|
Total |
|
|
99,500 |
|
|
|
239,250 |
|
Less: current portion of term loan |
|
|
(15,000 |
) |
|
|
(15,000 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
84,500 |
|
|
$ |
224,250 |
|
|
|
|
|
|
|
|
Our financing facilities contain various covenants, including the requirement that we comply
with leverage and minimum fixed charge ratio requirements. If we fail to comply with these
covenants, the lenders would be able to demand payment within a specified period of time. Because
we were not current with our reporting obligations under the Securities Exchange Act of 1934
beginning on September 30, 2006 and ending on July 26, 2007, we would have been in violation of our
financial reporting covenants had we not obtained agreements with our lenders regarding the
delivery of substitute financial information to them. The agreements with our lenders waived our
obligation to provide the filed reports and waived any events of default occurring under the
facility as a result of our failure to comply with the financial reporting covenants. We have
since provided all late reports filed with the SEC to our lenders and are in compliance with this
reporting covenant at July 26, 2007 and all other covenants at June 30, 2007.
6. Income Taxes
Our effective tax rates from continuing operations for the three months ended June
30, 2007 and 2006 were 38.5% and 34.8%, respectively. For the three months ended June 30, 2007,
our effective tax rate 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. For the three months ended June 30, 2006, the effective tax rate
approximated the United States federal statutory rate because increases due primarily to state
12
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
income taxes, net of federal tax, were offset by internal initiatives implemented during the three
months ended June 30, 2006 that reduced certain state income taxes.
Our effective tax rates from continuing operations for the six months ended June 30, 2007 and
2006 were 38.7% and 35.3%, respectively. For the six months ended June 30, 2007, our effective tax
rate 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 and an increase in tax reserves in the first quarter of 2007. For the six months
ended June 30, 2006, our effective tax rate increased over the United States federal statutory rate
of 35.0% due primarily to state income taxes, net of federal tax, offset partially by a decrease in
tax reserves in the first quarter of 2006 due to the closing of an audit and a tax benefit recorded
in the second quarter of 2006 for internal initiatives that reduced certain state income taxes.
FIN 48 requires that companies recognize the effect of a tax position in their consolidated
financial statements if there is a greater likelihood than not of the position being sustained upon
audit based on the technical merits of the position. We adopted the provisions of FIN 48 effective
January 1, 2007. The adoption of FIN 48 resulted in no cumulative effect adjustment to our
retained earnings. However, in order to conform to the balance sheet presentation requirements of
FIN 48, we reclassified certain unrecognized tax benefits on our balance sheet from current assets
to non-current assets.
As of January 1, 2007 (the date we adopted FIN 48) and June 30, 2007 the Company had
approximately $10,300,000 and $12,000,000, respectively, of unrecognized tax benefits. Of these
amounts, approximately $1,500,000 and $2,000,000, respectively, relate to accrued interest.
Our policy to classify interest and penalties relating to uncertain tax positions as a
component of income tax expense in our consolidated statement of earnings did not change as a
result of implementing the provisions of FIN 48.
As of January 1, 2007, if recognized, $1,100,000 of the liability associated with uncertain
tax positions would affect the Companys effective tax rate. The remaining $9,200,000 balance
arose from business combinations that, if recognized, ultimately would be recorded as an adjustment
to goodwill or a receivable with no effect on the Companys effective tax rate.
Several of our subsidiaries are currently under audit for the 2002 through 2005 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 certain tax positions will significantly
decrease. However, based on the status of the examination, 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 2003
through 2006 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.
7. Restructuring and Acquisition Integration Activities
Acquisition-Related Cost Capitalized in 2006 as a Cost of Acquisition of Software Spectrum
We recorded $11,414,000 of employee termination benefits and 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 have been 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.
13
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The employee termination benefits relate to severance payments for Software Spectrum teammates
in North America and EMEA who have been or will be terminated in connection with integration plans.
The
facilities based costs relate to future lease payments or lease termination costs associated with
vacating Software Spectrum facilities.
The following table details the changes in these liabilities during the six months ended June
30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
EMEA |
|
|
Consolidated |
|
Balance at December 31, 2006 |
|
$ |
997 |
|
|
$ |
9,528 |
|
|
$ |
10,525 |
|
Foreign currency
translation adjustments |
|
|
|
|
|
|
201 |
|
|
|
201 |
|
Cash payments |
|
|
(24 |
) |
|
|
(1,134 |
) |
|
|
(1,158 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2007 |
|
$ |
973 |
|
|
$ |
8,595 |
|
|
$ |
9,568 |
|
|
|
|
|
|
|
|
|
|
|
Severance and restructuring activities expensed in 2005
During the year ended December 31, 2005, our EMEA operations moved into a new facility in the
United Kingdom and recorded restructuring costs of $7,458,000, of which $6,447,000 represented the
present value of the remaining lease obligations on the previous lease and $1,011,000 represented
duplicate rent expense for the new facility for the last half of 2005. At December 31, 2006, the
balance of these restructuring accruals was $6,468,000. During the six months ended June 30, 2007,
adjustments of $115,000 and $117,000 were recorded to reflect the accretion of interest for the
present value of the remaining lease obligations and fluctuations in the British pound sterling
exchange rates, respectively. Cash payments of $3,365,000 were made during the six months ended
June 30, 2007, resulting in an accrual balance of $3,335,000 at June 30, 2007. In the accompanying
consolidated balance sheet at June 30, 2007, all amounts are expected to be paid within the next
year and included in accrued expenses and other current liabilities.
8. Stock-Based Compensation
On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised
2004), Share Based Payment (SFAS No. 123R), which requires stock-based compensation to be
measured based on the fair value of the award on the date of grant and the corresponding expense to
be recognized over the period during which an employee is required to provide service in exchange
for the award. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, Share-Based
Payment (SAB No. 107), relating to SFAS No. 123R. We have applied the provisions of SAB No. 107
in our adoption of SFAS No. 123R. Prior to January 1, 2006, we issued stock options and restricted
stock shares. After January 1, 2006, we have elected to issue service-based and performance-based
restricted stock units (RSUs) instead of stock options and restricted stock shares.
We recorded the following pre-tax amounts for stock-based compensation, by operating segment,
in our consolidated financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
North America |
|
$ |
2,979 |
|
|
$ |
2,799 |
|
|
$ |
4,865 |
|
|
$ |
5,686 |
|
EMEA |
|
|
479 |
|
|
|
283 |
|
|
|
844 |
|
|
|
568 |
|
APAC |
|
|
24 |
|
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Continuing Operations |
|
$ |
3,482 |
|
|
$ |
3,082 |
|
|
$ |
5,747 |
|
|
$ |
6,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations |
|
$ |
|
|
|
$ |
714 |
|
|
$ |
|
|
|
$ |
1,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Accounting for Stock Options After SFAS No. 123R Implementation
There were no stock options granted during the three months ended June 30, 2007 or 2006,
and we do not currently plan to grant any stock options in 2007. The current expense for all
outstanding stock options granted prior to January 1, 2006, net of estimated forfeitures, has been
recognized in our consolidated statements of earnings for the three and six months ended June 30,
2007 and 2006. Forfeitures were estimated and will be revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates.
For the three months ended June 30, 2007 and 2006, we recorded in continuing operations
stock-based compensation expense related to stock options, net of forfeitures, of $856,000 and $
2,124,000, respectively. For the six months ended June 30, 2007 and 2006, we recorded in
continuing operations stock-based compensation expense related to stock options, net of
forfeitures, of $2,123,000 and $4,627,000, respectively. As of June 30, 2007, total compensation
cost related to nonvested stock options not yet recognized is $1,896,000, which is expected to be
recognized over the next 0.60 years on a weighted-average basis.
We used the criteria in SFAS No. 123R to calculate and establish the beginning balance of the
additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based
compensation and to determine the subsequent effect on the APIC pool and consolidated statements of
cash flows of the tax effects of employee stock-based compensation awards that were outstanding
upon adoption of SFAS No. 123R.
