Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2009
or
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
Commission File Number: 0-25092
INSIGHT ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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86-0766246
(IRS Employer
Identification No.) |
6820 South Harl Avenue, Tempe, Arizona 85283
(Address of principal executive offices, Zip Code)
Registrants telephone number, including area code: (480) 902-1001
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered |
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Common stock, par value $0.01
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NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act.
Yes o No þ
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 Data 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 file such reports), and (2) has
been subject to such filing requirement for the past 90 days.
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. 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 the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act (check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates
of the registrant, based upon the closing price of the registrants common stock as reported on The
Nasdaq Global Select Market on June 30, 2009, the last business day of the registrants most
recently completed second fiscal quarter, was $436,594,152.
The number of shares outstanding of the registrants common stock on February 19, 2010 was
45,973,309.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement relating to its 2010 Annual Meeting of
Stockholders have been incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this
Annual Report on Form 10-K.
INSIGHT ENTERPRISES, INC.
ANNUAL REPORT ON FORM 10-K
Year Ended December 31, 2009
TABLE OF CONTENTS
INSIGHT ENTERPRISES, INC.
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K, including statements in Managements
Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of
this report, are forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements may include: projections of matters that
affect net sales, gross profit, operating expenses, earnings from continuing operations,
non-operating income and expenses, net earnings or cash flows, cash needs and the sufficiency of
our capital resources and the payment of accrued expenses and liabilities; our business strategy
and our strategic initiatives; that we will be able to renew our accounts receivable securitization
financing facility; that we may be able to negotiate extended payment terms with a supplier;
effects of acquisitions or dispositions; projections of capital expenditures and trade credit
liability settlements, our business outlook and earnings per share expectations in 2010; plans for
future operations; the availability of financing and our needs or plans relating thereto; plans
relating to our products and services including, but not limited to, our planned launch of our
Software as a Service (SaaS) portal; the effect of new accounting principles or changes in
accounting policies; the effect of guaranty and indemnification obligations; projections about the
outcome of ongoing tax audits; statements related to accounting estimates, including estimated
stock-based compensation award forfeitures and the realization of deferred tax assets; our
positions and strategies with respect to ongoing and threatened litigation, including those matters
identified in Legal Proceedings in Part I, Item 3 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 results described in
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:
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our reliance on partners for product availability, marketing funds, purchasing
incentives and competitive products to sell; |
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changes in the information technology industry and/or rapid changes in product
standards; |
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general economic conditions, including concerns regarding our ability to collect our accounts receivable and credit constraints; |
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disruptions in our information technology systems and voice and data networks, including
our system upgrade and the migration of acquired businesses to our information technology
systems and voice and data networks; |
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actions of our competitors, including manufacturers and publishers of products we sell; |
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stockholder litigation and regulatory proceedings related to the restatement of our
consolidated financial statements; |
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increased debt and interest expense and lower availability on our financing facilities
and changes in the overall capital markets that could increase our borrowing costs or
reduce future availability of financing; |
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the integration and operation of acquired businesses, including our ability to achieve
expected benefits of the acquisitions; |
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the variability and seasonality of our net sales and gross profit; |
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the risks associated with international operations; |
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exposure to changes in, or interpretations of, tax rules and regulations; |
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exposure to foreign currency exchange risks; |
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failure to comply with the terms and conditions of our public sector contracts; |
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our dependence on key personnel; and |
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intellectual property infringement claims and challenges to our registered trademarks
and trade names. |
Additionally, there may be other risks that are otherwise described from time to time in the
reports that we file with the SEC. Any forward-looking statements in this report should be
considered in light of various important factors, including the risks and uncertainties listed
above, as well as others. We assume no obligation to update, and do not intend to update, any
forward-looking statements. We do not endorse any projections regarding future performance that
may be made by third parties.
1
INSIGHT ENTERPRISES, INC.
PART I
Item 1. Business
General
Insight Enterprises, Inc. (Insight or the Company) is a leading provider of brand-name
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:
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% of 2009 |
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Operating Segment* |
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Geography |
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Consolidated Net Sales |
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North America |
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United States and Canada |
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69 |
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EMEA |
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Europe, Middle East and Africa |
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28 |
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APAC |
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Asia-Pacific |
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3 |
% |
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Additional detailed segment and geographic information can be found in
Managements Discussion and Analysis of Financial Condition and Results of
Operations in Part II, Item 7 and in Note 18 to the Consolidated Financial
Statements in Part II, Item 8 of this report. |
We are a global provider of technology solutions, helping companies design, enable, manage and
secure their IT environments with our process knowledge, technical expertise and product
fulfillment and logistics capabilities. Our management tools and capabilities make designing,
deploying and managing IT solutions easier, and our expertise helps our clients control their IT
costs. Insight is located in 22 countries, and we support clients in 190 countries, transacting
business in 18 languages and 13 currencies. 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. On a
consolidated basis, hardware, software and services represented 50%, 44% and 6%, respectively, of
our net sales in 2009, compared to 54%, 42% and 4%, respectively, in 2008.
We were incorporated in Delaware in 1991 as the successor to an Arizona corporation that
commenced operations in 1988, and our corporate headquarters are located in Tempe, Arizona. We
began operations in the U.S., expanded into Canada in 1997 and into the United Kingdom in 1998. In
2006, through our acquisition of Software Spectrum, Inc. (Software Spectrum), we penetrated
deeper into global markets in EMEA and APAC, where Software Spectrum already had an established
footprint and strategic relationships. In 2008, through our acquisitions of Calence, LLC
(Calence) in North America and MINX Limited (MINX) in the United Kingdom, we enhanced our
global technical expertise around higher-end networking and communications technologies, as well as
managed services and security. As part of our focus on core elements of our growth strategy, in
2007 we sold PC Wholesale, a seller of IT products to other resellers in the U.S., and in 2006 we
sold Direct Alliance Corporation (Direct Alliance), a business process outsourcing provider in
the U.S.
Business Strategy
Our strategic vision is to be the trusted advisor to our clients, helping them enhance their
business performance through the implementation of innovative technology solutions. With the
continual emergence of new technologies and technology solution options in this dynamic and
fast-paced industry, we believe clients and partners (we refer to our suppliers as partners)
continue to seek technology providers to supply value-added advice to help them identify and deploy
IT solutions. As a trusted advisor, we are involved earlier in our clients IT planning cycles,
assisting them with technology decisions. We believe that Insight has a unique position in the
market and can gain significant, profitable market share and provide enhanced value to our clients.
We have a multi-partner approach and excel at providing broad product selection at competitive
prices through an efficient supply chain. We have deeper services and solutions capabilities than
many of our competitors, we are the only value-added reseller with a multi-national footprint, and
our client base covers a broader cross-section of clients small, medium and large businesses and
public sector institutions than many of our competitors.
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INSIGHT ENTERPRISES, INC.
To further refine our strategic focus and strengthen our execution and operational
effectiveness, Insight is focused on six strategic initiatives:
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Strengthen the foundation of our business; |
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Accelerate growth of our value-added services and product offerings; |
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Expand our client relationships and reach; |
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Seize new growth opportunities from new technologies; |
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Expand selectively in key global markets; and |
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Focus on cost effectiveness and operational execution. |
Strengthen the foundation of our business. Hardware and software sales continue to be core to
Insights continued growth and success. Insights business was built on these offerings and they
are the foundation of many of our client relationships today.
