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INSIGHT ENTERPRISES INC - Quarter Report: 2011 September (Form 10-Q)

Form 10-Q
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2011
OR
     
o   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)
     
Delaware   86-0766246
(State or other jurisdiction of   (I.R.S. Employer Identification Number)
incorporation or organization)    
6820 South Harl Avenue, Tempe, Arizona 85283
(Address of principal executive offices) (Zip Code)
(480) 902-1001
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
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 issuer’s common stock as of October 28, 2011 was 43,876,093.
 
 

 

 


 

INSIGHT ENTERPRISES, INC.
QUARTERLY REPORT ON FORM 10-Q
Three Months Ended September 30, 2011
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 Exhibit 10.1
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT

 

 


Table of Contents

INSIGHT ENTERPRISES, INC.
FORWARD-LOOKING INFORMATION
Certain statements in this Quarterly Report on Form 10-Q, including statements in “Management’s 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 operations, non-operating income and expenses, net earnings or cash flows, working capital needs, sources and uses, cash needs and the sufficiency of our capital resources and the payment of accrued expenses and liabilities; details of our business strategy and our strategic initiatives; projections of capital expenditures; our intentions not to pay dividends; the availability of financing and our needs or plans relating thereto; our plans relating to products and services; the effect of new accounting principles or changes in accounting principles; the effect of indemnification obligations and other off-balance sheet arrangements; projections about the outcome of ongoing tax audits; our expectations relative to the benefits of a recently acquired business, Ensynch; statements related to accounting estimates, including estimated stock-based compensation award forfeitures and the realization of deferred tax assets; the timing of amortization of stock-based compensation expense and the payment of accrued severance and restructuring costs; projections of compliance with debt covenants; our intention to reinvest undistributed earnings of foreign subsidiaries; our expectations regarding seasonality; our anticipated compliance with our debt covenants; the sufficiency of our provisions for litigation losses; our positions and strategies with respect to ongoing and threatened litigation, including those matters identified in “Legal Proceedings” in Part II, Item 1 of this report; statements of belief; and statements of assumptions underlying any of the foregoing. Forward-looking statements are identified by such words as “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” “project,” “will,” “may” and variations of such words and similar expressions and are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. There can be no assurances that the results discussed in the forward-looking statements will be achieved, and actual results could differ materially from those suggested by the forward-looking statements. Some of the important factors that could cause our actual results to differ materially from those projected in any forward-looking statements include, but are not limited to, the following:
    our reliance on partners for product availability and competitive products to sell as well as competition with our partners;
    our reliance on partners for marketing funds and purchasing incentives;
    disruptions in our information technology (“IT”) systems and voice and data networks, including risks and costs associated with the integration and upgrade of our IT systems;
    general economic conditions, including concerns regarding our ability to collect our accounts receivable and client credit constraints;
    actions of our competitors, including manufacturers and publishers of products we sell;
    changes in the IT industry and/or rapid changes in product standards;
    failure to comply with the terms and conditions of our commercial and public sector contracts;
    stockholder litigation and regulatory proceedings related to the restatement of our consolidated financial statements;
    the availability of future financing and our ability to access and/or refinance our credit facilities;
    the security of our electronic and other confidential information;
    the variability of our net sales and gross profit;
    the risks associated with our international operations;
    exposure to changes in, interpretations of, or enforcement trends related to tax rules and regulations;
    our dependence on key personnel; and
    intellectual property infringement claims and challenges to our registered trademarks and trade names.
Additionally, there may be other risks that are otherwise described from time to time in the reports that we file with the Securities and Exchange Commission. 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.

 

 


Table of Contents

PART I — FINANCIAL INFORMATION
Item 1.   Financial Statements.
INSIGHT ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
                 
    September 30,     December 31,  
    2011     2010  
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 98,680     $ 123,763  
Accounts receivable, net of allowances for doubtful accounts of $18,810 and $17,540, respectively
    910,134       1,135,951  
Inventories
    115,169       106,734  
Inventories not available for sale
    33,827       50,677  
Deferred income taxes
    20,094       23,283  
Other current assets
    28,100       49,289  
 
           
Total current assets
    1,206,004       1,489,697  
 
               
Property and equipment, net of accumulated depreciation of $203,342 and $183,809, respectively
    137,373       141,399  
Goodwill
    16,474       16,474  
Intangible assets, net of accumulated amortization of $62,382 and $50,755, respectively
    60,108       69,081  
Deferred income taxes
    65,262       73,796  
Other assets
    15,350       12,836  
 
           
 
  $ 1,500,571     $ 1,803,283  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 576,920     $ 881,688  
Accrued expenses and other current liabilities
    141,094       187,457  
Current portion of long-term debt
    1,012       997  
Deferred revenue
    37,351       67,373  
 
           
Total current liabilities
    756,377       1,137,515  
 
               
Long-term debt
    156,358       91,619  
Deferred income taxes
    1,830       5,011  
Other liabilities
    23,745       24,167  
 
           
 
    938,310       1,258,312  
 
           
 
               
Commitments and contingencies
               
 
               
Stockholders’ equity:
               
Preferred stock, $0.01 par value, 3,000 shares authorized; no shares issued
           
Common stock, $0.01 par value, 100,000 shares authorized; 43,875 shares at September 30, 2011 and 46,325 shares at December 31, 2010 issued and outstanding
    439       463  
Additional paid-in capital
    358,107       377,277  
Retained earnings
    188,471       149,349  
Accumulated other comprehensive income — foreign currency translation adjustments
    15,244       17,882  
 
           
Total stockholders’ equity
    562,261       544,971  
 
           
 
  $ 1,500,571     $ 1,803,283  
 
           
See accompanying notes to consolidated financial statements.

 

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INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
 
                               
Net sales
  $ 1,238,019     $ 1,169,197     $ 3,926,875     $ 3,470,731  
Costs of goods sold
    1,074,504       1,014,552       3,396,701       2,997,236  
 
                       
Gross profit
    163,515       154,645       530,174       473,495  
Operating expenses:
                               
Selling and administrative expenses
    135,071       129,511       420,558       385,052  
Severance and restructuring expenses
    529       298       4,458       1,687  
 
                       
Earnings from operations
    27,915       24,836       105,158       86,756  
Non-operating (income) expense:
                               
Interest income
    (536 )     (161 )     (1,294 )     (467 )
Interest expense
    1,753       1,899       5,209       5,957  
Net foreign currency exchange loss (gain)
    633       130       (531 )     743  
Other expense, net
    451       348       1,240       1,097  
 
                       
Earnings before income taxes
    25,614       22,620       100,534       79,426  
Income tax expense
    8,448       8,188       34,953       28,915  
 
                       
Net earnings
  $ 17,166     $ 14,432     $ 65,581     $ 50,511  
 
                       
 
                               
Net earnings per share:
                               
Basic
  $ 0.38     $ 0.31     $ 1.43     $ 1.09  
 
                       
Diluted
  $ 0.38     $ 0.31     $ 1.41     $ 1.08  
 
                       
 
                               
Shares used in per share calculations:
                               
Basic
    44,886       46,268       46,001       46,193  
 
                       
Diluted
    45,417       46,865       46,550       46,749  
 
                       
See accompanying notes to consolidated financial statements.

 

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INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
                 
    Nine Months Ended September 30,  
    2011     2010  
 
               
Cash flows from operating activities:
               
Net earnings
  $ 65,581     $ 50,511  
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Depreciation and amortization
    29,033       28,515  
Provision for losses on accounts receivable
    3,387       546  
Write-downs of inventories
    6,319       4,875  
Write-off of computer software development costs
    1,390        
Non-cash stock-based compensation
    5,579       5,139  
Excess tax benefit from employee gains on stock-based compensation
    (1,569 )     (912 )
Deferred income taxes
    7,683       11,762  
Changes in assets and liabilities:
               
Decrease in accounts receivable
    230,630       143,709  
Decrease (increase) in inventories
    1,901       (32,676 )
Decrease (increase) in other current assets
    21,021       (6,558 )
Increase in other assets
    (2,169 )     (1,557 )
Decrease in accounts payable
    (281,221 )     (110,705 )
Decrease in deferred revenue
    (30,937 )     (11,414 )
Decrease in accrued expenses and other liabilities
    (46,566 )     (43,727 )
 
           
Net cash provided by operating activities
    10,062       37,508  
 
           
Cash flows from investing activities:
               
Payment of additional purchase price consideration for Calence
          (5,123 )
Purchases of property and equipment
    (16,883 )     (12,631 )
 
           
Net cash used in investing activities
    (16,883 )     (17,754 )
 
           
Cash flows from financing activities:
               
Borrowings on senior revolving credit facility
    971,000       910,136  
Repayments on senior revolving credit facility
    (905,500 )     (892,636 )
Borrowings on accounts receivable securitization financing facility
    40,000       45,000  
Repayments on accounts receivable securitization financing facility
    (40,000 )     (45,000 )
Payments on capital lease obligation
    (746 )     (681 )
Net repayments under inventory financing facility
    (33,214 )     (9,952 )
Payment of deferred financing fees
          (490 )
Proceeds from sales of common stock under employee stock plans
    38       49  
Excess tax benefit from employee gains on stock-based compensation
    1,569       912  
Payment of payroll taxes on stock-based compensation through shares withheld
    (2,544 )     (1,260 )
Repurchases of common stock
    (50,000 )      
 
           
Net cash (used in) provided by financing activities
    (19,397 )     6,078  
 
           
Foreign currency exchange effect on cash flows
    1,135       (134 )
 
           
(Decrease) increase in cash and cash equivalents
    (25,083 )     25,698  
Cash and cash equivalents at beginning of period
    123,763       68,066  
 
           
Cash and cash equivalents at end of period
  $ 98,680     $ 93,764  
 
           
See accompanying notes to consolidated financial statements.