The following table summarizes our stock option activity during the three months
ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
5,076,391 |
|
|
$ |
19.39 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(325 |
) |
|
$ |
8.81 |
|
|
$ |
3,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
(260,273 |
) |
|
$ |
23.29 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(1,466 |
) |
|
$ |
19.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of period |
|
|
4,814,327 |
|
|
$ |
19.18 |
|
|
$ |
16,931,582 |
|
|
|
2.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at the end of period |
|
|
3,818,754 |
|
|
$ |
19.20 |
|
|
$ |
13,483,238 |
|
|
|
2.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest |
|
|
4,766,148 |
|
|
$ |
19.18 |
|
|
$ |
16,766,414 |
|
|
|
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the preceding table represents the total pre-tax
intrinsic value, based on our closing stock price of $22.57 as of June 30, 2007, which would have
been received by the option holders had all option holders exercised options and sold the
underlying shares on that date.
15
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes the status of outstanding stock options as of June
30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
$5.88 17.94 |
|
|
1,003,406 |
|
|
|
2.47 |
|
|
$ |
14.71 |
|
|
|
882,399 |
|
|
$ |
14.67 |
|
17.98 18.64 |
|
|
1,004,246 |
|
|
|
2.71 |
|
|
$ |
18.49 |
|
|
|
700,468 |
|
|
$ |
18.47 |
|
18.67 19.90 |
|
|
1,086,219 |
|
|
|
2.36 |
|
|
$ |
19.66 |
|
|
|
783,335 |
|
|
$ |
19.64 |
|
19.92 21.25 |
|
|
1,046,398 |
|
|
|
1.87 |
|
|
$ |
20.93 |
|
|
|
778,494 |
|
|
$ |
20.94 |
|
21.30 41.00 |
|
|
674,058 |
|
|
|
2.58 |
|
|
$ |
23.39 |
|
|
|
674,058 |
|
|
$ |
23.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,814,327 |
|
|
|
2.38 |
|
|
$ |
19.18 |
|
|
|
3,818,754 |
|
|
$ |
19.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting for Restricted Stock
We have issued shares of restricted common stock and RSUs as incentives to certain
officers and teammates and plan to do so in the future. We recognize compensation expense
associated with the issuance of such shares and RSUs over the vesting period for each respective
share and RSU. The total compensation expense associated with restricted stock represents the
value based upon the number of shares or RSUs awarded multiplied by the closing price on the date
of grant. Recipients of restricted stock shares are entitled to receive any dividends declared on
our common stock and have voting rights, regardless of whether such shares have vested. Recipients
of RSUs do not have voting or dividend rights until the vesting conditions are satisfied and shares
are released.
Starting in 2006, we have elected to issue service-based and performance-based RSUs instead of
stock options and restricted stock shares. The number of RSUs ultimately awarded under the
performance-based RSUs will vary based on whether we achieve certain financial results. We will
record compensation expense each period based on our estimate of the most probable number of RSUs
that will be issued under the grants of performance-based RSUs. Additionally, the compensation
expense will be reduced for our estimate of forfeitures.
For the three months ended June 30, 2007 and 2006, we recorded in continuing
operations stock-based compensation expense, net of forfeitures, related to restricted stock shares
and RSUs of $2,626,000 and $958,000, respectively. For the six months ended June 30, 2007 and
2006, we recorded in continuing operations stock-based compensation expense, net of forfeitures,
related to restricted stock shares and RSUs of $3,624,000 and $1,627,000, respectively. As of June
30, 2007, total compensation cost related to nonvested restricted stock shares and RSUs was
$15,650,000, which is expected to be recognized over the next 1.4 years on a weighted-average
basis.
The following table summarizes our restricted stock activity, including restricted
stock shares and RSUs, during the three months ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Number |
|
|
Grant Date Fair Value |
|
|
Fair Value |
|
Nonvested at the beginning of period |
|
|
1,344,186 |
|
|
$ |
20.11 |
|
|
|
|
|
Granted |
|
|
100 |
|
|
$ |
18.65 |
|
|
|
|
|
Vested |
|
|
(16,506 |
) |
|
$ |
19.56 |
|
|
$ |
329,039 |
(a) |
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(19,989 |
) |
|
$ |
18.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at the end of period |
|
|
1,307,791 |
|
|
$ |
20.14 |
|
|
$ |
28,689,336 |
(b) |
|
|
|
|
|
|
|
|
|
|
|
Expected to vest |
|
|
1,126,750 |
|
|
|
|
|
|
$ |
25,430,754 |
(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The fair value of vested restricted stock shares and RSUs
represents the total pre-tax fair value, based on the closing |
16
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
|
|
|
|
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 $22.57 as of June 30, 2007, which would have been received by holders of restricted
stock shares and RSUs had all such holders sold their underlying shares on that date. |
9. Share Repurchase Program
In January 2006, our Board of Directors authorized the repurchase of up to $50,000,000 of our
common stock. As of June 30, 2007, we have not purchased any shares under this authorization.
10. Commitments and Contingencies
Contractual
We have entered into a sponsorship agreement through 2013 with the Valley of the Sun Bowl
Foundation, d/b/a Insight Bowl, which is the not-for-profit entity that conducts the Insight Bowl
post-season intercollegiate football game. We have committed to pay an aggregate amount of
approximately $9,650,000 over the next eight years for sponsorship arrangements, ticket purchases
and miscellaneous expenses.
We have committed to pay the Arizona Cardinals an aggregate of approximately $9,900,000 over
the next ten years for advertising and marketing events at the University of Phoenix stadium, the
home of the Arizona Cardinals.
We have entered into a transition services agreement with Level 3 Communications, Inc. (Level
3) related to our acquisition of Software Spectrum. We have committed to pay an aggregate amount
of approximately $1,000,000 during 2007 as part of the physical separation of Software Spectrums
IT environment from Level 3.
In July 2007, we signed a Statement of Work with Wipro Limited to assist us in integrating our
hardware, services and software distribution operations in US, Canada, EMEA and APAC on mySAP. We
have committed to pay Wipro an aggregate amount of approximately $17,350,000 against milestones in
2007 through 2009, as set forth in the Statement of Work.
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 be equal to
either one or two times the teammates annual salary and bonus. Additionally, we would record
additional compensation expense for the acceleration of the vesting of any stock-based
compensation.
On May 2, 2007, we announced the retirement of Stanley Laybourne, the Companys chief
financial officer, secretary and treasurer and a member of our Board of Directors. In connection
with his retirement, we have agreed to provide him payments and benefits consistent with those
required for termination without cause under his existing employment agreement, which has been
previously filed with the SEC. Accordingly, we expect to pay him a lump sum severance payment
equal to two times his base salary plus two times his 2006 bonus. The total severance amount
related to this retirement is estimated to be approximately $2,842,000, including non-cash
stock-based compensation expense for a ninety day extension of the post termination exercise
17
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
period for stock options, which was recorded as severances expenses during the three months ended
June 30, 2007.
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
In the ordinary course of business, we enter into contractual arrangements under which we may
agree to indemnify either our client or a third-party service provider in the arrangement from any
losses incurred relating to services performed on our behalf or for losses arising from certain
defined events, which may include litigation or claims relating to past performance. These
arrangements include, but are not limited to, our indemnification of our officers and directors to
the maximum extent under the laws of the State of Delaware, the indemnification of our lessors 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. Management believes
that payments, if any, related to these indemnifications are not probable at June 30, 2007 and, if
incurred, would be immaterial. Accordingly, we have not accrued any liabilities related to such
indemnifications in our consolidated interim financial statements.
In connection with our sale of Direct Alliance in June 2006, the sale agreement contains
certain indemnification provisions pursuant to which we are required to indemnify the 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 business prior
to and at the time of sale. Management believes that payments related to these indemnifications,
if any, are not probable at June 30, 2007 and, if incurred, would be immaterial.
In connection with our sale of PC Wholesale in March 2007, the sale agreement contains certain
indemnification provisions pursuant to which we are required to indemnify the 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 business prior to and
at the time of sale. Management believes that payments related to these indemnifications, if any,
are not probable at June 30, 2007 and, if incurred, would not have a material adverse effect on our
results of operations.
Legal Proceedings
We are party to various legal proceedings arising in the ordinary course of business,
including asserted preference payment claims in client bankruptcy proceedings, claims of alleged
infringement of patents, trademarks, copyrights and other intellectual property rights and claims
of alleged non-compliance with contract provisions.
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
18
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
expenses related to defense, negotiations, settlements, rulings and advice of outside legal counsel
are expensed as incurred.