Insights hardware and software capabilities include:
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World-class supply chain management capabilities; |
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5,000+ partnerships with manufacturers and publishers; |
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Over $3 billion in virtual inventory and over $80 million in on-hand inventory; |
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Telesales, field sales and e-commerce/web capabilities; |
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Global software capabilities; |
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Dedicated global account managers; and |
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Global reporting multi-currency and multi-language. |
With current clients, Insights multi-partner approach, breadth of offerings, quality of
supply chain execution, cost competitiveness, and overall ease of doing business will continue to
be the heart of our value proposition. We believe we can build on these solid relationships and
the confidence our clients have in Insight.
In addition, we continue to invest in our transactional capabilities to maintain a competitive
position in the marketplace. A major focus area will be to continually enhance our Insight.com web
site to improve the end-user experience and increase the volume of business completed over the web
across all client sets. In addition to the web, other focus areas include new, emerging
technologies, such as virtualization, collaboration, cloud computing, wireless, security, data
center and convergence.
Additionally, we are working closely with our partners to ensure we deliver value to them by
increasing their access to target clients. Our goal is to achieve higher sales and profitability
levels by aligning more closely with our partners. Our value proposition for our partners
includes:
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Access to over 60,000 commercial and public sector clients globally; |
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Customizable sales engagement and program models; |
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Multi-partner integration and project implementation capabilities; |
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2,500+ technical certifications; and |
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Complementary solution services. |
Accelerate growth of our value-added services and product offerings. While our foundation has
been built on hardware and software sales, we believe there is a strong opportunity for competitive
differentiation and greater long-term success by introducing value-added services and solutions
capabilities to earn a greater share of our clients IT spend. Our 2008 acquisition of Calence
augmented our service and networking capabilities to enable us to provide more sophisticated and
higher margin solutions to our clients. We believe these same capabilities will strengthen
relationships with key clients and enhance our status as a trusted advisor.
Insights service capabilities are in three primary categories:
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Consulting and professional services |
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INSIGHT ENTERPRISES, INC.
Lifecycle services support our hardware and software capabilities and are often the first,
natural add-on in a client relationship. Insights IT lifecycle services capabilities include:
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Complete integration services, including |
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Simple to advanced configurations |
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Software asset management |
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Managed warranty solutions |
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Full equipment, partner-certified depot repair center as well as field repair services |
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Complete end-of-life asset management, including |
Consulting and professional services help our clients manage and deploy IT assets within their
environments to minimize the total cost of ownership. Insights consulting and professional
services capabilities include:
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Strategy, assessment and implementation services around |
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Infrastructure |
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Data Center |
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Security |
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Collaboration |
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1,000+ services professionals |
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2,500+ technical certifications |
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A proprietary methodology |
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Experienced project management |
Managed services include our most advanced capabilities, which enable a client to drive
improved efficiency and generate cost savings by outsourcing non-core IT capabilities, thus
allowing the internal IT department to focus on more value-add activities. Insights managed
services capabilities currently available in the United States include:
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Services ranging from off-hours monitoring through business process outsourcing |
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World-class Network Operations Center (NOC), with |
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24/7 operations and |
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Best-in-class management tools |
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Telecom cost management services |
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Help desk support services |
Expand our client relationships and reach. Our operating model allows us to tailor offerings
based on the size and complexity of our client. Accordingly, we believe that there are many
opportunities for Insight to expand our relationships with our existing clients and increase the
types of products and services each of our existing clients buys from us.
We also believe there are opportunities for growth by increasing the number of new small- to
medium-sized businesses (SMB) and public sector clients in our base. We are addressing these
opportunities by continuing to invest in our SMB sales teams in EMEA and APAC and by strengthening
the sales teams in North America. Additionally, partially in response to the various fiscal
stimulus packages implemented across the globe to re-invigorate economic growth, we have sales
teams focused on public sector opportunities in all geographies and have been successful in
securing several large supply contracts, particularly in EMEA and APAC.
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INSIGHT ENTERPRISES, INC.
Seize new growth opportunities from new technologies. As manufacturers, publishers and
service providers develop new technologies and as new ways of buying and supplying technology take
hold, we are committed to taking advantage of and leveraging these opportunities. We are building
an as-a-service aggregation portal linked to Insight.com which takes advantage of opportunities such as Software as a Service (SaaS).
As an aggregator we are designing our portal to enable the procurement, delivery, billing,
administration and support of on-demand services, making it easier for a client to leverage the
availability of software and services provided through the cloud. We are planning to bring this
solution to the market beginning in late 2010.
Expand selectively in key global markets. We will continue to offer global software licensing
and asset management, as these global capabilities represent meaningful differentiation with our
clients. We will introduce hardware sales and value added services capabilities in select markets
based on careful economic analysis and assessment of client needs. This expansion is planned to
begin with building capabilities to allow clients to procure hardware in selected countries in
Europe. We have been developing the IT systems capabilities in our EMEA operating segment to
enable this expansion and plan to begin deployment of this new system in the second half of 2010.
The roll out will occur in phases, and we expect a positive contribution to our financial results
beginning in 2011. In addition, we plan to expand our partner network in the United Kingdom and
Canada (where we currently offer the full suite of Insight capabilities) to further augment
capabilities to deliver lifecycle services and our targeted solution practice areas. Further, as
hardware capabilities are expanded to other countries, we will evaluate feasibility of further
expanding our partner network to deliver lifecycle services and targeted solution practice areas.
In other countries where we will not expand beyond software, we will continue to enhance our
software offerings, introducing SaaS solutions, expanding our software services capabilities, and
extending our client reach in SMB. In addition, we will maintain our global software capabilities
differentiation, although we will continue to look for efficiencies in our approach to ensure we
operate profitability in supporting our global clients.
For a discussion of risks associated with international operations, see Risk Factors There
are risks associated with our international operations that are different than the risks associated
with our operations in the U.S., and our exposure to the risks of a global market could hinder our
ability to maintain and expand international operations, in Part I, Item 1A of this report.
Focus on cost effectiveness and operational execution. In order to ensure the effective
implementation of our strategic initiatives and to drive enhanced financial results for the
Company, we must drive improvements in our daily execution. In addition, we must improve the speed
of execution in the organization, which will enhance the client, partner and teammate experience.
We are focused on improving the business intelligence from within our business in addition to
intelligence on our client and partner activities. The resulting dashboards will enable us to
quickly identify successes as well as areas where focus is needed to improve efficiency, service
and value. In addition, we are focused on training and investments to understand and deliver
operational excellence. Employee incentive plans are aligned to various key metrics in order to
drive continuous improvement.