 

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INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation and Recently Issued Accounting Pronouncements
We are a leading provider of information technology (“IT”) hardware, software and services to small, medium and large businesses and public sector institutions in North America, Europe, the Middle East, Africa and Asia-Pacific. The Company is organized in the following three operating segments, which are primarily defined by their related geographies:
     
Operating Segment   Geography
North America
  United States and Canada
EMEA
  Europe, Middle East and Africa
APAC
  Asia-Pacific
Currently, our offerings in North America and the United Kingdom include IT hardware, software and services. Our offerings in the remainder of our EMEA segment and in APAC are almost entirely software and software-related services.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly our financial position as of September 30, 2011, our results of operations for the three and nine months ended September 30, 2011 and 2010 and our cash flows for the nine months ended September 30, 2011 and 2010. The consolidated balance sheet as of December 31, 2010 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, 2010.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Additionally, these estimates and assumptions affect the reported amounts of net sales and expenses during the reported period. Actual results could differ from those estimates. On an ongoing basis, we evaluate our estimates, including those related to sales recognition, anticipated achievement levels under partner funding programs, assumptions related to stock-based compensation valuation, allowances for doubtful accounts, litigation-related obligations, valuation allowances for deferred tax assets and impairment of long-lived assets, including purchased intangibles and goodwill, if indicators of potential impairment exist.
The consolidated financial statements include the accounts of Insight Enterprises, Inc. and its wholly-owned subsidiaries. All 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, 2010 that affect or may affect our financial statements.

 

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INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
2. Net Earnings Per Share (“EPS”)
Basic EPS is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted EPS is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and restricted stock units. A reconciliation of the denominators of the basic and diluted EPS calculations follows (in thousands, except per share data):
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
Numerator:
                               
Net earnings
  $ 17,166     $ 14,432     $ 65,581     $ 50,511  
 
                       
 
                               
Denominator:
                               
Weighted average shares used to compute basic EPS
    44,886       46,268       46,001       46,193  
Dilutive potential common shares due to dilutive options and restricted stock units, net of tax effect
    531       597       549       556  
 
                       
Weighted average shares used to compute diluted EPS
    45,417       46,865       46,550       46,749  
 
                       
 
                               
Net earnings per share:
                               
Basic
  $ 0.38     $ 0.31     $ 1.43     $ 1.09  
 
                       
Diluted
  $ 0.38     $ 0.31     $ 1.41     $ 1.08  
 
                       
For the three months ended September 30, 2011 and 2010, 200,000 and 258,000, respectively, of weighted average outstanding stock options were not included in the diluted EPS calculations because the exercise prices of these options were greater than the average market price of our common stock during the respective periods. For the nine months ended September 30, 2011 and 2010, the excluded weighted average outstanding stock options were 210,000 and 383,000, respectively.
3. Debt, Capital Lease Obligation and Inventory Financing Facility
Debt
Our long-term debt consists of the following (in thousands):
                 
    September 30,     December 31,  
    2011     2010  
Senior revolving credit facility
  $ 155,500     $ 90,000  
Accounts receivable securitization financing facility
           
Capital lease obligation
    1,870       2,616  
 
           
Total
    157,370       92,616  
Less: current portion of obligation under capital lease
    (1,012 )     (997 )
Less: current portion of revolving credit facilities
           
 
           
Long-term debt
  $ 156,358     $ 91,619  
 
           
Our senior revolving credit facility has a maximum borrowing capacity of $300,000,000 and matures April 1, 2013.
Our accounts receivable securitization financing facility (the “ABS facility”) has a maximum borrowing capacity of $150,000,000 and matures on April 1, 2013. While the ABS facility has a stated maximum amount, the actual availability under the ABS facility is limited by the quantity and quality of the underlying accounts receivable. As of September 30, 2011, availability under the ABS facility was $150,000,000.

 

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INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Our consolidated debt balance that can be outstanding at the end of any fiscal quarter under our senior revolving credit facility and our ABS facility is limited by certain financial covenants, particularly a maximum leverage ratio. The maximum leverage ratio is calculated as aggregate debt outstanding divided by the sum of the Company’s trailing twelve month net earnings (loss) plus (i) interest expense, less non-cash imputed interest on our inventory financing facility, (ii) income tax expense (benefit), (iii) depreciation and amortization and (iv) non-cash stock-based compensation (referred to herein as “adjusted earnings”). The maximum leverage ratio permitted under the agreements is 2.50 times trailing twelve-month adjusted earnings. A significant drop in the Company’s adjusted earnings would limit the amount of indebtedness that could be outstanding at the end of any fiscal quarter to a level that would be below the Company’s consolidated maximum debt capacity. As of September 30, 2011, the Company’s debt balance that could have been outstanding was equal to the maximum available under the facilities of $450,000,000.
Our financing facilities contain various covenants, including the requirement that we comply with maximum leverage, minimum fixed charge and minimum asset coverage ratio requirements and meet monthly, quarterly and annual reporting requirements. If we fail to comply with these covenants, the lenders would be able to demand payment within a specified period of time. At September 30, 2011, we were in compliance with all such covenants.
Capital Lease Obligation
The present value of minimum lease payments under our capital lease and the current portion thereof are included in our debt balances as summarized in the table above. The value of the IT equipment held under the capital lease of $3,867,000 is included in property and equipment, with accumulated amortization on the capital lease assets of $2,036,000 and $1,283,000 as of September 30, 2011 and December 31, 2010, respectively.
Inventory Financing Facility
As of September 30, 2011 and December 31, 2010, $101,898,000 and $135,112,000, respectively, were included in accounts payable within our consolidated balance sheets related to our inventory financing facility.
4. Income Taxes
Our effective tax rate for the three and nine months ended September 30, 2011 was 33.0% and 34.8%, respectively. For the three months ended September 30, 2011, our effective tax rate was lower than the United States federal statutory rate of 35.0% due primarily to lower taxes on earnings in foreign jurisdictions and to the recognition of tax benefits relating to the re-measurement or settlement of specific uncertain tax positions during the quarter, partially offset by state income taxes, net of federal income tax benefit. For the nine months ended September 30, 2011, our effective tax rate was slightly lower than the United States federal statutory rate of 35.0% due primarily to lower taxes on earnings in foreign jurisdictions, the recognition of tax benefits relating to the re-measurement or settlement of specific uncertain tax positions and the release of a valuation allowance in the United Kingdom, offset by state income taxes, net of federal income tax benefit.
Our effective tax rate for the three and nine months ended September 30, 2010 was 36.2% and 36.4%, respectively. For the three and nine months ended September 30, 2010, 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 income tax benefit, partially offset by lower taxes on earnings in foreign jurisdictions.

 

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INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
As of September 30, 2011 and December 31, 2010, we had $4,733,000 and $6,013,000, respectively, of unrecognized tax benefits. Of these amounts, approximately $470,000 and $425,000 relate to accrued interest as of September 30, 2011 and December 31, 2010, respectively.
Several of our subsidiaries are currently under audit for the 2002 through 2009 tax years. It is reasonably possible that the examination phase of these audits may conclude in the next 12 months and that the related unrecognized tax benefits for uncertain tax positions may change, potentially having a material effect on our effective tax rate. However, based on the status of the various examinations in multiple jurisdictions, an estimate of the range of reasonably possible outcomes cannot be made at this time.
5. Severance and Restructuring Activities
Severance Costs Expensed for 2011 Resource Actions
During the three months ended September 30, 2011, North America and EMEA recorded severance expense totaling $476,000 and $53,000, respectively, and during the nine months ended September 30, 2011, North America and EMEA recorded severance expense totaling $1,961,000 and $2,578,000, respectively, related to 2011 resource actions. The charges were associated with severance for the elimination of certain positions based on a re-alignment of roles and responsibilities. The remaining outstanding obligations as of September 30, 2011 of $619,000 and $1,738,000 for North America and EMEA, respectively, are expected to be paid during the next twelve months and are therefore included in accrued expenses and other current liabilities.
Severance Costs Expensed for 2010 Resource Actions
During the year ended December 31, 2010, North America and EMEA recorded severance expense totaling $2,003,000 and $1,476,000, respectively, relating to 2010 resource actions. The North America charge was part of the roll-out of our new sales engagement model and plans to add new leadership in key areas, and the EMEA charge was associated with severance for the elimination of certain positions based on a re-alignment of roles and responsibilities.
The following table details the 2011 activity and the outstanding obligation related to the 2010 resource actions as of September 30, 2011 (in thousands):
                         
    North America     EMEA     Consolidated  
Balance at December 31, 2010
  $ 1,166     $ 575     $ 1,741  
Foreign currency translation adjustments
          70       70  
Adjustments
    (45 )     (36 )     (81 )
Cash payments
    (1,029 )     (281 )     (1,310 )
 
                 
Balance at September 30, 2011
  $ 92     $ 328     $ 420  
 
                 
In North America and EMEA, adjustments totaling $45,000 and $36,000, respectively, were recorded as a reduction to severance and restructuring expense during the nine months ended September 30, 2011 and a reduction of the related severance accrual due to changes in estimates as cash payments were made. All remaining outstanding obligations are expected to be paid during the next twelve months and are therefore included in accrued expenses and other current liabilities.
Prior Resource Actions
In prior years, as a result of ongoing restructuring efforts to reduce operating expenses, certain severance costs were recorded in each of our operating segments. The only remaining outstanding obligations related to these prior resource actions as of December 31, 2010 were in our EMEA segment. As of September 30, 2011 and December 31, 2010, the total liability remaining for unpaid severance costs associated with resource actions prior to 2010 in our EMEA segment was approximately $417,000 and $1,113,000, respectively. The decrease in this total liability during the nine months ended September 30, 2011 was primarily attributable to cash payments totaling approximately $728,000 and foreign currency translation adjustments. All remaining outstanding obligations are expected to be paid during the next twelve months and are therefore included in accrued expenses and other current liabilities.