In June 2006, our subsidiary, Software Spectrum, Inc. was named as a defendant in a civil
lawsuit, Allocco v. Gardner (Superior Court, County of San Diego), regarding certain software
resale transactions with Peregrine Systems, Inc. The subsidiary was named as successor to Corporate
Software & Technology, Inc. (CS&T) and alleges that during October 2000 CS&T participated in or
aided and abetted a fraudulent scheme by Peregrine to inflate Peregrines stock price. Pursuant to
the terms of the agreement by which we acquired Software Spectrum, Inc. from Level 3 (the former
corporate parent of Software Spectrum, Inc.), Level 3 has agreed to indemnify, defend and hold us
harmless for this matter. The discovery process is on-going, and we strongly dispute any
allegations of participation in fraudulent behavior. On our behalf Level 3 is vigorously defending
this matter.
In October 2006, we received a letter of informal inquiry from the SEC requesting certain
documents relating to our stock option grants and practices. We have cooperated with the SEC and
will continue to do so. We cannot predict the outcome of this investigation.
Software Spectrum, 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 for cost to cover in the amount of
approximately $2,700,000, and, in July 2002, CS&T added a Belgian subsidiary of Microsoft as a
defendant. We believe that MODs counterclaims are unfounded, and we are vigorously defending the
claim.
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.
11. Discontinued Operations
PC Wholesale
On March 1, 2007, we completed the sale of PC Wholesale, a division of our North America
operating segment that sells to other resellers. The transaction generated proceeds of $28.7
million, including net assets sold that are subject to certain post-closing adjustments. We expect
to have resolution of the post-closing adjustments by the end of August 2007, which may result in
additional gain recorded on the sale. The sale of PC Wholesale is consistent with our strategic
plan as we concluded that selling IT products to other resellers is not a core element of our
growth strategy.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144), we have accounted for PC Wholesale as a discontinued operation, and we
have reported the results of operations of PC Wholesale as a discontinued operation in the
consolidated statements of earnings for all periods presented. We did not allocate interest,
general corporate overhead expense or non-specific vendor funding to the discontinued operation.
PC Wholesales accounts receivable and inventory was approximately $15 million and $6 million,
respectively, at December 31, 2006. Other assets and liabilities of PC Wholesale included in the
consolidated balance sheets as of December 31, 2006 were not material.
19
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following amounts for the three and six months ended June 30, 2007 and 2006, respectively,
represent PC Wholesales results of operations. The following amounts have been segregated from
continuing operations and reflected as a discontinued operation (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net sales |
|
$ |
|
|
|
$ |
56,758 |
|
|
$ |
30,142 |
|
|
$ |
112,837 |
|
Costs of goods sold |
|
|
|
|
|
|
54,652 |
|
|
|
29,092 |
|
|
|
108,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
2,106 |
|
|
|
1,050 |
|
|
|
4,053 |
|
Selling and administrative expenses |
|
|
|
|
|
|
1,239 |
|
|
|
768 |
|
|
|
2,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operation
before income taxes |
|
|
|
|
|
|
867 |
|
|
|
282 |
|
|
|
1,429 |
|
Income tax expense |
|
|
|
|
|
|
345 |
|
|
|
111 |
|
|
|
566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from discontinued operation |
|
$ |
|
|
|
$ |
522 |
|
|
$ |
171 |
|
|
$ |
863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Alliance
On June 30, 2006, we completed the sale of 100% of the outstanding stock of Direct Alliance
for a purchase price of $46,500,000, subject to a working capital adjustment. The purchase price
did not include real estate and intercompany receivables, which had an estimated fair value of
$49,400,000 (book value of $43,237,000) and were distributed to us immediately prior to closing.
In addition to payment of the purchase price, the buyer is obligated to make a one-time bonus
payment to us if Direct Alliance achieves certain gross profit levels for the year ended December
31, 2006 (Earn Out). Additionally, the buyer is entitled to a claw back of the purchase price of
up to $5,000,000 if certain Direct Alliance client contracts are not renewed on terms prescribed in
the sale agreement. The Company is in the process of negotiating the final resolution of the Earn
Out and the claw back, which may result in additional gain recorded on the sale. Additionally, on
June 30, 2006, we paid $2,696,000 to the holders of 1,997,500 exercised Direct Alliance stock
options. If additional gain is recorded on the sale as a result of final resolution of the Earn
Out and clawback, additional amounts will also be paid to the holders of 1,997,500 exercised Direct
Alliance stock options.
In accordance with SFAS No. 144, we have reported the results of operations of Direct Alliance
as a discontinued operation in the consolidated statements of earnings for all periods presented.
We did not allocate interest or general corporate overhead expense to the discontinued operation.
On June 30, 2006, in connection with the sale of Direct Alliance, we entered into a lease
agreement with Direct Alliance pursuant to which Direct Alliance will lease from us the facilities
it used prior to the sale. The initial lease term is for eighteen months starting July 1, 2006.
Accordingly, we have separately presented the value of the land and buildings as buildings held
for lease on the consolidated balance sheet at June 30, 2007. Lease income related to these
buildings was $272,000 and $524,000 for the three and six months ended June 30, 2007, respectively,
and is classified as net sales. Depreciation expense related to these buildings was $183,000 and
$366,000 for the three and six months ended June 30, 2007, respectively, and is classified as costs
of goods sold.
12. 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.
20
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Statement of Financial Accounting Standards 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. None of our clients
exceeded ten percent of consolidated net sales for the three and six months ended June 30, 2007.
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 efficiently use resources. These expenses, collectively identified as
corporate charges, include senior management expenses, 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.
The tables below present information about our reportable operating segments as of
and for the three and six months ended June 30, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2007 |
|
|
|
North America |
|
|
EMEA |
|
|
APAC |
|
|
Consolidated |
|
Net sales |
|
$ |
923,899 |
|
|
$ |
331,903 |
|
|
$ |
27,647 |
|
|
$ |
1,283,449 |
|
Costs of goods sold |
|
|
789,710 |
|
|
|
286,863 |
|
|
|
22,063 |
|
|
|
1,098,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
134,189 |
|
|
|
45,040 |
|
|
|
5,584 |
|
|
|
184,813 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
101,092 |
|
|
|
33,470 |
|
|
|
3,761 |
|
|
|
138,323 |
|
Severance and restructuring expenses |
|
|
2,841 |
|
|
|
|
|
|
|
|
|
|
|
2,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations |
|
$ |
30,256 |
|
|
$ |
11,570 |
|
|
$ |
1,823 |
|
|
$ |
43,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before
income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,570 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,809 |
|
Net earnings from discontinued operation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
26,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,168,691 |
|
|
$ |
485,673 |
|
|
$ |
42,112 |
|
|
$ |
1,786,731 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Consolidated total assets include corporate assets and intercompany eliminations for a net reduction of $909,745. |
21
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2006 |
|
|
|
North America |
|
|
EMEA |
|
|
APAC |
|
|
Consolidated |
|
Net sales |
|
$ |
665,023 |
|
|
$ |
115,323 |
|
|
$ |
|
|
|
$ |
780,346 |
|
Costs of goods sold |
|
|
580,300 |
|
|
|
97,900 |
|
|
|
|
|
|
|
678,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
84,723 |
|
|
|
17,423 |
|
|
|
|
|
|
|
102,146 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
65,027 |
|
|
|
14,507 |
|
|
|
|
|
|
|
79,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations |
|
$ |
19,696 |
|
|
$ |
2,916 |
|
|
$ |
|
|
|
|
22,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(663 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before
income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,275 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,169 |
|
Net earnings from discontinued operation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,184,765 |
|
|
$ |
123,913 |
|
|
$ |
|
|
|
$ |
930,077 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Consolidated total assets include corporate assets and intercompany eliminations for a
net reduction of $378,601. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2007 |
|
|
|
North America |
|
|
EMEA |
|
|
APAC |
|
|
Consolidated |
|
Net sales |
|
$ |
1,701,100 |
|
|
$ |
659,279 |
|
|
$ |
47,045 |
|
|
$ |
2,407,424 |
|
Costs of goods sold |
|
|
1,454,995 |
|
|
|
575,768 |
|
|
|
38,673 |
|
|
|
2,069,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
246,105 |
|
|
|
83,511 |
|
|
|
8,372 |
|
|
|
337,988 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
195,862 |
|
|
|
65,481 |
|
|
|
6,738 |
|
|
|
268,081 |
|
Severance and restructuring expenses |
|
|
2,841 |
|
|
|
|
|
|
|
|
|
|
|
2,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations |
|
$ |
47,402 |
|
|
$ |
18,030 |
|
|
$ |
1,634 |
|
|
|
67,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before
income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,777 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,105 |
|
Net earnings from discontinued operation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
44,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,168,691 |
|
|
$ |
485,673 |
|
|
$ |
42,112 |
|
|
$ |
1,786,731 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Consolidated total assets include corporate assets and intercompany eliminations for a net reduction of $909,745. |
22
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2006 |
|
|
|
North America |
|
|
EMEA |
|
|
APAC |
|
|
Consolidated |
|
|
|
As Restated (1) |
|
|
|
|
|
|
|
|
|
|
As Restated (1) |
|
Net sales |
|
$ |
1,277,902 |
|
|
$ |
235,268 |
|
|
$ |
|
|
|
$ |
1,513,170 |
|
Costs of goods sold |
|
|
1,113,671 |
|
|
|
200,247 |
|
|
|
|
|
|
|
1,313,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
164,231 |
|
|
|
35,021 |
|
|
|
|
|
|
|
199,252 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
127,082 |
|
|
|
28,557 |
|
|
|
|
|
|
|
155,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations |
|
$ |
37,149 |
|
|
$ |
6,464 |
|
|
$ |
|
|
|
|
43,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(595 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before
income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,208 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,611 |
|
Net earnings from discontinued operation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
40,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,184,765 |
|
|
$ |
123,913 |
|
|
$ |
|
|
|
$ |
930,077 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 2 Restatement of Consolidated Financial Statements. |
|
* |
|
Consolidated total assets include corporate assets and intercompany eliminations for a net
reduction of $378,601. |
23
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
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.