Hardware, Software and Services Offerings
Hardware Offerings. We currently offer our clients in North America and the United Kingdom a
comprehensive selection of IT hardware products. We offer products from hundreds of manufacturers,
including such leading manufacturers as Hewlett-Packard (HP), Cisco, Lenovo, IBM, Panasonic and
American Power Conversion Corporation (APC). Our scale and purchasing power, combined with our
efficient, high-volume and cost effective direct sales and marketing model, allow us to offer
competitive prices. We believe that offering multiple partner choices enables us to better serve
our clients by providing a variety of product solutions to best address their specific business
needs. These needs may be based on particular client preferences or other criteria, such as
real-time best pricing and availability, or compatibility with existing technology. In addition to
our distribution facilities, we have direct-ship programs with many of our partners, including
manufacturers and distributors, allowing us to expand our product offerings without further
increasing inventory, handling costs or inventory risk exposure. As a result, we are able to
provide a product offering with billions of dollars of products in virtual inventory. Convenience
and product options among multiple brands are key competitive advantages against manufacturers
direct selling programs, which are generally limited to their own brands and may not offer clients
a complete or best solution across all product categories.
Software Offerings. Our clients acquire software applications from us in the form of
licensing agreements with software publishers, boxed products, or through a growing delivery model,
SaaS. Under a SaaS arrangement, clients subscribe to software that is hosted either by the
software publisher or a dedicated third-party hosting company on the internet. The majority of our
clients obtain their software applications through licensing agreements, which we believe is a
result of their ease of administration and cost-effectiveness. Licensing agreements, or
right-to-copy agreements, allow a client to either purchase a license for each of its users in a single transaction or
periodically report its software usage, paying a license fee for each user. For most clients, the
overall cost of acquiring software through a licensing arrangement is substantially less than
purchasing boxed products.
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INSIGHT ENTERPRISES, INC.
As software publishers choose different models for implementing licensing agreements,
businesses must evaluate the alternatives to ensure that they select the appropriate agreements and
comply with the publishers licensing terms when purchasing and managing their software licenses.
We work closely, both locally or globally, with our clients to understand their licensing
requirements and to educate them regarding the options available under publisher licensing
agreements. Many of our clients who have elected to purchase software licenses through licensing
agreements have also entered into software maintenance agreements, which allow clients to receive
new versions, upgrades or updates of software products released during the maintenance period, in
exchange for a specified annual fee. We assist our clients and partner publishers in tracking and
renewing these agreements. In connection with certain enterprise-wide licensing agreements,
publishers may choose to bill and collect from clients directly. In these cases, we earn a
referral fee directly from the publisher.
Services Offerings. We currently offer a suite of IT lifecycle, consulting and professional
services in the U.S. and the United Kingdom via our own field service personnel, augmented by
service partners to fill gaps in our geographic coverage or capabilities. We also utilize partners
to deliver these services in Canada. In addition, we offer managed services in the U.S.
Developing these capabilities internally or through targeted acquisitions over time in other
geographies is an essential element of a technology solution and, we believe, will be a key
differentiator for us.
The breadth and quality of our technical and service capabilities are key points of
differentiation for us. We have, and continue to develop, an array of technical expertise and
service capabilities to help identify, acquire, implement and manage technology solutions to allow
our clients to address their business needs. We dont believe that our competition is able to
offer the same breadth and depth of IT solutions that we offer across our target client groups in
North America and EMEA.
To strengthen our solutions offerings, we have focused on the following specific
solutions/value-added practice areas:
These technology practice groups are responsible for understanding client needs and, together
with our technology partners, customizing total solutions that address those needs. These
technology practice groups are made up of industry- and product-certified engineers, consultants
and specialists who are up-to-date on best practices and the latest developments in their
respective practice areas.
We are a Cisco Gold Certified partner in the United States and the United Kingdom and have
Master Certifications in unified communications and security in the United States. Our data center
practice in the United States is an HP Authorized Enterprise Provider and holds HP Storage Elite,
HP Blade Elite and HP Services Elite partner status. We also have been awarded premier partner
status by a number of other partners, such as IBM, EMC and VMware. Our networking and
communications solutions provide clients secure voice and data communications within and across
organizations.
Infrastructure. Todays networks are becoming increasingly complex. Support for critical
enterprise applications and converged communication systems have created unparalleled expectations
for network availability and performance. Insights core networking competency is the architecture
and deployment of infrastructure. We offer services to successfully plan, design, implement and
support the operation of complex and secure wired and wireless networks. Solution offerings also
include network strategy, network assessment and application delivery infrastructure services.
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Network strategy services assist clients in ensuring that their network is
positioned to support their business and provides a roadmap to guide investments in
people, operations and technology. |
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Network assessment services help clients ensure their network is ready to support
their business, is designed based on industry best practices and is operating at peak
performance. |
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Application delivery infrastructure services allow clients to deploy next generation
solutions, such as application acceleration, WAN optimization and load balancing, to
optimize the performance of critical applications on their networks and better utilize
their technology infrastructure. |
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INSIGHT ENTERPRISES, INC.
We also have the scale, skill and technology investments required to execute a spectrum of
managed services. Operating 24 hours a day, 7 days a week and 365 days a year through our network
operations center, we serve as an extension of our clients teams, dedicating resources to keep
their networks operating at optimal capacity.
Data Center. Using technology and products from various partners, we provide high-end
servers, data disk arrays, hard drives, tape libraries, blades, and virtualization software to help
clients build and maintain responsive IT infrastructures that allow them to quickly adapt to
changes in business priorities. We also provide IT professional services for designing,
implementing and managing adaptive server and storage environments for our clients ensuring a
resilient and cost-effective data center while reducing the clients maintenance and management
costs.
Security. To properly implement a security strategy, a client must first define its risk.
From regulatory compliance and business operations to asset protection, threat mitigation and
vulnerability identification, a security program is essential to maintaining productivity and
profitability. Every organization requires a comprehensive security program and procedures to
ensure data integrity, confidentiality and availability. Our security solutions include a range of
offerings including: strategy solutions to quantify the skills, methodologies and experience
needed for a comprehensive security program; assessment solutions to help clients identify gaps and
risks as well as make the right decisions to manage them; security design, implementation and
operation services; security compliance solutions to help clients make certain their internal
processes are able to repel attempts to breach security; and risk and vulnerability assessments in
which security testing is utilized to highlight unmanaged security risks.
Collaboration. Advanced networking technologies that merge voice, data and video applications
are increasingly becoming a critical component of an enterprises strategic IT infrastructure and
the backbone of an organizations unified communications strategy. With advanced collaboration
technology implementations, we offer our clients an integrated combination of email, chat, audio,
video and web conferencing capabilities. These solutions offer a more cost effective answer than
traditional audio, video and web conferencing with increased productivity, increased functionality
and added security over internet-based solutions as well as the ability for clients to leverage
existing investments in IT infrastructure. This practice area also includes unified
communications, unified contact center solutions and video solutions.
In addition to these specific solutions/value-added practice areas, we continue to offer
clients a suite of services designed to streamline the deployment cycle of IT assets, as well as
minimize the complexity and cost of managing those assets throughout their lives. We:
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provide advice on hardware, software licensing and financing programs; |
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streamline procurement; |
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plan and manage the rollout; |
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assist with developing standards and implementing best practices; |
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pre-configure systems, load custom software images and tag assets; |
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provide logistics planning and drop-ship to locations; |
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provide on-site implementation; |
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offer help desk support for users; and |
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provide IT maintenance services and disposal of equipment at end-of-life. |
These services are available primarily in the U.S., Canada and the United Kingdom at present.