 

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INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
6. Stock-Based Compensation
We recorded the following pre-tax amounts for stock-based compensation, by operating segment, in our consolidated financial statements (in thousands):
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
North America
  $ 1,233     $ 1,712     $ 4,054     $ 3,901  
EMEA
    464       508       1,356       1,105  
APAC
    59       57       169       133  
 
                       
Total
  $ 1,756     $ 2,277     $ 5,579     $ 5,139  
 
                       
Stock Options
The following table summarizes our stock option activity during the nine months ended September 30, 2011:
                                 
                            Weighted  
                    Aggregate     Average  
            Weighted     Intrinsic Value     Remaining  
    Number     Average     (in-the-money     Contractual  
    Outstanding     Exercise Price     options)     Life (in years)  
Outstanding at January 1, 2011
    243,452     $ 17.99                  
Granted
                           
Exercised
    (2,666 )     14.12     $ 10,442          
 
                             
Forfeited or expired
    (39,503 )     19.47                  
 
                             
Outstanding at September 30, 2011
    201,283       17.75     $ 1,292       1.20  
 
                         
Exercisable at September 30, 2011
    201,283       17.75     $ 1,292       1.20  
 
                         
Vested and expected to vest
    201,283       17.75     $ 1,292       1.20  
 
                         
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on our closing stock price of $15.14 as of September 30, 2011, which would have been received by the option holders had all option holders exercised options and sold the underlying shares on that date.
As of September 30, 2011, all outstanding options are exercisable, including 200,000 options with an exercise price of $17.77 and a remaining contractual life of 1.21 years. The remaining 1,283 outstanding options have exercise prices ranging from $14.00 to $19.10 and a weighted average remaining contractual life of 0.02 years.
As of December 31, 2010, all stock options had vested and total compensation cost related to all previously granted stock options had been recognized. For the three and nine months ended September 30, 2010, we recorded stock-based compensation expense related to stock options, net of an estimate of forfeitures, of $93,000 and $276,000, respectively.

 

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INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Restricted Stock
For the three months ended September 30, 2011 and 2010, we recorded stock-based compensation expense, net of estimated forfeitures, related to restricted stock units (“RSUs”) of $1,756,000 and $2,184,000, respectively. For the nine months ended September 30, 2011 and 2010, we recorded stock-based compensation expense, net of an estimate of forfeitures, related to RSUs of $5,579,000 and $4,863,000, respectively. As of September 30, 2011, total compensation cost not yet recognized related to nonvested RSUs is $12,053,000, which is expected to be recognized over the next 1.18 years on a weighted-average basis.
The following table summarizes our RSU activity during the nine months ended September 30, 2011:
                         
            Weighted Average        
    Number     Grant Date Fair Value     Fair Value  
Nonvested at January 1, 2011
    1,599,376     $ 9.99          
Granted
    532,332       18.12          
Vested, including shares withheld to cover taxes
    (588,521 )     9.37     $ 10,410,316 (a)
 
                     
Forfeited
    (171,351 )     11.12          
 
                     
Nonvested at September 30, 2011
    1,371,836       13.28     $ 20,769,597 (b)
 
                   
Expected to vest
    1,286,549             $ 19,478,352 (b)
 
                   
     
(a)   The fair value of vested RSUs represents the total pre-tax fair value, based on the closing stock price on the day of vesting, which would have been received by holders of RSUs had all such holders sold their underlying shares on that date.
 
(b)   The aggregate fair value represents the total pre-tax fair value, based on our closing stock price of $15.14 as of September 30, 2011, which would have been received by holders of RSUs had all such holders sold their underlying shares on that date.
During the nine months ended September 30, 2011 and 2010, the RSUs that vested for teammates in the United States were net-share settled such that we withheld shares with value equivalent to the teammates’ minimum statutory United States tax obligations for the applicable income and other employment taxes and remitted the corresponding cash amount to the appropriate taxing authorities. The total shares withheld during the nine months ended September 30, 2011 and 2010 of 143,773 and 94,353, respectively, were based on the value of the RSUs on their vesting date as determined by our closing stock price on such vesting date. For the nine months ended September 30, 2011 and 2010, total payments for the employees’ tax obligations to the taxing authorities were $2,544,000 and $1,260,000, respectively, and are reflected as a financing activity within the consolidated statements of cash flows. These net-share settlements had the economic effect of repurchases of common stock as they reduced the number of shares that would have otherwise been issued as a result of the vesting and did not represent a repurchase of shares or an expense to us.
7. Derivative Financial Instruments
We use derivatives to partially offset our exposure to fluctuations in certain foreign currencies. We do not enter into derivatives for speculative or trading purposes. Derivatives are recorded at fair value on the balance sheet and gains or losses resulting from changes in fair value of the derivative are recorded currently in income. The Company does not designate its foreign currency derivatives as hedges for hedge accounting.

 

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INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes our derivative financial instruments as of September 30, 2011 and December 31, 2010 (in thousands):
                                     
        September 30, 2011     December 31, 2010  
        Asset     Liability     Asset     Liability  
        Derivatives     Derivatives     Derivatives     Derivatives  
    Balance Sheet Location   Fair Value     Fair Value     Fair Value     Fair Value  
Derivatives not designated as hedging instruments:
                                   
Foreign exchange forward contracts
  Other current assets   $ 222     $     $ 28     $  
Foreign exchange forward contracts
  Accrued expenses and other current liabilities           273             91  
 
                           
Total derivatives not designated as hedging instruments
      $ 222     $ 273     $ 28     $ 91  
 
                           
The following table summarizes the effect of our derivative financial instruments on our results of operations during the three and nine months ended September 30, 2011 and 2010 (in thousands):
                                         
    Location of (Gain) Loss              
Derivatives Not Designated as   Recognized in     Amount of (Gain) Loss Recognized in
Hedging Instruments   Earnings on Derivatives     Earnings on Derivatives  
            Three Months Ended     Nine Months Ended  
            September 30,     September 30,  
            2011     2010     2011     2010  
Foreign exchange forward contracts
  Net foreign currency exchange (gain) loss   $ (281 )   $ 314     $ (881 )   $ (1,147 )
 
                               
Total
          $ (281 )   $ 314     $ (881 )   $ (1,147 )
 
                               

 

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INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
8. Fair Value Measurements
The following table summarizes the valuation of our financial instruments by the following three categories as of September 30, 2011 and December 31, 2010 (in thousands):
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
                                     
        September 30, 2011     December 31, 2010  
                Non-qualified             Non-qualified  
                Deferred             Deferred  
        Foreign     Compensation     Foreign     Compensation  
        Exchange     Plan     Exchange     Plan  
Balance Sheet Classification       Derivatives     Investments     Derivatives     Investments  
Other current assets
  Level 1   $     $     $     $  
 
  Level 2     222             28        
 
  Level 3                          
 
                           
 
      $ 222     $     $ 28     $  
 
                           
 
                                   
Other assets
  Level 1   $     $ 1,185     $     $ 1,245  
 
  Level 2                        
 
  Level 3                        
 
                           
 
      $     $ 1,185     $     $ 1,245  
 
                           
 
                                   
Accrued expenses and other current liabilities
  Level 1   $     $     $     $  
 
  Level 2     273             91        
 
  Level 3                        
 
                           
 
      $ 273     $     $ 91     $  
 
                           
9. Comprehensive Income
Comprehensive income for the three and nine months ended September 30, 2011 and 2010 includes the following component (in thousands):
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
Net earnings
  $ 17,166     $ 14,432     $ 65,581     $ 50,511  
Other comprehensive income (loss), net of tax:
                               
Foreign currency translation adjustments
    (12,622 )     13,097       (2,638 )     (2,066 )
 
                       
Total comprehensive income
  $ 4,544     $ 27,529     $ 62,943     $ 48,445  
 
                       
10. Share Repurchase Program
On May 26, 2011, we announced that our Board of Directors had authorized the repurchase of up to $50,000,000 of our common stock. During the nine months ended September 30, 2011, we purchased 2,897,493 shares of our common stock on the open market at an average price of $17.26 per share, which represented the full amount authorized under the repurchase program. All shares repurchased were retired.