Net sales for the three months ended June 30, 2007 increased 64% to $1.28 billion from $780.3
million for the three months ended June 30, 2006. Net earnings for the three months ended June 30,
2007 increased 4% to $26.8 million from $25.9 million for the three months ended June 30, 2006 and
diluted earnings per share increased to $0.54 for the three months ended June 30, 2007 from $0.53
for the three months ended June 30, 2006. Net earnings and diluted earnings per share for the
three months ended June 30, 2007 include the following items:
|
|
|
expenses of $4.3 million, $2.6 million net of tax, for professional fees
associated with our stock option review (see Note 2 to our Consolidated Financial
Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended
December 31, 2006); and |
|
|
|
|
$2.8 million, $1.7 million net of tax, for severance expense. |
Net earnings and diluted earnings per share for the three months ended June 30, 2006 include
the gain on the sale of a discontinued operation of $15.1 million, $9.1 million net of taxes.
Net sales for the six months ended June 30, 2007 increased 59% to $2.4 billion from $1.5
billion for the six months ended June 30, 2006. Net earnings for the six months ended June 30,
2007 increased 8% to $44.1 million from $40.7 million for the six months ended June 30, 2006 and
diluted earnings per share increased to $0.89 for the six months ended June 30, 2007 from $0.84 for
the six months ended June 30, 2006. Net earnings and diluted earnings per share for the six months
ended June 30, 2007 include the following items:
|
|
|
gain on sale of a discontinued operation of $7.9 million, $4.8 million net of
tax; |
|
|
|
|
expenses of $10.0 million, $6.1 million net of tax, for professional fees
associated with our stock option review; and |
|
|
|
|
$2.8 million, $1.7 million net of tax, for severance expense. |
Net earnings and diluted earnings per share for the six months ended June 30, 2006 include the
gain on the sale of a discontinued operation of $15.1 million, $9.1 million net of taxes.
Overviews of each of our operating segments are discussed below and reconciliations of segment
results of operations to consolidated results of operations can be found in Note 12 to our
Consolidated Financial Statements provided in 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 year to year and the primary factors that
contributed to those changes, as well as how certain critical accounting estimates affect our
consolidated financial statements.
Our North America net sales increased 39% from $665.0 million in the three months ended June 30,
2006 to $923.9 million in the three months ended June 30, 2007, due primarily to an increase in
software sales
24
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
attributable to the acquisition of Software Spectrum. Our North America segment achieved very
strong results, including gross profit growth of 58%, in what is typically our strongest quarter of
the year for sales of software. Within North America, our software category grew 315%, hardware
declined 1%, and our services grew 26%. We were pleased with the sales results in all categories,
including hardware, which had a difficult year-over-year performance comparison due to a large
one-time Cisco rollout to one of our largest clients in the second quarter of 2006. Excluding this
large sale from the second quarter last year, North America hardware sales growth exceeded 8%,
which we believe was faster than the overall IT hardware market. Also included in our North
America segment results was $4.1 million of professional fees associated with our stock option
review and $2.8 million of severance expense. Overall North America earnings from operations
increased 54% from $19.7 million for the three months ended June 30, 2006 to $30.3 million for the
three months ended June 30, 2007.
Our EMEA operations, which included only the United Kingdom in the three months ended June 30,
2006, recognized net sales that were up from $115.3 million in three months ended June 30, 2006 to
$331.9 million in the three months ended June 30, 2007, due primarily to the acquisition of
Software Spectrum. Our EMEA segment capitalized on the strongest quarter for software sales and
achieved strong results across all geographic regions. Additionally, our United Kingdom operations
continue to benefit from a combined solution offering and posted strong results across the
hardware, software and services categories. Within EMEA, our software category grew 1,045%,
hardware grew 18%, and our services grew 220%. Also included in our EMEA segment results was
$228,000 of professional fees associated with our stock option review. Overall EMEA earnings from
operations increased 297% from $2.9 million for the three months ended June 30, 2006 to $11.6
million for the three months ended June 30, 2007.
Our APAC segment continues to perform very well and contributed net sales of $27.6 million,
gross profit of $5.6 million and earnings from operations of $1.8 million for the three months
ended June 30, 2007. Although this operating segment represents a small percentage of our
consolidated results, we continue to be excited about the growth opportunities this region brings.
Critical Accounting Estimates
General
Our consolidated financial statements have been prepared in accordance with United States
generally accepted accounting principles (GAAP). The preparation of these consolidated financial
statements requires us to make estimates and assumptions that affect the reported amounts of
assets, liabilities, net sales, costs of goods sold 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. Members of our senior
management have discussed the development, selection and disclosure of these estimates with the
Audit Committee of our Board of Directors. Actual results, however, may differ from estimates we
have made.
In addition 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, 2006, we adopted FIN 48 on January 1,
2007. FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This
interpretation prescribes a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken
in income tax returns.
25
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS
The following table sets forth for the periods presented certain financial data as a
percentage of net sales for the three and six months ended June 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated (1) |
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Costs of goods sold |
|
|
85.6 |
|
|
|
86.9 |
|
|
|
86.0 |
|
|
|
86.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
14.4 |
|
|
|
13.1 |
|
|
|
14.0 |
|
|
|
13.2 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
10.8 |
|
|
|
10.2 |
|
|
|
11.1 |
|
|
|
10.3 |
|
Severance and restructuring expenses |
|
|
0.2 |
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations |
|
|
3.4 |
|
|
|
2.9 |
|
|
|
2.8 |
|
|
|
2.9 |
|
Non-operating (income) expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
|
(0.1 |
) |
Interest expense |
|
|
0.4 |
|
|
|
|
|
|
|
0.4 |
|
|
|
0.1 |
|
Net foreign currency exchange gain |
|
|
(0.2 |
) |
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
Other income, net |
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
before
income taxes |
|
|
3.4 |
|
|
|
3.0 |
|
|
|
2.6 |
|
|
|
2.9 |
|
Income tax expense |
|
|
1.3 |
|
|
|
1.0 |
|
|
|
1.0 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations |
|
|
2.1 |
|
|
|
2.0 |
|
|
|
1.6 |
|
|
|
1.9 |
|
Net earnings from discontinued operation |
|
|
|
|
|
|
1.3 |
|
|
|
0.2 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
2.1 |
% |
|
|
3.3 |
% |
|
|
1.8 |
% |
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 2 Restatement of Consolidated Financial Statements. |
Net Sales. Net sales for the three months ended June 30, 2007 increased 64% to $1.28
billion from $780.3 million for the three months ended June 30, 2006. The increase in sales is due
primarily to an increase in software sales attributable to the acquisition of Software Spectrum on
September 7, 2006. Our net sales by operating segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
% |
|
|
June 30, |
|
|
% |
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
Change |
|
Insight North America |
|
$ |
923,899 |
|
|
$ |
665,023 |
|
|
|
39 |
% |
|
$ |
1,701,100 |
|
|
$ |
1,277,902 |
|
|
|
33 |
% |
EMEA |
|
|
331,903 |
|
|
|
115,323 |
|
|
|
188 |
% |
|
|
659,279 |
|
|
|
235,268 |
|
|
|
180 |
% |
APAC |
|
|
27,647 |
|
|
|
|
|
|
|
|
|
|
|
47,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
1,283,449 |
|
|
$ |
780,346 |
|
|
|
64 |
% |
|
$ |
2,407,424 |
|
|
$ |
1,513,170 |
|
|
|
59 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in North America net sales for the three and six months ended June 30, 2007
compared to the same periods in 2006 is due primarily to an increase in software sales attributable
to the acquisition of Software Spectrum. The second quarter is also seasonally the strongest
quarter of the year for software sales. During the three months ended June 30, 2007 compared to
the three months ended June 30, 2006, our North America software category grew 315%, hardware
declined 1%, and our services grew 26%. We were pleased with the sales results in all categories,
including hardware, which had a difficult year-over-year performance comparison due to a large
one-time Cisco rollout to one of our largest clients in the second quarter of 2006. Excluding this
large sale from the second quarter last year, North America hardware sales growth exceeded 8%,
which we believe was faster than the overall IT hardware market. North America had 1,336 account
executives at June 30, 2007, an increase from 1,034 at June 30, 2006 due primarily to the
acquisition of Software Spectrum. Net sales per account executive in North America increased 11%
to $708,000 for the three months ended June 30,
26
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
2007 from $637,000 for the three months ended June 30, 2006. The average tenure of our account
executives in North America has increased from 4.1 years at June 30, 2006 to 4.3 years at June 30,
2007. The increase is due primarily to the addition of more tenured account executives with the
acquisition of Software Spectrum.