In addition, we offer clients a portfolio of Software Asset Management (SAM) services,
including SAM consultation, assessment of ISO standard attainment, license reconciliations, and our
proprietary Insight:LicenseAdvisor SAM solution platform. Our SAM services are provided to clients
throughout North America, EMEA and APAC.
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INSIGHT ENTERPRISES, INC.
Our Information Technology Systems
We have committed significant resources to the IT systems we use to manage our business. We
believe that our success is dependent upon our ability to provide prompt and efficient service to
our clients based on the accuracy, quality and utilization of the information generated by our IT
systems. These systems affect our ability to manage our sales, client service, distribution, inventories and accounting systems and the reliability of our
voice and data networks. Our U.S. and foreign locations are not on a single IT system platform.
To support our business more efficiently and effectively, we are on a continuous improvement plan
to maintain our IT systems. We are focused on driving improvements in sales productivity through
upgraded IT systems to support higher levels of client satisfaction and new client acquisition, as
well as garnering efficiencies in our business as more processes become automated. We are also in
the process of converting our EMEA operations to a new IT system platform that will allow us to
expand our sales of hardware and services in addition to software to clients in that region to
promote future sales growth. We believe that in order to remain competitive, we will need to
continue to make enhancements and upgrades to our IT systems.
For a discussion of risks associated with our IT systems, see Risk Factors Disruptions in
our IT systems and voice and data networks, including the system upgrade and the migration of
acquired businesses to our IT systems and voice and data networks, could affect our ability to
service our clients and cause us to incur additional expenses, in Part I, Item 1A of this report.
Competition
The IT hardware, software and services industry is very fragmented and highly competitive. We
compete with a large number and wide variety of marketers and resellers of IT hardware, software
and services, including:
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product manufacturers, such as Dell, HP, IBM and Lenovo; |
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software publishers, such as IBM, Microsoft and Symantec; |
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direct marketers and resellers, such as CDW Corporation (North America), Systemax
(Europe), SoftChoice, PC Ware and SHI International Corporation; |
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systems integrators, such as Compucom Systems, Inc.; |
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national and regional resellers, including value-added resellers (VARs), specialty
retailers, aggregators, distributors, and to a lesser extent, national computer
retailers, computer superstores, Internet-only computer providers, consumer electronics
and office supply superstores and mass merchandisers; |
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national and global service providers, such as IBM Global Services and HP/EDS; and |
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e-tailers, such as New Egg, Buy.com and e-Buyer (United Kingdom). |
The competitive landscape in the industry is changing as various competitors expand their
product and service offerings. In addition, emerging models such as cloud computing are creating
new competitors and opportunities.
For a discussion of risks associated with the actions of our competitors, see Risk Factors
The IT hardware, software and services industry is intensely competitive, and actions of our
competitors, including manufacturers and publishers of products we sell, can negatively affect our
business, in Part I, Item 1A of this report.
Partners
We are focused on understanding our partners objectives and developing plans and programs to
grow our mutual businesses. Our strategy is focused on: increasing partner alignment by focusing
on skills and marketing alignment with key partners; building enhanced capabilities to deliver,
monitor, analyze and report return on marketing investment for our partners; and building strong
relationships with our key partners field sales organizations.
We measure partner satisfaction regularly through a partner satisfaction survey in North
America and EMEA and through similar means in APAC. We hold quarterly business reviews with our
largest partners to review business results from the prior quarter, discuss plans for the future
and obtain feedback. Additionally, we host an annual partner conference in North America, EMEA and
APAC to articulate our plans for the upcoming year.
During 2009, we purchased products and software from approximately 5,500 partners.
Approximately 58% (based on dollar volume) of these purchases were directly from manufacturers or
software publishers, with the balance purchased through distributors. Purchases from Microsoft (a
software publisher) and Ingram Micro (a distributor) accounted for approximately 24% and 12%,
respectively, of our aggregate purchases in 2009. No other partner accounted for more than 10% of
purchases in 2009. Our top five partners as a group for 2009 were Microsoft, Ingram Micro, HP (a
manufacturer), Cisco (a manufacturer) and Tech Data (a distributor). Approximately 60% of our
total purchases during 2009 came from this group of partners. Although brand names and individual
products are important to our business, we believe that competitive sources of supply are available
in substantially all of our product categories such that, with the exception of Microsoft, we are
not dependent on any single partner for sourcing products.
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INSIGHT ENTERPRISES, INC.
We obtain partner funding from certain product manufacturers, software publishers and
distribution partners based typically upon the volume of sales or purchases of their products and
services. In other cases, such funding may be in the form of participation in our partner
programs, which may require specific services or activities with our clients, discounts, marketing
funds, price protection or rebates. Manufacturers and publishers may also provide mailing lists,
contacts or leads to us. We believe that partner funding allows us to increase our marketing reach
and strengthen our relationships with leading manufacturers and publishers. This funding is
important to us, and any elimination or substantial reduction would increase our costs of goods
sold or marketing expenses, resulting in a corresponding decrease in our earnings from operations
and net earnings.
During 2009, sales of Microsoft products and HP products accounted for approximately 28% and
15%, respectively, of our consolidated net sales. No other manufacturers products accounted for
more than 10% of our consolidated net sales in 2009. Sales of product from our top five
manufacturers/publishers as a group (Microsoft, HP, Cisco, Lenovo and Adobe) accounted for
approximately 60% of Insights consolidated net sales during 2009.
As we move into new service areas, consistent with our strategy to expand our technical
expertise, we may become more reliant on certain partner relationships. For a discussion of risks
associated with our reliance on partners, see Risk Factors We rely on our partners for product
availability, marketing funds, purchasing incentives and competitive products to sell, in Part I,
Item 1A of this report.
Teammates
As of December 31, 2009, we employed 4,898 persons, of whom 2,740 were engaged in management,
support services and administration activities, 1,979 were engaged in sales related activities, and
179 were engaged in distribution activities. Our employees are not represented by a labor union,
and we have never experienced a labor related work stoppage.
For a discussion of risks associated with our dependence on key personnel, including sales
personnel, see Risk Factors We depend on certain key personnel, in Part I, Item 1A of this
report.
Seasonality
General economic conditions have an effect on our business and results of operations. We also
experience some seasonal trends in our sales of IT hardware, software and services. For example:
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software sales are seasonally higher in our second and fourth quarters, particularly
the second quarter; |
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business clients, particularly larger enterprise businesses in the U.S., tend to
spend less in the first quarter and more in our fourth quarter as they utilize their
remaining capital budget authorizations; |
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sales to the federal government in the U.S. are often stronger in our third quarter;
and |
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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. For a
discussion of risks associated with seasonality see Risk Factors Our net sales and gross profit
have historically varied and include some seasonality, making our future operating results less
predictable, in Part I, Item 1A of this report.
Backlog
The majority of our backlog historically has been and continues to be open cancelable purchase
orders. We do not believe that backlog as of any particular date is predictive of future results.