 

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INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. Commitments and Contingencies
Contractual
In the ordinary course of business, we issue performance bonds to secure our performance under certain contracts or state tax requirements. As of September 30, 2011, we had approximately $21,819,000 of performance bonds outstanding. These bonds are issued on our behalf by a surety company on an unsecured basis; however, if the surety company is ever required to pay out under the bonds, we have contractually agreed to reimburse them.
Employment Contracts and Severance Plans
We have employment contracts with, and plans covering, certain officers and management teammates under which severance payments would become payable in the event of specified terminations without cause or terminations under certain circumstances after a change in control. In addition, vesting of stock-based compensation would accelerate following a change in control. If severance payments under the current employment agreements or plan payments were to become payable, the severance payments would generally range from three to twenty-four months of salary.
Indemnifications
From time to time, in the ordinary course of business, we enter into contractual arrangements under which we agree to indemnify either our clients or third-party service providers from certain losses incurred relating to services performed on our behalf or for losses arising from defined events, which may include litigation or claims relating to past performance. These arrangements include, but are not limited to, the indemnification of our clients for certain claims arising out of our performance under our sales contracts, the indemnification of our landlords for certain claims arising from our use of leased facilities and the indemnification of the lenders that provide our credit facilities for certain claims arising from their extension of credit to us. Such indemnification obligations may not be subject to maximum loss clauses.
Management believes that payments, if any, related to these indemnifications are not probable at September 30, 2011. Accordingly, we have not accrued any liabilities related to such indemnifications in our consolidated financial statements.
We have entered into separate indemnification agreements with our executive officers and with each of our directors. These agreements require us, among other requirements, to indemnify such officers and directors against expenses (including attorneys’ fees), judgments and settlements paid by such individual in connection with any action arising out of such individual’s status or service as our executive officer or director (subject to exceptions such as where the individual failed to act in good faith or in a manner the individual reasonably believed to be in or not opposed to the best interests of the Company) and to advance expenses incurred by such individual with respect to which such individual may be entitled to indemnification by us. Other than the pending purported class action litigation and the Federal derivative action discussed under the caption “Legal Proceedings” below, there are no pending legal proceedings that involve the indemnification of any of the Company’s directors or officers.
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. 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.

 

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INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Legal Proceedings
We are party to various legal proceedings arising in the ordinary course of business, including preference payment claims asserted in client bankruptcy proceedings, claims of alleged infringement of patents, trademarks, copyrights and other intellectual property rights, claims of alleged non-compliance with contract provisions and claims related to alleged violations of laws and regulations.
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 or proceeding. Although litigation is inherently unpredictable, we believe that we have adequate provisions for any probable and estimable losses. It is possible, nevertheless, that our consolidated financial position, results of operations or liquidity 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.
Beginning in March 2009, three purported class action lawsuits were filed in the U.S. District Court for the District of Arizona against us and certain of our current and former directors and officers on behalf of purchasers of our securities during the period April 22, 2004 to February 6, 2009. As amended, the complaint sought damages and asserted claims under the federal securities laws relating to our February 2009 announcement of a restatement of certain financial statements and contained allegations regarding other purported accounting, revenue recognition and financial reporting issues during the April 2004 — February 2009 period. In November 2010, the second amended complaint (the only remaining complaint then on file) of the lead plaintiff was dismissed with prejudice, and another purported class member plaintiff has appealed the order of dismissal with prejudice to the U.S. Court of Appeals for the Ninth Circuit. That appeal is currently pending. In June 2009, a shareholder derivative lawsuit was filed in the U.S. District Court for the District of Arizona by a person identifying himself as an Insight shareholder and purporting to act on behalf of Insight, naming Insight as a nominal defendant and current and former officers and directors as defendants. The derivative action was dismissed with prejudice in July 2010, and the plaintiff in that action appealed the order of dismissal to the U.S. Court of Appeals for the Ninth Circuit. That appeal is currently pending. We have tendered a claim to our D&O liability insurance carriers, and our carriers have acknowledged their obligations under these policies subject to a reservation of rights. Based on the information available at this time, the Company is not able to estimate the possible loss or range of loss for the purported class action or the Federal derivative action, if any, at this time.
In August 2010, in connection with an investigation being conducted by the United States Department of Justice (the “DOJ”), our subsidiary, Calence, LLC, received a subpoena from the Office of the Inspector General of the Federal Communications Commission (the “FCC OIG”) requesting documents and information related to the expenditure, by the Universal Service Administration Company, of funds under the E-Rate program. The E-Rate program provides schools and libraries with discounts to obtain affordable telecommunications and internet access and related hardware and software. We are cooperating with the DOJ and FCC OIG and have responded to the subpoena, and, based on the information available at this time, the Company is not able to estimate what the possible loss or range of loss might be, if any, at this time. The Company is pursuing its rights under the Calence acquisition agreements to indemnification for losses that may arise out of or result from this matter, including our fees and expenses for responding to the subpoena.
In September 2011, Insight Public Sector, Inc. learned that it had been named as a defendant in a qui tam lawsuit alleging violations of the Trade Agreements Act and the False Claims Act. This case, designated United States ex rel. Sandager v. Hewlett-Packard et al., was originally filed under seal in the United States District Court for the District of Minnesota in July 2008. In September 2009, the United States declined to intervene in the matter on behalf of the private qui tam plaintiff (the relator) and take the lead in the litigation, but that decision should not be viewed as a final assessment by the United States of the merits of this qui tam action. The amended complaint was filed in September 2011 and was served on Insight Public Sector, Inc. on September 26, 2011. Insight Public Sector, Inc. is one of twenty-one named defendants in the amended complaint. The plaintiff dropped 13 of the original 34 defendants in filing the amended complaint. The amended complaint seeks various remedies including damages, statutory penalties and an award to the relator under the False Claims Act. The Company intends to defend vigorously against this lawsuit. Based on the information available at this time, the Company is not able to estimate the possible loss or range of loss, if any, at this time.

 

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INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Aside from the matters discussed above, the Company is not involved in any pending or threatened legal proceedings that it believes could reasonably be expected to have a material adverse effect on its financial condition, results of operations or liquidity.
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 IT hardware, software and services. Our offerings in the remainder of our EMEA segment and in APAC are almost entirely software and select software-related services. Net sales by product or service type for North America, EMEA and APAC were as follows for the three and nine months ended September 30, 2011 and 2010 (in thousands):
                                                 
    North America     EMEA     APAC  
    Three Months Ended     Three Months Ended     Three Months Ended  
    September 30,     September 30,     September 30,  
Sales Mix   2011     2010     2011     2010     2011     2010  
Hardware
  $ 610,073     $ 572,427     $ 107,086     $ 103,326     $ 772     $ 408  
Software
    242,518       245,563       176,376       159,854       32,703       29,112  
Services
    61,002       53,214       5,668       4,633       1,821       660  
 
                                   
 
  $ 913,593     $ 871,204     $ 289,130     $ 267,813     $ 35,296     $ 30,180  
 
                                   
                                                 
    North America     EMEA     APAC  
    Nine Months Ended     Nine Months Ended     Nine Months Ended  
    September 30,     September 30,     September 30,  
Sales Mix   2011     2010     2011     2010     2011     2010  
Hardware
  $ 1,767,418     $ 1,555,173     $ 333,021     $ 322,888     $ 1,404     $ 818  
Software
    798,905       716,528       678,468       607,978       141,674       98,012  
Services
    183,632       153,298       17,497       13,450       4,856       2,586  
 
                                   
 
  $ 2,749,955     $ 2,424,999     $ 1,028,986     $ 944,316     $ 147,934     $ 101,416  
 
                                   
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 or nine months ended September 30, 2011.
A portion of our operating segments’ selling and administrative expenses arise from shared services and infrastructure that we provide to them in order to realize economies of scale. These expenses, collectively identified as corporate charges, include senior management expenses, internal audit, legal, tax, insurance services, treasury and other corporate infrastructure expenses. Charges are allocated to our operating segments, and the allocations have been determined on a basis that we considered to be a reasonable reflection of the utilization of services provided to or benefits received by the operating segments.

 

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INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The tables below present information about our reportable operating segments as of and for the three months ended September 30, 2011 and 2010 (in thousands):
                                 
    Three Months Ended September 30, 2011  
    North America     EMEA     APAC     Consolidated  
Net sales
  $ 913,593     $ 289,130     $ 35,296     $ 1,238,019  
Costs of goods sold
    798,955       247,012       28,537       1,074,504  
 
                       
Gross profit
    114,638       42,118       6,759       163,515  
Operating expenses:
                               
Selling and administrative expenses
    89,539       39,372       6,160       135,071  
Severance and restructuring expenses
    476       53             529  
 
                       
Earnings from operations
  $ 24,623     $ 2,693     $ 599       27,915  
 
                         
Non-operating expense, net
                            2,301  
 
                             
Earnings before income taxes
                            25,614  
Income tax expense
                            8,448  
 
                             
Net earnings
                          $ 17,166  
 
                             
 
                               
Total assets at period end
  $ 1,373,333     $ 382,984     $ 57,671     $ 1,813,988 *
 
                       
     
*   Consolidated total assets do not reflect the net effect of corporate assets and intercompany eliminations of $313,417,000.
                                 