The increase in EMEA net sales for the three and six months ended June 30, 2007 compared to
the same periods in 2006 is due primarily to an increase in software sales attributable to the
acquisition of Software Spectrum. Our EMEA segment capitalized on the strongest quarter for
software sales and achieved strong results across all geographic regions. Additionally, our United
Kingdom operations continue to benefit from a combined solution offering and posted strong results
across the hardware, software and services categories. During the three months ended June 30, 2007
compared to the three months ended June 30, 2006, our EMEA software category grew 1,045%, hardware
grew 18%, and our services grew 220%. EMEA had 495 account executives at June 30, 2007, an
increase from 276 at June 30, 2006 due primarily to the acquisition of Software Spectrum. Net
sales per account executive in EMEA increased 56% to $682,000 for the three months ended June 30,
2007 from $438,000 for the three months ended June 30, 2006. The average tenure of our account
executives in EMEA has increased from 2.3 years at June 30, 2006 to 2.9 years at June 30, 2007.
The increase is due primarily to a decrease in account executive turnover and the addition of more
tenured account executives with the acquisition of Software Spectrum.
APACs net sales for the three months ended June 30, 2007 were $27.6 million. We were pleased
with the results of our APAC segment and we continue to be encouraged by the growth opportunities
in this region.
Percentage of net sales by category for North America, EMEA and APAC were as follows for the
three months ended June 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
EMEA |
|
APAC |
|
|
Three Months Ended |
|
Three Months Ended |
|
Three Months Ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
Sales Mix |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Notebooks and PDAs |
|
|
11 |
% |
|
|
13 |
% |
|
|
8 |
% |
|
|
17 |
% |
|
|
0 |
% |
|
NA |
Desktops and Servers |
|
|
12 |
% |
|
|
15 |
% |
|
|
6 |
% |
|
|
14 |
% |
|
|
0 |
% |
|
NA |
Network and Connectivity |
|
|
10 |
% |
|
|
18 |
% |
|
|
4 |
% |
|
|
9 |
% |
|
|
0 |
% |
|
NA |
Storage Devices |
|
|
5 |
% |
|
|
7 |
% |
|
|
3 |
% |
|
|
8 |
% |
|
|
0 |
% |
|
NA |
Supplies and Accessories |
|
|
5 |
% |
|
|
7 |
% |
|
|
3 |
% |
|
|
8 |
% |
|
|
0 |
% |
|
NA |
Monitors and Video |
|
|
4 |
% |
|
|
6 |
% |
|
|
2 |
% |
|
|
8 |
% |
|
|
0 |
% |
|
NA |
Printers |
|
|
4 |
% |
|
|
7 |
% |
|
|
3 |
% |
|
|
8 |
% |
|
|
0 |
% |
|
NA |
Memory and Processors |
|
|
4 |
% |
|
|
5 |
% |
|
|
2 |
% |
|
|
4 |
% |
|
|
0 |
% |
|
NA |
Miscellaneous |
|
|
6 |
% |
|
|
8 |
% |
|
|
2 |
% |
|
|
6 |
% |
|
|
1 |
% |
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware |
|
|
61 |
% |
|
|
86 |
% |
|
|
33 |
% |
|
|
82 |
% |
|
|
1 |
% |
|
NA |
Software |
|
|
37 |
% |
|
|
12 |
% |
|
|
66 |
% |
|
|
17 |
% |
|
|
98 |
% |
|
NA |
Services |
|
|
2 |
% |
|
|
2 |
% |
|
|
<1 |
% |
|
|
<1 |
% |
|
|
<1 |
% |
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
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
six months ended June 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
EMEA |
|
APAC |
|
|
Six Months Ended |
|
Six Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
Sales Mix |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Notebooks and PDAs |
|
|
11 |
% |
|
|
13 |
% |
|
|
8 |
% |
|
|
17 |
% |
|
|
0 |
% |
|
NA |
Desktops and Servers |
|
|
12 |
% |
|
|
15 |
% |
|
|
7 |
% |
|
|
14 |
% |
|
|
0 |
% |
|
NA |
Network and Connectivity |
|
|
10 |
% |
|
|
16 |
% |
|
|
4 |
% |
|
|
9 |
% |
|
|
0 |
% |
|
NA |
Storage Devices |
|
|
6 |
% |
|
|
8 |
% |
|
|
4 |
% |
|
|
8 |
% |
|
|
0 |
% |
|
NA |
Supplies and Accessories |
|
|
5 |
% |
|
|
7 |
% |
|
|
3 |
% |
|
|
8 |
% |
|
|
0 |
% |
|
NA |
Monitors and Video |
|
|
4 |
% |
|
|
6 |
% |
|
|
3 |
% |
|
|
9 |
% |
|
|
0 |
% |
|
NA |
Printers |
|
|
5 |
% |
|
|
7 |
% |
|
|
3 |
% |
|
|
8 |
% |
|
|
0 |
% |
|
NA |
Memory and Processors |
|
|
4 |
% |
|
|
5 |
% |
|
|
2 |
% |
|
|
4 |
% |
|
|
0 |
% |
|
NA |
Miscellaneous |
|
|
6 |
% |
|
|
8 |
% |
|
|
3 |
% |
|
|
6 |
% |
|
|
1 |
% |
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware |
|
|
63 |
% |
|
|
85 |
% |
|
|
37 |
% |
|
|
83 |
% |
|
|
1 |
% |
|
NA |
Software |
|
|
34 |
% |
|
|
12 |
% |
|
|
62 |
% |
|
|
16 |
% |
|
|
98 |
% |
|
NA |
Services |
|
|
3 |
% |
|
|
3 |
% |
|
|
<1 |
% |
|
|
<1 |
% |
|
|
<1 |
% |
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In general, we continue to experience declines in average selling prices for most of our
hardware product categories, which requires us to sell more units in order to maintain or increase
the level of sales. With the acquisition of Software Spectrum, our product mix changed
significantly as noted above, with software representing a much greater percentage of our net
sales. 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.
Gross Profit. The increase in sales of software licenses for which we receive only an
agency fee, as well as sales of software maintenance contracts and third-party warranties for which
only the gross profit is recorded as net sales, makes period-to-period comparability of net sales
and costs of goods sold more difficult. As a result, we believe that gross profit is a more
reliable measure of business performance and is more useful in comparing period-to-period trends
than net sales. Gross profit increased 81% to $184.8 million for the three months ended June 30,
2007 from $102.1 million for the three months ended June 30, 2006, due primarily to the acquisition
of Software Spectrum. As a percentage of net sales, gross profit increased to 14.4% for the three
months ended June 30, 2007 from 13.1% for the three months ended June 30, 2006. Gross profit
increased 70% to $338.0 million for the six months ended June 30, 2007 from $199.3 million for the
six months ended June 30, 2006, due primarily to the acquisition of Software Spectrum. As a
percentage of net sales, gross profit increased to 14.0% for the six months ended June 30, 2007
from 13.2% for the six months ended June 30, 2006.