Intellectual Property
We do not maintain a traditional research and development group, but we do develop and seek to
protect a range of intellectual property, including trademarks, service marks, copyrights, domain
name rights, trade dress, trade secrets and similar intellectual property relying, for such
protection, on applicable statutes and common law rights, trade-secret protection and
confidentiality and license agreements, as applicable, with teammates, clients, partners and others
to protect our intellectual property rights. Our principal trademark is a registered mark, and we
also license certain of our proprietary intellectual property rights to third parties. We have
registered a number of domain names, applied for registration of other marks in the U.S. and in
select international jurisdictions, and, from time to time, filed patent applications. We believe
our trademarks and service marks, in particular, have significant value, and we continue to invest
in the promotion of our trademarks and service marks and in our protection of them.
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INSIGHT ENTERPRISES, INC.
Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act
of 1934, as amended (the Exchange Act), and the reports of beneficial ownership filed pursuant to
Section 16(a) of the Exchange Act are available free of charge on our Web site at www.insight.com,
as soon as reasonably practicable after we electronically file with, or furnish to, the Securities
and Exchange Commission (SEC). The information contained on our Web site is not included as a
part of, or incorporated by reference into, this Annual Report on Form 10-K.
Item 1A. Risk Factors
We rely on our partners for product availability, marketing funds, purchasing incentives and
competitive products to sell. We acquire products for resale both directly from
manufacturers/publishers and indirectly through distributors. The loss of a partner could cause a
disruption in the availability of products to us. Additionally, there is no assurance that, as
manufacturers/publishers continue to sell directly to end users and through the distribution
channel, they will not limit or curtail the availability of their product to resellers like us. In
addition, a reduction in the amount of credit granted to us by our
partners could increase our need for and cost
of working capital and have a material adverse effect on our business, results of operations and
financial condition.
Although product is generally available from multiple sources via the distribution channel as
well as directly from manufacturers/publishers, we rely on the manufacturers/publishers of products
we offer not only for product availability and partner funding, but
also for the development and marketing of products to compete effectively with products of manufacturers/publishers we do not
currently offer, particularly Dell. Although we have the ability to sell, and from time to time do
sell, Dell products if they are specifically requested by our clients and approved by Dell, we do
not proactively advertise or offer Dell products.
Certain manufacturers, publishers and distributors provide us with substantial incentives in
the form of rebates, marketing funds, purchasing incentives, early payment discounts, referral fees
and price protections. Partner funding is used to offset, among other things, inventory costs,
costs of goods sold, marketing costs and other operating expenses. Certain of these funds are
based on our volume of net sales or purchases, growth rate of net sales or purchases and marketing
programs. If we do not grow our net sales over prior periods or if we are not in compliance with
the terms of these programs, there could be a material negative effect on the amount of incentives
offered or paid to us by manufacturers/publishers. No assurance can be given that we will continue
to receive such incentives or that we will be able to collect outstanding amounts relating to these
incentives in a timely manner, or at all. We anticipate that, during 2010, the incentives that
many partners make available to us may be reduced. Any sizeable reduction in, the discontinuance
of, a significant delay in receiving or the inability to collect such incentives, particularly
related to incentive programs with our largest partners, HP and Microsoft, could have a material
adverse effect on our business, results of operations and financial condition. Additionally, the
activities for which resellers are compensated change from time to time. If we are unable to react
timely to any fundamental changes in the programs of publishers or manufacturers, including the
elimination of funding for some of the activities for which we have been compensated in the past,
such changes would have a material adverse effect on our business, results of operations and
financial condition.
Changes in the IT industry and/or rapid changes in product standards may result in substantial
inventory obsolescence and may reduce demand for the IT hardware, software and services we sell.
Our results of operations are influenced by a variety of factors, including the condition of the IT
industry, shifts in demand for, or availability of, IT hardware, software, peripherals and
services, and industry introductions of new products, upgrades or methods of distribution. The IT
industry is characterized by rapid technological change and the frequent introduction of new
products, product enhancements and new distribution methods or channels, each of which can decrease
demand for current products or render them obsolete. Net sales can be dependent on demand for
specific product categories, and any change in demand for or supply of such products could have a
material adverse effect on our net sales and/or cause us to record write-downs of obsolete
inventory, if we fail to react in a timely manner to such changes. In addition, in order to
satisfy client demand, protect ourselves against product shortages, obtain greater purchasing
discounts and react to changes in original equipment manufacturers terms and conditions, we may
decide to carry relatively high inventory levels of certain products that may have limited or no
return privileges. There can be no assurance that we will be able to avoid losses related to
inventory obsolescence on these products.
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INSIGHT ENTERPRISES, INC.
Our operating results are also highly dependent upon our level of gross profit as a percentage
of net sales, which fluctuates due to numerous factors, including changes in prices from partners,
changes in the amount and timing of supplier reimbursements and marketing funds, volumes of
purchases, changes in client mix, the relative mix of products sold during the period, general
competitive conditions, opportunistic purchases of inventory and opportunities to increase market
share. In addition, our expense levels are based, in part, on anticipated net sales and the
anticipated amount and timing of partner funding. Therefore, we may not be able to reduce spending
quickly enough to compensate for any unexpected net sales shortfall, and any such inability could
have a material adverse effect on our business, results of operations and financial condition.
General economic conditions, including concerns regarding our ability to collect our accounts receivable and credit constraints, or unfavorable economic
conditions in a particular region, business or industry sector, may lead our clients to delay or
forgo investments in IT hardware, software and services, either of which could adversely affect our
business, financial condition, operating results and cash flow. Weak economic conditions generally
or a reduction in IT spending adversely affects our business, operating results and financial
condition. A prolonged continued slowdown in the global economy, or in a particular region, or
business or industry sector, or prolonged or further tightening of credit markets, could cause our
clients to have difficulty accessing capital and credit sources; delay contractual payments; or
delay or forgo decisions to (i) upgrade or add to their existing IT environments, (ii) license new
software or (iii) purchase services (particularly with respect to discretionary spending for
hardware, software and services). Such events could adversely affect our business, financial
condition, operating results and cash flow.
The failure of our clients to pay the accounts receivable they owe to us or the loss of
significant clients could have a significant negative impact on our business, results of
operations, financial condition or liquidity. A significant portion of our working capital
consists of accounts receivable from clients. If clients responsible for a significant amount of
accounts receivable were to become insolvent or otherwise unable to pay for products and services,
or were to become unwilling or unable to make payments in a timely manner, our business, results of
operations, financial condition or liquidity could be adversely affected. Economic or industry
downturns could result in longer payment cycles, increased collection costs and defaults in excess
of managements expectations. A significant deterioration in our ability to collect on accounts
receivable could also impact the cost or availability of financing under our accounts receivable
securitization program discussed below.