    Three Months Ended September 30, 2010  
    North America     EMEA     APAC     Consolidated  
Net sales
  $ 871,204     $ 267,813     $ 30,180     $ 1,169,197  
Costs of goods sold
    760,668       229,681       24,203       1,014,552  
 
                       
Gross profit
    110,536       38,132       5,977       154,645  
Operating expenses:
                               
Selling and administrative expenses
    89,012       35,808       4,691       129,511  
Severance and restructuring expenses
    199       99             298  
 
                       
Earnings from operations
  $ 21,325     $ 2,225     $ 1,286       24,836  
 
                         
Non-operating expense, net
                            2,216  
 
                             
Earnings before income taxes
                            22,620  
Income tax expense
                            8,188  
 
                             
Net earnings
                          $ 14,432  
 
                             
 
                               
Total assets at period end
  $ 1,329,004     $ 362,576     $ 46,743     $ 1,738,323 **
 
                       
     
**   Consolidated total assets do not reflect the net effect of corporate assets and intercompany eliminations of $261,124,000.

 

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INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The tables below present information about our reportable operating segments as of and for the nine months ended September 30, 2011 and 2010 (in thousands):
                                 
    Nine Months Ended September 30, 2011  
    North America     EMEA     APAC     Consolidated  
Net sales
  $ 2,749,955     $ 1,028,986     $ 147,934     $ 3,926,875  
Costs of goods sold
    2,393,718       879,795       123,188       3,396,701  
 
                       
Gross profit
    356,237       149,191       24,746       530,174  
Operating expenses:
                               
Selling and administrative expenses
    277,114       125,030       18,414       420,558  
Severance and restructuring expenses
    1,916       2,542             4,458  
 
                       
Earnings from operations
  $ 77,207     $ 21,619     $ 6,332       105,158  
 
                         
Non-operating expense, net
                            4,624  
 
                             
Earnings before income taxes
                            100,534  
Income tax expense
                            34,953  
 
                             
Net earnings
                          $ 65,581  
 
                             
 
                               
Total assets at period end
  $ 1,373,333     $ 382,984     $ 57,671     $ 1,813,988 *
 
                       
     
*   Consolidated total assets do not reflect the net effect of corporate assets and intercompany eliminations of $313,417,000.
                                 
    Nine Months Ended September 30, 2010  
    North America     EMEA     APAC     Consolidated  
Net sales
  $ 2,424,999     $ 944,316     $ 101,416     $ 3,470,731  
Costs of goods sold
    2,095,892       818,440       82,904       2,997,236  
 
                       
Gross profit
    329,107       125,876       18,512       473,495  
Operating expenses:
                               
Selling and administrative expenses
    260,241       110,698       14,113       385,052  
Severance and restructuring expenses
    1,142       545             1,687  
 
                       
Earnings from operations
  $ 67,724     $ 14,633     $ 4,399       86,756  
 
                         
Non-operating expense, net
                            7,330  
 
                             
Earnings before income taxes
                            79,426  
Income tax expense
                            28,915  
 
                             
Net earnings
                          $ 50,511  
 
                             
 
                               
Total assets at period end
  $ 1,329,004     $ 362,576     $ 46,743     $ 1,738,323 **
 
                       
     
**   Consolidated total assets do not reflect the net effect of corporate assets and intercompany eliminations of $261,124,000.
We recorded the following pre-tax amounts, by operating segment, for depreciation and amortization, in the accompanying consolidated financial statements (in thousands):
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2011     2010     2011     2010  
North America
  $ 7,922     $ 7,696     $ 23,156     $ 23,179  
EMEA
    1,775       1,613       5,242       4,809  
APAC
    211       186       635       527  
 
                       
Total
  $ 9,908     $ 9,495     $ 29,033     $ 28,515  
 
                       

 

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INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
13. Subsequent Event
Effective October 1, 2011, we acquired Tempe, Arizona-based Ensynch, Incorporated, a leading professional services firm with multiple Microsoft Gold competencies across the complete Microsoft solution set, including cloud migration and management. Ensynch’s 2010 services revenue was $16.2 million. We believe this acquisition brings a depth of knowledge and expertise that will enhance our professional services capabilities. We believe that combining Ensynch’s technical skills with Insight’s sales engine will elevate our ability to provide clients with complete software solutions to drive their success.
We are in the process of determining the fair value of net assets acquired, including identifiable intangible assets, which will be recorded in our North America operating segment. We will consolidate the results of operations for Ensynch beginning on October 1, 2011, the effective date of the acquisition. We do not believe that our historical results would have been materially affected by the acquisition of Ensynch.

 

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this Quarterly Report on Form 10-Q.
Quarterly Overview
We are a leading provider of information technology (“IT”) hardware, software and services to small, medium and large businesses and public sector institutions in North America, Europe, the Middle East, Africa and Asia-Pacific. Currently, our offerings in North America and the United Kingdom include IT hardware, software and services. Our offerings in the remainder of our EMEA segment and in APAC are almost entirely software and software-related services.
Solid sales performance combined with significant operating leverage drove double-digit growth in earnings from operations and operating margin expansion during the third quarter of 2011. Consolidated net sales increased 6% to $1.24 billion in the three months ended September 30, 2011 compared to $1.17 billion for three months ended September 30, 2010. Gross profit for the three months ended September 30, 2011 also increased 6% year over year to $163.5 million, and gross margin remained steady at 13.2%. On a consolidated basis, we reported earnings from operations of $27.9 million, net earnings of $17.2 million and diluted earnings per share of $0.38 for the third quarter of 2011. This compares to earnings from operations of $24.8 million, net earnings of $14.4 million and diluted earnings per share of $0.31 for the third quarter of 2010. While the market for IT products moderated somewhat from the double-digit sales growth we experienced in recent quarters coming out of the recession, our sales performance and disciplined cost management drove financial performance ahead of our expectations.
Our consolidated results of operations for the third quarter of 2011 include $529,000, $330,000 net of tax, of severance expense, compared to $298,000, $192,000 net of tax, recorded during the third quarter of 2010. Net of tax amounts were computed using the statutory tax rate for the taxing jurisdictions in the operating segment in which the related expenses were recorded.
Details about segment results of operations can be found in Note 12 to the Consolidated Financial Statements in Part I, Item 1 of this report.
Our discussion and analysis of financial condition and results of operations is intended to assist in the understanding of our consolidated financial statements, the changes in certain key items in those consolidated financial statements from period to period and the primary factors that contributed to those changes, as well as how certain critical accounting estimates affect our consolidated financial statements.
Critical Accounting Estimates
General
Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). For a summary of significant accounting policies, see Note 1 to the Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2010. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results, however, may differ from estimates we have made. Members of our senior management have discussed the critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors.

 

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
There have been no changes to the items disclosed as critical accounting estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2010.
Results of Operations
The following table sets forth for the periods presented certain financial data as a percentage of net sales for the three and nine months ended September 30, 2011 and 2010:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %
Costs of goods sold
    86.8       86.8       86.5       86.4  
 
                       
Gross profit
    13.2       13.2       13.5       13.6  
Selling and administrative expenses
    10.9       11.1       10.7       11.1  
Severance and restructuring expenses
    0.0       0.0       0.1       0.0  
 
                       
Earnings from operations
    2.3       2.1       2.7       2.5  
Non-operating expense, net
    0.2       0.2       0.1       0.2  
 
                       
Earnings before income taxes
    2.1       1.9       2.6       2.3  
Income tax expense
    0.7       0.7       0.9       0.8  
 
                       
Net earnings
    1.4 %     1.2 %     1.7 %     1.5 %
 
                       
We experience some seasonal trends in our sales of IT hardware, software and services. Software sales are typically seasonally higher in our second and fourth quarters, particularly the second quarter; business clients, particularly larger enterprise businesses in the U.S., tend to spend more in our fourth quarter as they utilize their remaining capital budget authorizations and less in the first quarter; sales to the federal government in the U.S. are often stronger in our third quarter; and sales to public sector clients in the United Kingdom are often stronger in our first quarter. These trends create overall seasonality in our consolidated results such that sales and profitability are expected to be higher in the second and fourth quarters of the year.
Throughout this “Results of Operations” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we refer to changes in net sales, gross profit and selling and administrative expenses in EMEA and APAC excluding the effects of foreign currency movements. In computing these change amounts and percentages, we compare the current year amount as translated into U.S. dollars under the applicable accounting standards to the prior year amount in local currency translated into U.S. dollars utilizing the average translation rate for the current quarter.
Net Sales. Net sales for the three months ended September 30, 2011 increased 6% compared to the three months ended September 30, 2010. Net sales for the nine months ended September 30, 2011 increased 13% compared to the nine months ended September 30, 2010. Our net sales by operating segment were as follows (dollars in thousands):
                                                 
    Three Months Ended             Nine Months Ended        
    September 30,     %     September 30,     %  
    2011     2010     Change     2011     2010     Change  
North America
  $ 913,593     $ 871,204       5 %   $ 2,749,955     $ 2,424,999       13 %
EMEA
    289,130       267,813       8 %     1,028,986       944,316       9 %
APAC
    35,296       30,180       17 %     147,934       101,416       46 %
 
                                       
Consolidated
  $ 1,238,019     $ 1,169,197       6 %   $ 3,926,875     $ 3,470,731       13 %
 
                                       

 