Our gross profit and gross profit as a percentage of net sales by operating segment for the
three and six months ended June 30, 2007 and 2006 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
2007 |
|
|
Net Sales |
|
|
2006 |
|
|
Net Sales |
|
|
2007 |
|
|
Net Sales |
|
|
2006 |
|
|
Net Sales |
|
North America |
|
$ |
134,189 |
|
|
|
14.5 |
% |
|
$ |
84,723 |
|
|
|
12.7 |
% |
|
$ |
246,105 |
|
|
|
14.5 |
% |
|
$ |
164,231 |
|
|
|
12.9 |
% |
EMEA |
|
|
45,040 |
|
|
|
13.6 |
% |
|
|
17,423 |
|
|
|
15.1 |
% |
|
|
83,511 |
|
|
|
12.7 |
% |
|
|
35,021 |
|
|
|
14.9 |
% |
APAC |
|
|
5,584 |
|
|
|
20.2 |
% |
|
|
|
|
|
|
|
|
|
|
8,372 |
|
|
|
17.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
184,813 |
|
|
|
14.4 |
% |
|
$ |
102,146 |
|
|
|
13.1 |
% |
|
$ |
337,988 |
|
|
|
14.0 |
% |
|
$ |
199,252 |
|
|
|
13.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Americas gross profit increased for the three months ended June 30, 2007 by 58% to
$134.2 million from $84.7 million for the three months ended June 30, 2006. Gross profit per
account executive
28
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
increased 27% from $81,000 for the three months ended June 30, 2006 to $103,000 for the three
months ended June 30, 2007. As a percentage of net sales, gross profit increased to 14.5% for the
three months ended June 30, 2007 from 12.7% for the three months ended June 30, 2006 due primarily
to increases in agency fees for Microsoft enterprise software agreement renewals, decreases in
inventory write-downs due to improvements in the aging of inventories and increases in the sales of
services. These increases were offset partially by decreases in product margin, which includes
vendor funding. North Americas gross profit increased for the six months ended June 30, 2007 by
50% to $246.1 million from $164.2 million for the six months ended June 30, 2006. As a percentage
of net sales, gross profit increased to 14.5% for the six months ended June 30, 2007 from 12.9% for
the six months ended June 30, 2006 due primarily to increases in agency fees for Microsoft
enterprise software agreement renewals, decreases in inventory write-downs due to improvements in
the aging of inventories and increases in the sales of services. These increases were offset
partially by decreases in product margin, which includes vendor funding, and decreases in freight.
EMEAs gross profit increased for the three months ended June 30, 2007 by 159% to $45.0
million from $17.4 million for the three months ended June 30, 2006. Gross profit per account
executive increased 41% from $66,000 for the three months ended June 30, 2006 to $93,000 for the
three months ended June 30, 2007. As a percentage of net sales, gross profit decreased to 13.6% for
the three months ended June 30, 2007 from 15.1% for the three months ended June 30, 2006 due
primarily to decreases in product margin, which includes vendor funding, and decreases in supplier
discounts. These decreases in gross margin were offset partially by increases in agency fees for
Microsoft enterprise software agreement renewals and decreases in inventory write-downs due to
improvements in the aging of inventories. EMEAs gross profit increased for the six months ended
June 30, 2007 by 138% to $83.5 million from $35.0 million for the six months ended June 30, 2006.
As a percentage of net sales, gross profit decreased to 12.7% for the six months ended June 30,
2007 from 14.9% for the six months ended June 30, 2006 due primarily to decreases in product
margin, which includes vendor funding, and decreases in supplier discounts. These decreases in
gross margin were offset partially by increases in agency fees for Microsoft enterprise software
agreement renewals and decreases in inventory write-downs due to improvements in the aging of
inventories.
APAC reported gross profit of $5.6 million and $8.4 million for the three and six months ended
June 30, 2007, respectively. As a percentage of net sales, gross profit was 20.2% and 17.8% for
the three and six months ended June 30, 2007, respectively.
Operating Expenses.
Selling and Administrative Expenses. Selling and administrative expenses increased in the
2007 periods compared to the 2006 periods due primarily to the acquisition of Software Spectrum.
Selling and administrative expenses by operating segment for the three and six months ended June
30, 2007 and 2006 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
2007 |
|
|
Net Sales |
|
|
2006 |
|
|
Net Sales |
|
|
2007 |
|
|
Net Sales |
|
|
2006 |
|
|
Net Sales |
|
North America |
|
$ |
101,092 |
|
|
|
10.9 |
% |
|
$ |
65,027 |
|
|
|
9.8 |
% |
|
$ |
195,862 |
|
|
|
11.5 |
% |
|
$ |
127,082 |
|
|
|
9.9 |
% |
EMEA |
|
|
33,470 |
|
|
|
10.1 |
% |
|
|
14,507 |
|
|
|
12.6 |
% |
|
|
65,481 |
|
|
|
9.9 |
% |
|
|
28,557 |
|
|
|
12.1 |
% |
APAC |
|
|
3,761 |
|
|
|
13.6 |
% |
|
|
|
|
|
|
|
|
|
|
6,738 |
|
|
|
14.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
138,323 |
|
|
|
10.8 |
% |
|
$ |
79,534 |
|
|
|
10.2 |
% |
|
$ |
268,081 |
|
|
|
11.1 |
% |
|
$ |
155,639 |
|
|
|
10.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
North America selling and administrative expenses as a percentage of sales for the
three months ended June 30, 2007 has increased over the three months ended June 30, 2006 due
primarily to:
|
|
|
$4.1 million in other professional fees associated with our stock option review; |
|
|
|
|
increases in salaries and wages of approximately $22.7 million due mainly to the
acquisition of Software Spectrum, increases in sales incentive programs and increases in
bonus expenses due to increased overall financial performance; and |
|
|
|
|
amortization of intangible assets acquired with the acquisition of Software Spectrum of
$1.3 million. |
North America selling and administrative expenses as a percentage of sales for the six months
ended June 30, 2007 has increased over the six months ended June 30, 2006 due primarily to:
|
|
|
$10.0 million in professional fees associated with our stock option review; |
|
|
|
|
increases in salaries and wages of approximately $41.3 million due mainly to the
acquisition of Software Spectrum, increases in sales incentive programs and increases in
bonus expenses due to increased overall financial performance; |
|
|
|
|
amortization of intangible assets acquired with the acquisition of Software Spectrum of
$3.2 million; and |
|
|
|
|
other integration-related expenses, such as travel and professional fees. |
EMEA selling and administrative expenses decreased as a percentage of net sales for the three
months ended June 30, 2007 compared to the three months ended June 30, 2006 due primarily to
increases in net sales partially offset by:
|
|
|
increases in salaries and wages of approximately $12.4 million due mainly to the
acquisition of Software Spectrum, increases in sales incentive plans and bonus expenses due
to increased overall financial performance; |
|
|
|
|
amortization of intangible assets acquired with the acquisition of Software Spectrum of $780,000; and |
|
|
|
|
$228,000 in professional fees associated with our stock option review. |
EMEA selling and administrative expenses decreased as a percentage of net sales for the six
months ended June 30, 2007 compared to the six months ended June 30, 2006 due primarily to
increases in net sales partially offset by:
|
|
|
increases in salaries and wages of approximately $24.8 million due mainly to the
acquisition of Software Spectrum, increases in sales incentive plans and bonus expenses due
to increased overall financial performance; |
|
|
|
|
amortization of intangible assets acquired with the acquisition of Software Spectrum of $1.8 million; |
|
|
|
|
other integration-related expenses, such as travel and professional fees; and |
|
|
|
|
$683,000 in professional fees associated with our stock option review. |
APACs selling and administrative expenses were $3.8 million and $6.7 million, respectively,
for the three and six months ended June 30, 2007. As a percentage of net sales, selling and
administrative expenses were 13.6% and 14.3%, respectively, for the three and six months ended June
30, 2007.
Severance and Restructuring Expenses. During the three months ended June 30, 2007, severance
expense of $2.8 million was recorded in our North America operating segment for the pending
retirement of our Chief Financial Officer.