Disruptions in our IT systems and voice and data networks, including the system upgrade and
the migration of acquired businesses to our IT systems and voice and data networks, could affect
our ability to service our clients and cause us to incur additional expenses. We believe that our
success to date has been, and future results of operations will be, dependent in large part upon
our ability to provide prompt and efficient service to our clients. Our ability to provide that
level of service is largely dependent on the accuracy, quality and utilization of the information
generated by our IT systems, which affects our ability to manage our sales, client service,
distribution, inventories and accounting systems and the reliability of our voice and data networks
and managed services offerings. We have been making and will continue to make enhancements and
upgrades to our IT systems. Additionally, certain assumed expense synergies are dependent on
migrating acquired businesses to our IT systems. There can be no assurances that these
enhancements or conversions will not cause disruptions in our business, and any such disruption
could have a material adverse effect on our results of operations and financial condition. The
conversion of EMEA to a new IT system platform is intended to enable us to sell hardware and
services to clients in that region, and therefore any delay in that implementation or disruption of
service during that implementation would have an adverse effect on current results and future sales
growth. Further, any delay in the timing could reduce and/or delay our expense savings, and any
such disruption could have a material adverse effect on our results of operations and financial
condition. Additionally, if we complete conversions that shorten the life of existing technology
or impair the value of the existing system, we could incur additional depreciation expense and/or
impairment charges. Although we have built redundancy into most of our IT systems, have documented
system outage policies and procedures and have comprehensive data backup, we do not have a formal
disaster recovery plan. Substantial interruption in our IT systems or in our telephone
communication systems would have a material adverse effect on our business, results of operations
and financial condition.
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INSIGHT ENTERPRISES, INC.
The IT hardware, software and services industry is intensely competitive, and actions of our
competitors, including manufacturers and publishers of products we sell, can negatively affect our
business. Competition in the industry is based on price, product availability, speed of delivery,
credit availability, quality and breadth of product lines, and, increasingly, on the ability to
tailor specific solutions to client needs. We compete with manufacturers/publishers, including
manufacturers/publishers of products we sell, as well as a large number and wide variety of
marketers and resellers of IT hardware, software and services. Product manufacturers/publishers
have programs to sell directly to business clients, particularly larger corporate clients, and are thus a competitive threat to us.
In addition, the manner in which software products are distributed and sold and the manner in which
publishers compensate channel partners like us are continually changing. Software publishers may
intensify their efforts to sell their products directly to end-users, including our current and
potential clients, and may reduce the compensation to resellers or change the requirements for
earning the available amounts. Other products and methodologies for distributing software may be
introduced by publishers, present competitors or other third parties. An increase in the volume of
products sold through any of these competitive programs or distributed directly electronically to
end-users or a decrease in the amount of referral fees paid to us, or increased competition for
providing services to these clients, could have a material adverse effect on our business, results
of operations and financial condition.
Additionally, we believe our industry will see further consolidation as product resellers and
direct marketers combine operations or acquire or merge with other resellers, service providers and
direct marketers to increase efficiency, service capabilities and market share. Moreover, current
and potential competitors have established or may establish cooperative relationships among
themselves or with third parties to enhance their product and service offerings. Accordingly, it
is possible that new competitors or alliances among competitors may emerge and acquire significant
market share. Generally, pricing is very aggressive in the industry, and we expect pricing
pressures to continue. There can be no assurance that we will be able to negotiate prices as
favorable as those negotiated by our competitors or that we will be able to offset the effects of
price reductions with an increase in the number of clients, higher net sales, cost reductions,
greater sales of services, which are typically at higher gross margins, or otherwise. Price
reductions by our competitors that we either cannot or choose not to match could result in an
erosion of our market share and/or reduced sales or, to the extent we match such reductions, could
result in reduced operating margins, any of which could have a material adverse effect on our
business, results of operations and financial condition.
Certain of our competitors in each of our operating segments have longer operating histories
and greater financial, technical, marketing and other resources than we do. In addition, some of
these competitors may be able to respond more quickly to new or changing opportunities,
technologies and client requirements. Many current and potential competitors also have greater
name recognition and engage in more extensive promotional activities, offer more attractive terms
to clients and adopt more aggressive pricing policies than we do. Additionally, some of our
competitors have higher margins and/or lower operating cost structures, allowing them to price more
aggressively. There can be no assurance that we will be able to compete effectively with current
or future competitors or that the competitive pressures we face will not have a material adverse
effect on our business, results of operations and financial condition.
Another growing industry trend is the SaaS business model, whereby software vendors develop
and make their applications available for use over the Internet. In many cases, the SaaS model
allows enterprises to obtain the benefits of commercially licensed, internally operated software
without the associated complexity or high initial set-up, operational and licensing costs.
Advances in the SaaS business model and other new models could increase our competition or
eliminate the need for a resale channel. There can be no assurance that we will be able to adapt
to, or compete effectively with, current or future distribution channels or competitors or that the
competitive pressures we face will not have a material adverse effect on our business, results of
operations and financial condition.
We
are subject to stockholder litigation and regulatory proceedings related to the restatement
of our consolidated financial statements. As described in our 2008 annual report, we identified
errors in the Companys accounting related to trade credits in prior periods and determined that
corrections to our consolidated financial statements were required to reverse material prior period
reductions of costs of goods sold and selling and administrative expenses because of the incorrect
releases of certain aged trade credits.
Our internal review and related activities have required the Company to incur substantial
expenses for legal, accounting, tax and other professional services ($8.3 million through December
31, 2009), and the ongoing litigation will likely require further expenditures and could harm our
business, financial condition, results of operations and cash flows. Further, if the Company is
subject to adverse findings in litigation, regulatory proceedings or government enforcement
actions, the Company could be required to pay damages or penalties or have other remedies imposed,
which could harm its business, financial condition, results of operations and cash flows.
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INSIGHT ENTERPRISES, INC.
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. The plaintiffs in two of these lawsuits voluntarily dismissed their complaints in May and
June 2009, and the court appointed a lead plaintiff and lead counsel on June 24, 2009. The
plaintiff in the remaining action amended their class action complaint in September 2009. The
amended complaint seeks unspecified damages and asserts claims under the federal securities laws
relating to our February 9, 2009 announcement that we expected to restate our financial statements for the year ended December
31, 2007 and for the first three quarters of 2008 and that the restatement would include a material
reduction of retained earnings. In addition to claims relating to our earlier restatement, the
amended complaint also includes additional allegations regarding other purported accounting and
revenue recognition issues during the class period. The amended complaint also contends that we
issued false and misleading financial statements and issued misleading public statements about our
results of operations, and it adds our independent registered public accounting firm as a
defendant. All defendants have filed motions to dismiss the amended complaint, and oral argument
on the motions to dismiss is currently calendared for March 2010. In June 2009, we were notified
that three shareholder derivative lawsuits had been filed, two in the Superior Court in Maricopa
County, Arizona (the State derivative actions) and one in the U.S. District Court for the
District of Arizona (the Federal derivative action), by persons identifying themselves as Insight
shareholders and purporting to act on behalf of Insight, naming Insight as a nominal defendant and
current and former officers and directors as defendants. Initially, the three derivative action
complaints, like the purported class action complaint, primarily arose out of our February 9, 2009
announcement. The two State derivative actions were consolidated into a single action, and the
plaintiff filed an amended complaint on the consolidated action on October 30, 2009 that alleges
breaches of fiduciary duties of loyalty and good faith, breach of fiduciary duties for insider
selling and misappropriation of information, and unjust enrichment. In November 2009, the
plaintiffs moved to appoint themselves as lead plaintiffs, their counsel as lead counsel, and
their local counsel as liaison counsel. We opposed this motion as unnecessary. Also in November
2009, we moved to stay the State derivative actions pending the resolution of the Federal
derivative action. The Court heard oral argument on both motions on February 18, 2010 and took
both motions under advisement. The Federal derivative action was dismissed without prejudice, and
the judge gave the plaintiff thirty days (through February 8, 2010) to file a second amended
complaint. On February 8, 2010, the plaintiff filed the second amended complaint, which omitted
claims arising from the February 9, 2009 announcement and instead focused primarily on our prior
investigation of historical stock option granting practices. The amount of damages sought by the
plaintiffs is not specified in the complaints. In July and September 2009, we received, from the
plaintiff in the Federal derivative action, separate demands to inspect our books and records
pursuant to Section 220 of the Delaware General Corporation Law, and we objected to both demands as
improper. In November 2009, that same plaintiff also filed a lawsuit in the Court of Chancery of
the State of Delaware seeking to compel the inspection of certain books and records. In January
2010, we filed a motion to dismiss that complaint, and oral argument on the motions to dismiss is
currently calendared for March 2010. 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.