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Net sales in North America increased 5%, or $42.4 million, for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. Net sales of hardware and services increased 7% and 15%, respectively, year over year, while net sales of software decreased 1% year to year. Sales growth moderated somewhat in the third quarter compared to the year over year double-digit growth experienced in previous quarters post-recession. Overall, the increases in the hardware category resulted from higher volume with the year over year improvement in the demand environment for IT products, although at a more moderate pace than in previous quarters. The increase in services sales related to a higher volume of professional services and managed services projects. The decrease in the software category resulted from declines in public sector spending.
Net sales in North America increased 13%, or $325.0 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010, primarily as a result of generally higher demand for IT products. On a year to date basis, net sales of hardware, software and services increased 14%, 12% and 20%, respectively, year over year.
Net sales in EMEA increased 8%, or $21.3 million, in U.S. dollars, for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. Excluding the effects of foreign currency movements, net sales increased 2% compared to the third quarter of last year. EMEA’s growth rate lags our growth rate in North America and APAC as the European economy has recovered more slowly post-recession than our other markets. Net sales of hardware were up 4% year over year in U.S. dollars but were flat excluding the effects of foreign currency movements, as growth in the middle market client space more than offset reduced spending in the public sector market. Software net sales increased 10% year over year in U.S. dollars, 3% excluding the effects of foreign currency movements, due primarily to new client engagements in the middle market client space. Net sales of services increased 22% year over year in U.S. dollars, 15% excluding the effects of foreign currency movements, due primarily to higher volume and new client engagements.
Net sales in EMEA increased 9%, or $84.7 million, in U.S. dollars, for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. Excluding the effects of foreign currency movements, net sales were up 2% compared to the first nine months of last year. On a year to date basis, hardware and software sales increased 3% and 12%, respectively, while sales of services improved 30% year over year, in U.S. dollars. Excluding the effects of foreign currency movements, hardware sales declined 2% year to year, while net sales of software and services increased 3% and 22%, respectively, year over year. The year to date decrease in hardware sales primarily resulted from a decrease in spending in the public sector market, while the increases in software and services sales primarily resulted from higher volume and new client engagements.
Our APAC segment recognized net sales of $35.3 million for the three months ended September 30, 2011, a year over year increase of 17% from the three months ended September 30, 2010 in U.S. dollars, 3% excluding the effects of foreign currency movements. The increase primarily resulted from increased sales in the middle market.
Net sales in APAC increased 46%, or $46.5 million, in U.S. dollars, for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010, 28% excluding the effects of foreign currency movements. The year to date increase primarily resulted from higher volume and new client engagements, particularly with public sector clients.

 

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The percentage of net sales by category for North America, EMEA and APAC were as follows for the three months ended September 30, 2011 and 2010:
                                                 
    North America     EMEA     APAC  
    Three Months Ended     Three Months Ended     Three Months Ended  
    September 30,     September 30,     September 30,  
Sales Mix   2011     2010     2011     2010     2011     2010  
Hardware
    67 %     66 %     37 %     38 %     2 %     1 %
Software
    26 %     28 %     61 %     60 %     93 %     97 %
Services
    7 %     6 %     2 %     2 %     5 %     2 %
 
                                   
 
    100 %     100 %     100 %     100 %     100 %     100 %
 
                                   
The percentage of net sales by category for North America, EMEA and APAC were as follows for the nine months ended September 30, 2011 and 2010:
                                                 
    North America     EMEA     APAC  
    Nine Months Ended     Nine Months Ended     Nine Months Ended  
    September 30,     September 30,     September 30,  
Sales Mix   2011     2010     2011     2010     2011     2010  
Hardware
    64 %     64 %     32 %     34 %     1 %     1 %
Software
    29 %     30 %     66 %     64 %     96 %     97 %
Services
    7 %     6 %     2 %     2 %     3 %     2 %
 
                                   
 
    100 %     100 %     100 %     100 %     100 %     100 %
 
                                   
Currently, our offerings in North America and the United Kingdom include IT hardware, software and services. Our offerings in the remainder of our EMEA segment and in APAC are almost entirely software and software-related services.
Gross Profit. Gross profit for the three months ended September 30, 2011 increased 6% compared to the three months ended September 30, 2010, with gross margin remaining flat at 13.2%. For the nine months ended September 30, 2011, gross profit increased 12% compared to the nine months ended September 30, 2010, with a 10 basis point decrease in gross margin. Our gross profit and gross profit as a percentage of net sales by operating segment were as follows (dollars in thousands):
                                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
            % of             % of             % of             % of  
    2011     Net Sales     2010     Net Sales     2011     Net Sales     2010     Net Sales  
North America
  $ 114,638       12.5 %   $ 110,536       12.7 %   $ 356,237       13.0 %   $ 329,107       13.6 %
EMEA
    42,118       14.6 %     38,132       14.2 %     149,191       14.5 %     125,876       13.3 %
APAC
    6,759       19.1 %     5,977       19.8 %     24,746       16.7 %     18,512       18.3 %
 
                                                       
Consolidated
  $ 163,515       13.2 %   $ 154,645       13.2 %   $ 530,174       13.5 %   $ 473,495       13.6 %
 
                                                       
North America’s gross profit for the three months ended September 30, 2011 increased 4% compared to the three months ended September 30, 2010, but, as a percentage of net sales, gross margin decreased year to year, due primarily to a decrease in margin related to a lower mix of agency fees for enterprise software agreements of 23 basis points, offset partially by an increase in product margin, which includes vendor funding and freight, of 11 basis points. For the nine months ended September 30, 2011, gross profit increased 8% compared to the nine months ended September 30, 2010. However, as a percentage of net sales, gross margin for the nine months ended September 30, 2011 decreased compared to the nine months ended September 30, 2010, reflecting a year to date decrease in margin related to agency fees for enterprise software agreements of 26 basis points and a year to date decrease on margin related to sales of services of 20 basis points as well as a decrease in product margin, which includes vendor funding and freight, of approximately 9 basis points, primarily related to freight.

 

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
EMEA’s gross profit increased 10% in U.S. dollars for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. Excluding the effects of foreign currency movements, gross profit was up 4% compared to the third quarter of last year. As a percentage of net sales, gross margin increased year over year, due primarily to an increase in margin contributed by services sales of 27 basis points and an increase in agency fees for enterprise software agreement renewals contributing an increase in margin of 13 basis points. These increases in margin were primarily the result of a change in the mix of business year over year to a higher mix of commercial business in the three months ended September 30, 2011 compared to more lower margin public sector business in the three months ended September 30, 2010. For the nine months ended September 30, 2011, gross profit increased 19% compared to the nine months ended September 30, 2010. Excluding the effects of foreign currency movements, gross profit increased 11% compared to the first nine months of last year. As a percentage of net sales, gross margin for the nine months ended September 30, 2011 increased year over year, primarily due to an increase in product margin, which includes vendor funding and freight, of 63 basis points, an increase in agency fees for enterprise software agreements contributing an increase in margin of 35 basis points and an increase in margin contributed by services sales of 17 basis points.
APAC’s gross profit increased 13% for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. Excluding the effects of foreign currency movements, gross profit increased 1% compared to the third quarter of last year. As a percentage of net sales, gross margin declined by approximately 70 basis points, primarily due to the effect of a lower mix of agency fees for enterprise software agreements. For the nine months ended September 30, 2011, gross profit increased 34% compared to the nine months ended September 30, 2010. Excluding the effects of foreign currency movements, gross profit increased 18% compared to the first nine months of last year. As a percentage of net sales, gross margin declined by approximately 160 basis points, primarily due to the effect of an increase in the mix of public sector business, which is typically transacted at lower margins, as well as the effects of the prior year release of a sales tax reserve of approximately $480,000 upon settlement with the local taxing authorities in the first quarter of 2010.
Operating Expenses.
Selling and Administrative Expenses. Selling and administrative expenses increased $5.6 million, or 4%, for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. For the nine months ended September 30, 2011, selling and administrative expenses increased $35.5 million, or 9%, compared to the nine months ended September 30, 2010. Selling and administrative expenses as a percent of net sales by operating segment for the three and nine months ended September 30, 2011 and 2010 were as follows (dollars in thousands):
                                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
            % of             % of             % of             % of  
    2011     Net Sales     2010     Net Sales     2011     Net Sales     2010     Net Sales  
North America
  $ 89,539       9.8 %   $ 89,012       10.2 %   $ 277,114       10.1 %   $ 260,241       10.7 %
EMEA
    39,372       13.6 %     35,808       13.4 %     125,030       12.2 %     110,698       11.7 %
APAC
    6,160       17.5 %     4,691       15.5 %     18,414       12.4 %     14,113       13.9 %
 
                                                       
Consolidated
  $ 135,071       10.9 %   $ 129,511       11.1 %   $ 420,558       10.7 %   $ 385,052       11.1 %
 
                                                       

 