Interest Income. Interest income of $2.2 million and $1.1 million for the three months ended
June 30, 2007 and 2006, respectively, and $4.3 million and $2.0 million for the six months ended
June 30, 2007 and 2006, respectively, was generated through short-term investments. The increase
in interest income is due to a generally
30
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
higher level of cash available to be invested in short-term investments and increases in short-term
interest rates earned on those investments during the three and six months ended June 30, 2007.
Interest Expense. Interest expense of $4.8 million and $272,000 for the three months ended
June 30, 2007 and 2006, respectively, and $10.5 million and $1.1 million for the six months ended
June 30, 2007 and 2006, respectively, primarily relates to borrowings under our financing
facilities. The increase in interest expense is due to increased borrowings outstanding in the
three and six months ended June 30, 2007 resulting from the acquisition of Software Spectrum in
September 2006 and increases in interest rates.
Net Foreign Currency Exchange Gain. Net foreign currency exchange gain was $3.0 million for
the three months ended June 30, 2007 compared to $7,000 for the three months ended June 30, 2006.
Net foreign currency exchange gain was $3.7 million for the six months ended June 30, 2007 compared
to a net foreign currency exchange loss of $24,000 for the six months ended June 30, 2006. The net
gains consist primarily of foreign currency transaction gains or losses, including those for
intercompany balances that are not considered long-term in nature. The increase in the net foreign
currency exchange gain is due primarily to increases in business transacted outside of the U.S. as
a result of the acquisition of Software Spectrum and the continued decline in the value of the U.S.
dollar against currencies we transact business in, specifically the Canadian dollar, the Euro and
the British Pound Sterling.
Other Expense, Net. Other expense, net, was $496,000 and $158,000 for the three months ended
June 30, 2007 and 2006, respectively, and $713,000 and $320,000 for the six months ended June 30,
2007 and 2006, respectively. These amounts consist primarily of bank fees associated with our
financing facilities and cash management.
Income Tax Expense. Our effective tax rate from continuing operations for the three months
ended June 30, 2007 was 38.5% compared to 34.8% for the three months ended June 30, 2006. The
increase in the effective tax rate from continuing operations was due primarily to a tax benefit
recorded in the three months ended June 30, 2006 for internal initiatives that reduced certain
state income taxes. Additionally, the effective tax rate is higher in three months ended June 30,
2007 due to an increase in non-deductible expenses related to executive compensation. Our
effective tax rate from continuing operations for the six months ended June 30, 2007 was 38.7%
compared to 35.3% for the six months ended June 30, 2006. The increase in the effective tax rate
from continuing operations was due primarily to a decrease in tax reserves in the first quarter of
2006 due to the closing of an audit, a tax benefit recorded in the second quarter of 2006 for an
internal initiative that reduced certain state taxes, and an increase in non-deductible expenses
related to executive compensation recorded during the first and second quarters of 2007.
Earnings from Discontinued Operations. On March 1, 2007, we completed the sale of PC
Wholesale and on June 30, 2006, we completed the sale of Direct Alliance. Accordingly, the results
of operations attributable to PC Wholesale and Direct Alliance for all periods presented have been
classified as discontinued operations. See Note 11 to the Consolidated Financial Statements in
Item 1 of this report for further discussion.
31
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 six
months ended June 30, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
As Restated (1) |
|
Net cash provided by operating activities |
|
$ |
103,546 |
|
|
$ |
126,785 |
|
Net cash provided by investing activities |
|
|
9,764 |
|
|
|
29,313 |
|
Net cash used in financing activities |
|
|
(125,836 |
) |
|
|
(58,023 |
) |
Net cash provided by discontinued operation |
|
|
|
|
|
|
129 |
|
Foreign currency exchange effect on cash flow |
|
|
3,973 |
|
|
|
4,903 |
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
|
|
(8,553 |
) |
|
|
103,107 |
|
Cash and cash equivalents at beginning of period |
|
|
54,697 |
|
|
|
35,145 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
46,144 |
|
|
$ |
138,252 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 2 Restatement of Consolidated Financial Statements. |
Cash and Cash Flow
Our primary uses of cash in the past few years have been to fund our working capital
requirements, capital expenditures, repurchases of our common stock and repayments of debt incurred
to fund acquisitions.
Net cash provided by operating activities. Cash flows from operations for the six months
ended June 30, 2007 resulted primarily from net earnings from continuing operations before
depreciation, amortization and stock-based compensation expense as well as increases in accounts
payable. These increases in operating cash flows were partially offset by increases in accounts
receivable. The increased accounts receivable and accounts payable can be primarily attributed to
the seasonal increase in net sales. Cash flows from operations for the six months ended June 30,
2006 resulted primarily from net earnings before depreciation and stock-based compensation,
decreases in accounts receivable and inventory. Accounts receivable decreased due to a decrease in
net sales. Inventories decreased due primarily to improvements in our supply chain activities and
fewer opportunistic purchases during the quarter ended June 30, 2006.
Our consolidated cash flow operating metrics for the six months ended June 30, 2007 and 2006
are as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, |
|
|
2007 |
|
2006 |
Days sales outstanding in ending accounts receivable (DSOs) |
|
|
56 |
|
|
|
48 |
|
Annualized inventory turns, excluding inventories not available for sale |
|
|
47 |
|
|
|
31 |
|
Days purchases outstanding in ending accounts payable (DPOs) |
|
|
45 |
|
|
|
25 |
|
The increase in DSOs is due primarily to an increase in sales of software maintenance
contracts and third-party warranties where we bill the client the entire sales price but only
record the gross profit on the transaction in net sales. Additionally, we have seen an increase in
net sales with terms longer than 30 days, primarily related to our large enterprise and public
sector clients. The increase in inventory turns is primarily due to the decrease in inventories
primarily related to the increase in software sales, which do not require us to hold physical
inventory, our operational improvements and decreases in opportunistic purchases. The $20.0
million of inventories not available for sale at June 30, 2007 represents inventories segregated
pursuant to binding client contracts, which will be recorded as net sales when the criteria for
sales recognition are met. We anticipate that our DSOs will continue to increase due to the
purchase of Software Spectrum which sells a large percentage to larger enterprise clients who
generally have longer payment terms. The increase in DPOs is due primarily to the timing of
32
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
payments at period end and our continued focus on improving our cash conversion cycle in order to
pay down outstanding debt and increase our return on invested capital.
Assuming net sales continue to increase in the future, we expect that cash flow from
operations will be used, at least partially, to fund working capital as we typically pay our
suppliers on average terms that are shorter than the average terms granted to our clients in order
to take advantage of supplier discounts.
Net cash provided by (used in) investing activities. Cash flows provided by investing
activities for the six months ended June 30, 2007 was $9.8 million, which consisted of net proceeds
of $28.6 million from the sale of a discontinued operation, offset partially by capital
expenditures of $18.9 million. Capital expenditures for the three months ended June 30, 2007
primarily related to investments to upgrade our IT systems to mySAP, including capitalized costs of
software developed for internal use, IT equipment and software licenses. Cash flows used in
investing activities for the six months ended June 30, 2006 was $29.3 million due primarily to
$46.5 million of proceeds from the sale of a discontinued operation, offset partially by capital
expenditures, which consisted primarily of capitalized costs of computer software developed for
internal use and IT equipment. We expect total capital expenditures in 2007 to be between $30
million and $35 million, primarily related to IT investments, including the continued deployment of
the mySAP upgrade.
Net cash used in financing activities. Cash flows used in financing activities for the six
months ended June 30, 2007 and 2006 were $125.8 million and $58.0 million, respectively. During
the six months ended June 30, 2007, cash used in financing activities was primarily for net
repayments of outstanding debt of $112.8 million and decreases in book overdrafts of $15.6 million.
During the six months ended June 30, 2007 and 2006, cash of $2.5 million and $7.4 million,
respectively, was provided by cash received from common stock issuances as a result of stock option
exercises.
In January 2006, our Board of Directors approved a stock repurchase program that allows us to
purchase up to an additional $50.0 million of our common stock; however, no repurchases have been
made under this program since its inception.
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 incurred in connection with the acquisition of
Software Spectrum.
Cash and cash equivalents held by foreign subsidiaries are generally subject to U.S. income
taxation upon repatriation to the United States. 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 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.