We have outstanding debt and may need to refinance that debt and/or incur additional debt in
the future, and general economic conditions and continued volatility in the credit markets could
limit our ability to obtain such financing or could increase the cost of financing. Our credit
facilities include a five-year $300.0 million senior revolving credit facility, a $150.0 million
accounts receivable securitization financing facility (the ABS facility), and a $90.0 million
inventory financing facility. As of December 31, 2009, we had $149.3 million of outstanding
long-term indebtedness, of which $147.0 million was borrowed under our senior revolving credit
facility and $2.3 million was outstanding under a capital lease obligation. As of the end of
fiscal 2009, the following amounts were available under our credit facilities, subject to the
limitations discussed below:
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$153.0 million under our senior revolving credit facility; |
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$150.0 million under our accounts receivable securitization financing facility; and |
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no amounts under our inventory financing facility. |
Our consolidated debt balance that can be outstanding at the end of any fiscal quarter under
our senior revolving credit facility and our accounts receivable securitization financing 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 Companys
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, (iv) non-cash goodwill impairment and (v) non-cash stock-based compensation (referred
to herein as adjusted earnings). The maximum leverage ratio permitted under the agreements was
2.75 times as of December 31, 2009. A significant drop in 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 Companys consolidated maximum debt capacity. As a result of this limitation, of the
$450.0 million of consolidated maximum debt capacity available under our senior revolving credit
facility and our accounts receivable securitization financing facility, the Companys debt balance
that could have been outstanding as of December 31, 2009 was limited to $286.3 million based on
2.75 times the Companys trailing twelve-month adjusted earnings.
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INSIGHT ENTERPRISES, INC.
Our borrowing capacity under our ABS facility is limited by the value and quality of the
accounts receivable under the facility. While the ABS facility has a stated maximum amount of
$150.0 million, the actual availability under the facility is limited by the quantity and quality
of the underlying accounts receivable, which reduced the maximum borrowing capacity from $150.0
million to $97.7 million as of December 31, 2009.
The term of our accounts receivable securitization financing facility is scheduled to expire
on July 23, 2010. Our senior revolving credit facility and inventory financing facility both
mature on April 1, 2013. We may not be able to refinance our debt without a significant increase
in cost, or at all, and there can be no assurance that additional lines of credit or financing
instruments will be available to us. A lack, or high cost, of credit could limit our ability to:
obtain additional financing for working capital, capital expenditures, debt service requirements,
acquisitions or other purposes in the future, as needed; plan for, or react to, changes in
technology and in our business and competition; and react in the event of a further economic
downturn.
While we believe we can meet our capital requirements from our cash resources, future cash
flow and the sources of financing that we anticipate will be available to us, we can provide no
assurance that we will continue to be able to do so, particularly if current market or economic
conditions continue or deteriorate further. The future effects on our business, liquidity and
financial results of these conditions could be material and adverse to us, both in ways described
above and in other ways that we do not currently foresee.
The integration and operation of acquired businesses may disrupt our business and create
additional expenses, and we may not achieve the anticipated benefits of the acquisitions.
Integration of an acquired business involves numerous risks, including assimilation of operations
of the acquired business and difficulties in the convergence of IT systems, the diversion of
managements attention from other business concerns, risks of entering markets in which we have had
no or only limited direct experience, assumption of unknown and unquantifiable liabilities, the
potential loss of key teammates and/or clients, difficulties in completing strategic initiatives
already underway in the acquired companies, and unfamiliarity with partners of the acquired
company, each of which could have a material adverse effect on our business, results of operations
and financial condition. The success of our integration of acquired businesses assumes certain
synergies and other benefits. We cannot assure that these risks or other unforeseen factors will
not offset the intended benefits of the acquisitions, in whole or in part.
Our net sales and gross profit have historically varied and include some seasonality, making
our future operating results less predictable. Our net sales and gross profit vary among our
products and services and geographic markets, and our software business is subject to seasonal
change. For example, margins are generally higher in the services category and software sales are
seasonally much higher in our second and fourth quarters. As a result, our quarterly results will
vary with changes in the mix of hardware, software and services sold, with the geographic mix among
operating segments, and with the seasonality of software sales. A majority of our costs are not
variable, and therefore a substantial reduction in sales during a quarter could have a negative
effect on operating results. In addition, periods of higher sales activities during certain
quarters may require a greater use of working capital to fund our related business operations at
such higher levels. During these periods, these increased working capital requirements could
temporarily increase our leverage and liquidity needs and expose us to greater financial risk. As
a result, the operating results for any three-month period will not be indicative of the results
that may be achieved for any subsequent fiscal quarter or for a full fiscal year.
There are risks associated with our international operations that are different than the risks
associated with our operations in the U.S., and our exposure to the risks of a global market could
hinder our ability to maintain and expand international operations. We have operation centers in
Australia, Canada, Germany, France, the U.S., and the United Kingdom, as well as sales offices in
Austria, Australia, Belgium, Canada, China, Denmark, France, Germany, Hong Kong, Italy, the
Netherlands, Russia, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the U.S., and
sales presence in Finland, New Zealand, Norway and Portugal. In the regions in which we do not
currently have a physical presence, such as Africa, Japan and India, we serve our clients through
strategic relationships. In Japan, we serve our clients through Uchida Spectrum (an entity in
which we have a less than 20% investment). In implementing our international strategy, we may face
barriers to entry and competition from local companies and other companies that already have
established global businesses, as well as the risks generally associated with conducting business
internationally. The success and profitability of international operations are subject to numerous
risks and uncertainties, many of which are outside of our control, such as:
|
|
|
political or economic instability; |
|
|
|
changes in governmental regulation or taxation; |
14
INSIGHT ENTERPRISES, INC.
|
|
|
changes in import/export laws, regulations and customs and duties; |
|
|
|
difficulties and costs of staffing and managing operations in certain foreign countries; |
|
|
|
work stoppages or other changes in labor conditions; |
|
|
|
taxes and other restrictions on repatriating foreign profits back to the U.S.; |
|
|
|
extended payment terms; and |
|
|
|
seasonal reductions in business activity in some parts of the world. |
In addition, until a payment history is established with clients in a new region, the
likelihood of collecting receivables generated by such operations, on a timely basis or at all,
could be less than in established markets. As a result, there is a greater risk that reserves
established with respect to the collection of such receivables may be inadequate. Furthermore,
changes in policies and/or laws of the U.S. or foreign governments resulting in, among other
changes, higher taxation, tariffs or similar protectionist laws, currency conversion limitations or
the nationalization of private enterprises could reduce the anticipated benefits of international
operations. Any actions by countries in which we conduct business to reverse policies that
encourage foreign trade could have a material adverse effect on our results of operations and
financial condition.