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
North America’s selling and administrative expenses increased 1%, or $527,000, for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. A year over year increase of $1.1 million related to salaries and benefits, including stock-based compensation, associated with investments in headcount and related benefits and a year over year increase of $700,000 in variable compensation linked with increasing net sales were offset by declines in marketing, facilities and other general and administrative expenses resulting from tight expense management. Although selling and administrative expenses were relatively flat year over year, selling and administrative expenses as a percentage of net sales declined approximately 40 basis points to 9.8% of net sales for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. The decline is primarily attributable to the benefits of ongoing expense management efforts. For the nine months ended September 30, 2011, selling and administrative expenses in North America increased 6%, or $16.9 million compared to the nine months ended September 30, 2010. During the nine months ended September 30, 2011, as expected, we incurred incremental selling and administrative expenses associated with the North America IT systems integration project. In addition, we incurred a non-cash charge of approximately $1.4 million during the period to write-off certain computer software development costs that will not be placed into service as a result of the North America IT systems integration project. The year over year comparison was also affected by the prior year’s selling and administrative expenses being reduced by $2.9 million upon the collection of a single account receivable which we had previously specifically reserved as doubtful.
EMEA’s selling and administrative expenses increased 10%, or $3.6 million in U.S. dollars, for the three months ended September 30, 2011 compared to the three months ended September 30, 2010, increasing approximately 20 basis points year over year as a percent of net sales to 13.6%. Excluding the effects of foreign currency movements, selling and administrative expenses increased 4% compared to the third quarter of last year. The remaining increase year over year, after excluding the effects of foreign currency movements, related to increases in salaries and benefits due to investments in headcount and related benefits. Additionally, we incurred incremental selling and administrative expenses associated with investments in our IT systems in EMEA during the quarter. For the nine months ended September 30, 2011, selling and administrative expenses increased 13%, or $14.3 million in U.S. dollars, compared to the nine months ended September 30, 2010. Excluding the effects of foreign currency movements, selling and administrative expenses increased 6% compared to the first nine months of last year. The increase in selling and administrative expenses is primarily attributable to increases in salaries and benefits due to investments in headcount and related benefits and increases in variable compensation on increased gross profit.
APAC’s selling and administrative expenses increased 31% or $1.5 million in U.S. dollars, for the three months ended September 30, 2011 compared to the three months ended September 30, 2010, increasing year over year as a percent of net sales by approximately 200 basis points to 17.5%. Excluding the effects of foreign currency movements, selling and administrative expenses increased 15% compared to the third quarter of last year. The increase year over year was primarily driven by increases in salaries and benefits due to investments in headcount. For the nine months ended September 30, 2011, selling and administrative expenses increased 30%, or $4.3 million in U.S. dollars compared to the nine months ended September 30, 2010. Excluding the effects of foreign currency movements, selling and administrative expenses increased 14% compared to the first nine months of last year. The year over year increase in selling and administrative expenses in the nine month periods was primarily attributable to increases in salaries and benefits due to investments in headcount and increases in variable compensation on increased gross profit.
Severance and Restructuring Expenses. During the three months ended September 30, 2011, North America and EMEA recorded severance expense of $476,000 and $53,000, respectively, related to certain restructuring activities. During the nine months ended September 30, 2011, North America and EMEA recorded severance expense totaling $1.9 million, net of adjustments, and $2.5 million, net of adjustments, respectively, related to certain restructuring activities. Comparatively, during the three months ended September 30, 2010, North America and EMEA recorded severance expense of $199,000 and $99,000, respectively, and, during the nine months ended September 30, 2010, North America and EMEA recorded severance expense of $1.1 million and $545,000, respectively.
Non-Operating (Income) Expense.
Interest Income. Interest income for the three and nine months ended September 30, 2011 and 2010 was generated through cash equivalent short-term investments. The increase in interest income year over year is primarily due to increases in average cash balances outstanding.

 

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Interest Expense. Interest expense for the three and nine months ended September 30, 2011 and 2010 primarily relates to borrowings under our financing facilities and capital lease obligation and imputed interest under our inventory financing facility. Interest expense for the three months ended September 30, 2011 declined 8%, or $146,000, compared to the three months ended September 30, 2010. For the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010, interest expense declined 13% due primarily to lower average borrowing rates year to year and a change in estimate in the prior year period described below. Imputed interest under our inventory financing facility was $463,000 and $1.5 million for the three and nine months ended September 30, 2011, respectively, compared to $536,000 and $1.7 million for the three and nine months ended September 30, 2010. These decreases were due to decreased weighted average interest rates, partially offset by higher average balances outstanding under the facility. During the nine months ended September 30, 2010, we reduced interest expense by $553,000 for a change in estimate of accrued interest related to two state unclaimed property settlements.
Net Foreign Currency Exchange Gains/Losses. These gains/losses result from foreign currency transactions, including gains/losses on foreign currency derivative contracts and intercompany balances that are not considered long-term in nature. The change in net foreign currency exchange gains/losses is due primarily to the underlying changes in the applicable exchange rates, as mitigated by our use of foreign exchange forward contracts to hedge certain non-functional currency assets and liabilities against changes in exchange rate movements.
Other Expense, Net. Other expense, net, consists primarily of bank fees associated with our cash management activities.
Income Tax Expense. Our effective tax rate for the three months ended September 30, 2011 was 33.0% compared to 36.2% for the three months ended September 30, 2010. Our effective tax rate for the nine months ended September 30, 2011 and 2010 was 34.8% and 36.4%, respectively. The decrease in our effective tax rate for the three months ended September 30, 2011 was primarily due to the recognition of tax benefits relating to the re-measurement or settlement of specific uncertain tax positions during the quarter. The decrease in effective tax rates for the nine month periods was primarily due to the recognition of tax benefits relating to the re-measurement or settlement of specific uncertain tax positions and a release of a valuation allowance in the United Kingdom, partially offset by a revaluation of our deferred tax assets to reflect changes to certain statutory tax rates.
Liquidity and Capital Resources
The following table sets forth certain consolidated cash flow information for the nine months ended September 30, 2011 and 2010 (in thousands):
                 
    Nine Months Ended  
    September 30,  
    2011     2010  
Net cash provided by operating activities
  $ 10,062     $ 37,508  
Net cash used in investing activities
    (16,883 )     (17,754 )
Net cash (used in) provided by financing activities
    (19,397 )     6,078  
Foreign currency exchange effect on cash flow
    1,135       (134 )
 
           
(Decrease) increase in cash and cash equivalents
    (25,083 )     25,698  
Cash and cash equivalents at beginning of period
    123,763       68,066  
 
           
Cash and cash equivalents at end of period
  $ 98,680     $ 93,764  
 
           

 

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Cash and Cash Flow
Our primary uses of cash during the nine months ended September 30, 2011 were to fund working capital requirements, including repayments under our inventory financing facility, to repurchase shares of our common stock and to fund capital expenditures. Operating activities in the nine months ended September 30, 2011 provided $10.1 million in cash, compared to $37.5 million during the nine months ended September 30, 2010, reflecting higher working capital needs on higher sales during the nine months ended September 30, 2011. We had net borrowings on our long-term debt under our revolving credit facility of $65.5 million, made net repayments under our inventory financing facility of $33.2 million and funded $50.0 million of repurchases of our common stock during the nine months ended September 2011. Capital expenditures were $16.9 million for the nine months ended September 30, 2011, a 34% increase over the nine months ended September 30, 2010, primarily related to investments in our IT systems. Cash flows for the nine months ended September 30, 2011 benefited $1.1 million from the foreign currency exchange effect on cash flows while cash flows for the nine months ended September 30, 2010 were negatively affected by $134,000 as a result of foreign currency exchange rates.
Net cash provided by operating activities. Cash flows from operations for the nine months ended September 30, 2011 and 2010 reflect our net earnings, adjusted for non-cash items such as depreciation, amortization, stock-based compensation expense and write-offs and write-downs of assets, as well as changes in accounts receivable, other current assets, accounts payable, deferred revenue and accrued expenses and other liabilities. In both periods, the decreases in accounts receivable and accounts payable can be primarily attributed to the seasonal decrease in net sales, resulting in lower accounts receivable and accounts payable balances as of September 30, compared to December 31. For the 2011 period, the decrease in accrued expenses and other liabilities was primarily due to VAT and sales tax payments, payments made to settle certain state unclaimed property liabilities or other legal release of the recorded liabilities and a reduction in the payroll accrual at period end. The decreases in other current assets and deferred revenue in the nine months ended September 30, 2011 were primarily due to a large project for which we deferred revenue recognition and the related costs as of December 31, 2010 until we received client acceptance of the work performed throughout the first three quarters of 2011. For the 2010 period, the decrease in accrued expenses and other liabilities was primarily due to payments made to settle certain state unclaimed property liabilities and reduce income taxes payable. The increase in inventories in the nine months ended September 30, 2010 was primarily attributable to client-specific inventory purchased in North America during the third quarter of 2010 as a result of new client engagements and overall higher demand for hardware.
Our consolidated cash flow operating metrics for the quarter ended September 30, 2011 and 2010 are as follows:
                 
    2011     2010  
Days sales outstanding in ending accounts receivable (“DSOs”) (a)
    68       66  
Days inventory outstanding (“DIOs”) (b)
    10       10  
Days purchases outstanding in ending accounts payable (“DPOs”) (c)
    (50 )     (51 )
 
           
Cash conversion cycle (days) (d)
    28       25  
 
           
     
(a)   Calculated as the balance of accounts receivable, net at the end of the period divided by daily net sales. Daily net sales is calculated as net sales for the quarter divided by 92 days.
 