See Note 7 to our Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form
10-K for the year ended December 31, 2006 for a description of our financing facilities, including
terms, amounts outstanding, amounts available and weighted average borrowings and interest rates
during the year ended December 31, 2006. As of June 30,
2007, we had $160.1 million and $33.0 million available under our accounts receivable securitization facility and line of credit,
respectively. Additionally, our line of credit has a feature that allows us to increase
availability under our line of credit by $37.5 million, upon request. Our financing facilities
contain various covenants, including the requirement that we comply with leverage and minimum fixed
charge ratio requirements. In addition, our credit facilities prohibit the payment of cash
dividends without the lenders consent and the requirement that we provide annual and quarterly
financial information. If we fail to comply with these covenants, the lenders would be able to
demand payment within a specified period of time. Because we
33
INSIGHT ENTERPRISES, INC.
were not current with our reporting obligations under the SEC Exchange Act of 1934 beginning on
September 30, 2006 and ending on July 26, 2007, we were in violation of our financial reporting
covenant. We were able to obtain a waiver letter from the lender which waived our obligation to
provide the affected report from our independent registered public accounting firm and waived any
events of default occurring under the facility as a result of our failure to comply with the
covenant. We have since provided all late reports filed with the SEC to our lenders and are in
compliance with this reporting covenant at July 26, 2007 and all other covenants at June 30, 2007.
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. The
guaranties and indemnifications are discussed in Note 14 to our Consolidated Financial Statements
in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2006. We
believe that none of our off-balance sheet arrangements have, 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
See 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, 2006 for a description of recently issued accounting
pronouncements.
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, 2006.
Item 4. Controls and Procedures.
(a) 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 of 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 a result of the material weakness in internal control over financial reporting
described below, as of June 30, 2007 our disclosure controls and procedures were not 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
SEC rules and forms.
The Public Company Accounting Oversight Boards Auditing Standard No. 2 defines a material
weakness as a significant deficiency, or a combination of significant deficiencies, that results in
there being a more than remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The Company identified a material weakness
in its internal control over financial reporting as of December 31, 2006, arising from the combined
effect of the following control deficiencies in Companys accounting for equity based awards:
|
|
|
Inadequate policies and procedures to determine the grant date and exercise price of equity awards; |
|
|
|
|
Inadequate supervision and training for personnel involved in the stock option granting process; and |
34
INSIGHT ENTERPRISES, INC.
|
|
|
Inadequate documentation and monitoring of the application of accounting
policies and procedures regarding equity awards. |
As a result of financial statement errors attributable to the material weakness described
above, we have filed a comprehensive Form 10-K for the fiscal year ended December 31, 2006 in which
we restated our consolidated statements of earnings, of stockholders equity and comprehensive
income and of cash flows for the years ended December 31, 2005 and 2004, our consolidated balance
sheet as of December 31, 2005 and selected consolidated financial data for the years ended December
31, 2005, 2004, 2003 and 2002, and for each of the quarters in the year ended December 31, 2005 and
the quarters ended March 31, and June 30, 2006.
Subsequent to December 31, 2006, we have begun taking several steps to remediate the material
weakness described above. We have implemented or are in the process of implementing internal
control improvements in the following areas:
|
|
|
implementing new policies and procedures to ensure compliance with accounting
principles applicable to equity compensation, including restricted stock grants, and
through training and additions to the staff; |
|
|
|
|
developing an equity compensation training program for all teammates involved
in the award of and accounting for equity compensation; |
|
|
|
|
restructuring reporting responsibility for the administration of our equity
compensation programs; and |
|
|
|
|
adopting a written policy governing the award of equity compensation,
including standardizing documentation of approvals of all relevant terms of equity
compensation awards. |
The Compensation Committee of our Board of Directors, which was newly constituted in May 2007,
has already revised some of its policies and will now only approve equity compensation grants at
meetings and not by written consent. The Compensation Committee also has improved the process for
documenting its actions and ensuring the timely reporting of its actions to the Board of Directors.
(b) Changes in Internal Control Over Financial Reporting
Other than the steps being taken to remediate the material weakness described above, 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 June 30, 2007 that has
materially affected, or is reasonably likely to materially affect, the Companys internal control
over financial reporting.
(c) 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.
Part II OTHER INFORMATION
Item 1. Legal Proceedings.
We are party to various legal proceedings arising in the ordinary course of business,
including asserted preference payment claims in client bankruptcy proceedings, claims of alleged
infringement of patents, trademarks, copyrights and other intellectual property rights and claims
of alleged non-compliance with contract provisions.
35
INSIGHT ENTERPRISES, INC.
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 June 2006, our subsidiary, Software Spectrum, Inc. was named as a defendant in a civil
lawsuit, Allocco v. Gardner (Superior Court, County of San Diego), regarding certain software
resale transactions with Peregrine Systems, Inc. The subsidiary was named as successor to
Corporate Software & Technology, Inc. (CS&T) and alleges that during October 2000 CS&T
participated in or aided and abetted a fraudulent scheme by Peregrine to inflate Peregrines stock
price. Pursuant to the terms of the agreement by which we acquired Software Spectrum, Inc. from
Level 3 Communications, Inc. (Level 3, the former corporate parent of Software Spectrum, Inc.),
Level 3 has agreed to indemnify, defend and hold us harmless for this matter. The discovery
process is on-going, and we strongly dispute any allegations of participation in fraudulent
behavior. On our behalf Level 3 is vigorously defending this matter.
In October 2006, we received a letter of informal inquiry from the SEC requesting certain
documents relating to our stock option grants and practices. We have cooperated with the SEC and
will continue to do so. We cannot predict the outcome of this investigation.
Software Spectrum, 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 for cost to cover in the amount of
approximately $2,700,000, and, in July 2002, CS&T added a Belgian subsidiary of Microsoft as a
defendant. We believe that MODs counterclaims are unfounded, and we are vigorously defending the
claim.
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you 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, 2006, which could materially affect our business, financial condition or
future results. The risks described in our Annual Report on Form 10-K are not the only risks
facing our company. Additional risks and uncertainty 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of equity securities during the three months ended June 30,
2007.
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.
36
INSIGHT ENTERPRISES, INC.
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
(d) |
|
|
(a) |
|
|
|
|
|
Total Number of Shares |
|
Approximate Dollar Value |
|
|
Total Number |
|
(b) |
|
Purchased as Part of |
|
of Shares That May Yet be |
|
|
of Shares |
|
Average Price |
|
Publicly Announced |
|
Purchased Under the Plans |
Period |
|
Purchased |
|
Paid per Share |
|
Plans or Programs |
|
or Programs1 |
April 1, 2007 through
April 30, 2007 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
50,000,000 |
|
May 1, 2007 through May
31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000,000 |
|
June 1, 2007 through
June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
On January 26, 2006, we announced that our Board of Directors had authorized the
repurchase of up to
$50,000,000 of our common stock. We made no repurchases under this program during the three
months
ended June 30, 2007. |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
37
INSIGHT ENTERPRISES, INC.
Item 6. Exhibits.
(a) Exhibits (unless otherwise noted, exhibits are filed herewith).
|
|
|
Exhibit No. |
|
Description |
3.1
|
|
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). |
3.2
|
|
Certificate of Amendment to the Amended and Restated Certificate of Incorporation
of Insight Enterprises, Inc. (incorporated by reference to Exhibit 3.2 of our
Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, filed on
August 5, 2005, File No. 0-25092). |
3.3
|
|
Amended and Restated Bylaws of the Insight Enterprises, Inc. (incorporated by
reference to Exhibit 99.1 of our Current Report on Form 8-K filed on May 7, 2007,
File No. 0-25092). |
4.1
|
|
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). |
4.2
|
|
Rights Agreement (incorporated by reference to Exhibit 4.1 of our Current Report
on Form 8-K filed on March 17, 1999, File No. 0-25092). |
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
32.1
|
|
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer. |
38
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.
|
|
|
|
|
Date: August 9, 2007 |
|
INSIGHT ENTERPRISES, INC. |
|
|
|
|
|
|
|
By:
|
|
/s/ Richard A. Fennessy |
|
|
|
|
|
|
|
|
|
Richard A. Fennessy
President and Chief Executive Officer |
|
|
|
|
|
|
|
By:
|
|
/s/ Stanley Laybourne |
|
|
|
|
|
|
|
|
|
Stanley Laybourne
Chief Financial Officer, Secretary
and Treasurer
(Principal Financial Officer) |
39