(b)   Calculated as average inventories divided by daily costs of goods sold. Average inventories is calculated as the sum of the balances of inventories at the beginning of the quarter plus inventories at the end of the quarter divided by two. Daily costs of goods sold is calculated as costs of goods sold for the quarter divided by 92 days.
 
(c)   Calculated as the balances of accounts payable, which includes the inventory financing facility, at the end of the period divided by daily costs of goods sold. Daily costs of goods sold is calculated as costs of goods sold for the quarter divided by 92 days.
 
(d)   Calculated as DSOs plus DIOs, less DPOs.
Our cash conversion cycle was 28 days in the quarter ended September 30, 2011 compared to 25 days in the quarter ended September 30, 2010. These results were primarily due to year to year variances in the timing of supplier payments and higher sales recorded late in this year’s third quarter compared to last year, primarily in our foreign operations.

 

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
We expect that cash flow from operations will be used, at least partially, to fund working capital as we typically pay our partners on average terms that are shorter than the average terms granted to our clients in order to take advantage of supplier discounts. We intend to use cash generated in the remainder of 2011 in excess of working capital needs to pay down our outstanding debt balances and support our capital expenditures.
Net cash used in investing activities. Capital expenditures of $16.9 million and $12.6 million for the nine months ended September 30, 2011 and 2010, respectively, primarily related to investments in our IT systems. We expect capital expenditures for the full year 2011 between $22.0 million and $27.0 million, primarily for the integration of our IT systems in North America onto a single platform over the next two years, the IT systems upgrade in our EMEA operations and other facility and technology related maintenance and upgrade projects. During the nine months ended September 30, 2010, we made an earnout payment of $5.1 million to the former owners of Calence.
Net cash used in financing activities. During the nine months ended September 30, 2011, we had net borrowings on our debt facilities that increased our outstanding debt balances under our revolving credit facilities by $65.5 million, and we used $33.2 million to pay down our inventory financing facility in accordance with its payment terms. During the nine months ended September 30, 2011, we also funded repurchases of 2.9 million shares of our common stock in open market transactions at a total cost of $50.0 million (an average price of $17.26 per share). These repurchases were completed under a program approved by our Board of Directors in May 2011 authorizing the purchase of up to $50.0 million of our common stock. All shares repurchased have been retired as of September 30, 2011.
During the nine months ended September 30, 2010, we had net borrowings under our debt facilities that increased our outstanding debt balances under our revolving credit facilities by $17.5 million and made net repayments under our inventory financing facility of $10.0 million.
Our consolidated debt balance that can be outstanding at the end of any fiscal quarter under our senior revolving credit facility and our ABS facility is limited by certain financial covenants, particularly a maximum leverage ratio. The maximum leverage ratio is calculated as aggregate debt outstanding divided by the sum of the Company’s trailing twelve month net earnings (loss) plus (i) interest expense, less non-cash imputed interest on our inventory financing facility, (ii) income tax expense (benefit), (iii) depreciation and amortization and (iv) non-cash stock-based compensation (referred to herein as “adjusted earnings”). The maximum leverage ratio permitted under the agreements is 2.50 times trailing twelve-month adjusted earnings. We anticipate that we will be in compliance with our maximum leverage ratio requirements over the next four quarters. However, a significant drop in the Company’s adjusted earnings would limit the amount of indebtedness that could be outstanding at the end of any fiscal quarter to a level that would be below the Company’s consolidated maximum debt capacity. As of September 30, 2011, the Company’s debt balance that could have been outstanding was equal to the maximum available under the facilities of $450.0 million. Our debt balance as of September 30, 2011 was $157.4 million, including our capital lease obligation for certain IT equipment. As of September 30, 2011, the current portion of our long-term debt relates solely to our capital lease obligation.
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 12 months.
Cash and cash equivalents held by foreign subsidiaries are generally subject to U.S. income taxation upon repatriation to the U.S. For foreign entities not treated as branches for U.S. tax purposes, we do not provide for U.S. income taxes on the undistributed earnings of these subsidiaries as earnings are reinvested and, in the opinion of management, will continue to be reinvested indefinitely outside of the U.S. As of September 30, 2011, we had approximately $83.2 million in cash and cash equivalents in certain of our foreign subsidiaries where we consider undistributed earnings of these foreign subsidiaries to be permanently reinvested. As of September 30, 2011, the majority of our foreign cash resides in the Netherlands, the United Kingdom and Australia. Certain of these cash balances could be, and we expect that they will be, remitted to the U.S. by paying down intercompany payables generated in the ordinary course of business. This repayment would not change our policy to indefinitely reinvest earnings of our foreign subsidiaries. Our intention is that undistributed earnings will be used for general business purposes in the foreign jurisdictions as well as to fund our EMEA IT systems, various facility upgrades and the expansion of our sales of hardware and services, in addition to software, to clients in EMEA countries.

 

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Off Balance Sheet Arrangements
We have entered into off-balance sheet arrangements, which include guaranties and indemnifications. The guaranties and indemnifications are discussed in Note 11 to our Consolidated Financial Statements in Part I, Item 1 of this report. We believe that none of our off-balance sheet arrangements has, or is reasonably likely to have, a material current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Recently Issued Accounting Pronouncements
See Note 1 to our Consolidated Financial Statements in Part I, Item 1 of this report for a discussion of recently issued accounting pronouncements which affect or may affect our financial statements.
Contractual Obligations
There have been no material changes in our reported contractual obligations, as described under “Contractual Obligations” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2010.

 

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INSIGHT ENTERPRISES, INC.
Item 3.   Quantitative and Qualitative Disclosures About Market Risk.
Other than the change in our open foreign currency forward contracts reflected below, 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, 2010.
The following table summarizes our open foreign currency forward contracts held at September 30, 2011. All U.S. dollar and foreign currency amounts (Canadian Dollars, British Pounds Sterling and Euros) are presented in thousands.
             
    Buy   Buy   Buy
Foreign Currency
  CAD   GBP   EUR
Foreign Amount
  18,000   11,000   3,697
Exchange Rate
  1.0200   1.5450   1.3525
USD Equivalent
  $17,647   $16,995   $5,000
Weighted Average Maturity
  Less than 1 month   Less than 1 month   Less than 1 month
Item 4.   Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act) and determined that as of September 30, 2011, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Change in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations of 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.
For a discussion of legal proceedings, see Note 11 to the Consolidated Financial Statements in Part I, Item 1 of this report. For an additional discussion of certain risks associated with legal proceedings, see “Risk Factors — We are subject to stockholder litigation and regulatory proceedings related to the restatement of our consolidated financial statements,” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010.

 

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INSIGHT ENTERPRISES, INC.
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, 2010, 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 uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or operating results.
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of equity securities during the three months ended September 30, 2011.
We have never paid a cash dividend on our common stock, and our senior revolving credit facility contains restrictions on the payment of cash dividends. We currently intend to reinvest all of our earnings into our business and do not intend to pay any cash dividends in the foreseeable future.
Issuer Purchases of Equity Securities
                                 
                    (c)     (d)  
    (a)             Total Number of Shares     Approximate Dollar  
    Total Number     (b)     Purchased as Part of     Value of Shares That May  
    of Shares     Average Price     Publicly Announced     Yet be Purchased Under  
Period   Purchased     Paid per Share     Plans or Programs     the Plans or Programs  
July 1, 2011 through July 31, 2011
    592,969     $ 18.30       592,969     $ 25,000,000  
 
                             
August 1, 2011 through August 31, 2011
    894,366       16.82       894,366       9,953,000  
September 1, 2011 through September 30, 2011
    536,897       18.54       536,897        
 
                         
Total
    2,024,232     $ 17.71       2,024,232          
 
                         
On May 26, 2011, we announced that our Board of Directors had authorized the repurchase of up to $50,000,000 of our common stock. During the nine months ended September 30, 2011, we purchased 2,897,493 shares of our common stock on the open market at an average price of $17.26 per share, which represented the full amount authorized under the repurchase program. All shares repurchased were retired.
Item 3.   Defaults Upon Senior Securities.
None.
Item 4.   (Removed and Reserved).
Item 5.   Other Information.
None.

 

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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).
  3.2    
Amended and Restated Bylaws of Insight Enterprises, Inc. (incorporated by reference to Exhibit 3.1 of our current report on Form 8-K filed on January 14, 2008).
  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).
  10.1 (1)  
Release and Severance Agreement by and between Insight Enterprises, Inc. and Stephen A. Speidel dated as of September 1, 2011.
  31.1    
Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14.
  31.2    
Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14.
  32.1    
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  101    
Interactive data files pursuant to Rule 405 of Regulation S-T. In accordance with Rule 406T of Regulation S-T, the information in this exhibit shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
     
(1)   Management contract or compensatory plan or arrangement.

 

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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: November 2, 2011   INSIGHT ENTERPRISES, INC.    
 
           
 
  By:   /s/ Kenneth T. Lamneck    
 
     
 
Kenneth T. Lamneck
   
 
      President and Chief Executive Officer
(Duly Authorized Officer)
   
 
           
 
  By:   /s/ Glynis A. Bryan    
 
     
 
Glynis A. Bryan
   
 
      Chief Financial Officer
(Principal Financial Officer)
   
 
           
 
  By:   /s/ David C. Olsen    
 
     
 
David C. Olsen
   
 
      Corporate Controller
(Principal Accounting Officer)
   

 

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