Changes in, or interpretations of, tax rules and regulations may adversely affect our
effective income tax rates or operating margins and we may be required to pay additional tax
assessments. We conduct business globally and file income tax returns in various U.S. and foreign
tax jurisdictions. Our effective tax rate could be adversely affected by various factors, many of
which are outside of our control, including:
|
|
|
changes in pre-tax income in various jurisdictions in which we operate that have
differing statutory tax rates; |
|
|
|
higher corporate tax rates in the U.S. and elsewhere; |
|
|
|
changes in tax laws, regulations, and/or interpretations of such tax laws in multiple
jurisdictions; |
|
|
|
tax effects related to purchase accounting for acquisitions; and |
|
|
|
resolutions of issues arising from tax examinations and any related interest or
penalties. |
The determination of our worldwide provision for income taxes and other tax liabilities
requires estimation, judgment and calculations in situations where the ultimate tax determination
may not be certain. Our determination of tax liabilities is always subject to review or
examination by tax authorities in various jurisdictions. Any adverse outcome of such review or
examination could have a negative impact on our operating results and financial condition. The
results from various tax examinations and audits may differ from the liabilities recorded in our
financial statements and may adversely affect our financial results and cash flows.
International operations expose us to currency exchange risk and we cannot predict the effect
of future exchange rate fluctuations or the volatility of the U.S. dollar exchange rate on our
business and operating results. We have currency exposure arising from both sales and purchases
denominated in foreign currencies, including intercompany transactions outside the U.S. Changes in
exchange rates between foreign currencies and the U.S. dollar, or between foreign currencies, may
adversely affect our operating margins. For example, if these foreign currencies appreciate
against the U.S. dollar, it will become more expensive in U.S. dollars to pay expenses with foreign
currencies. In addition, currency devaluation against the U.S. dollar can result in a loss to us
if we hold deposits denominated in the devalued currency. We currently conduct limited hedging
activities, and, to the extent not hedged, we are vulnerable to the effects of currency
exchange-rate fluctuations. In addition, some currencies are subject to limitations on conversion
into other currencies, which can limit the ability to otherwise react to rapid foreign currency
devaluations. We cannot predict with precision the effect of future exchange-rate fluctuations on
business and operating results, and significant rate fluctuations could have a material adverse
effect on results of operations and financial condition.
International operations also expose us to currency fluctuations as we translate the financial
statements of our foreign operations to U.S. dollars.
The failure to comply with the terms and conditions of our public sector contracts could
result in, among other things, fines or other liabilities. Net sales to public sector clients are
derived from sales to federal, state and local governmental departments and agencies, as well as to
educational institutions, through open market sales and various contracts and programs. Government
contracting is a highly regulated area. Noncompliance with government
procurement regulations or contract provisions could result in civil, criminal, and administrative
liability, including substantial monetary fines or damages, termination of government contracts,
and suspension, debarment or ineligibility from doing business with the government. In addition,
substantially all of our contracts in the public sector are terminable at any time for convenience
of the contracting agency or upon default. The effect of any of these possible actions by any
governmental department or agency or the adoption of new or modified procurement regulations or
practices could materially adversely affect our business, financial position and results of
operations.
15
INSIGHT ENTERPRISES, INC.
We depend on certain key personnel. Our future success will be largely dependent on the
efforts of key management personnel. The loss of one or more of these leaders could have a
material adverse effect on our business, results of operations and financial condition. We cannot
offer assurance that we will be able to continue to attract or retain highly qualified executive
personnel or that any such executive personnel will be able to increase stockholder value. We also
believe that our future success will be largely dependent on our continued ability to attract and
retain highly qualified management, sales, service and technical personnel, but we cannot offer
assurance that we will be able to attract and retain such personnel. Further, we make a
significant investment in the training of our sales account executives and services engineers. Our
inability to retain such personnel or to train them either rapidly enough to meet our expanding
needs or in an effective manner for quickly changing market conditions could cause a decrease in
the overall quality and efficiency of our sales staff, which could have a material adverse effect
on our business, results of operations and financial condition.
We may not be able to protect our intellectual property adequately, and we may be subject to
intellectual property infringement claims. To protect our intellectual property, we rely on
copyright and trademark laws, unpatented proprietary know-how, and trade secrets and patents, as
well as confidentiality, invention assignment, non-solicitation and non-competition agreements.
There can be no assurance that these measures will afford us sufficient protection of our
intellectual property, and it is possible that third parties may copy or otherwise obtain and use
our proprietary information without authorization or otherwise infringe on our intellectual
property rights. The disclosure of our trade secrets could impair our competitive position and
could have a material adverse effect on our business relationships, results of operations,
financial condition and future growth prospects. In addition, our registered trademarks and trade
names are subject to challenge by other rights owners. This may affect our ability to continue
using those marks and names. Likewise, many businesses are actively investing in, developing and
seeking protection for intellectual property in the areas of search, indexing, e-commerce and other
Web-related technologies, as well as a variety of on-line business models and methods, all of which
are in addition to traditional research and development efforts for IT products and application
software. As a result, disputes regarding the ownership of these technologies are likely to arise
in the future, and, from time to time, parties do assert various infringement claims against us,
either because of our practices or because we resell allegedly infringing software, in the form of
cease-and-desist letters, licensing inquiries, lawsuits and other communications and demands. If
there is a determination that we have infringed the proprietary rights of others, we could incur
substantial monetary liability, be forced to stop selling infringing products or providing
infringing services, be required to enter into costly royalty or licensing agreements, if
available, or be prevented from using the rights, which could force us to change our business
practices or hardware, software or services offerings in the future. Additionally, as we increase
the geographic scope of our operations and the types of services provided under the Insight brand,
there is a greater likelihood that we will encounter challenges to our trade names, trademarks and
service marks. We may not be able to use our principal mark without modification in all
geographies for all of our offerings, and these challenges may come from either governmental
agencies or other market participants. These types of claims could have a material adverse effect
on our business, results of operations and financial condition.
Some anti-takeover provisions contained in our certificate of incorporation, bylaws and
stockholders rights agreement, as well as provisions of Delaware law and executive employment
contracts, could impair a takeover attempt. We have provisions in our certificate of incorporation
and bylaws which could have the effect (separately, or in combination) of rendering more difficult
or discouraging an acquisition deemed undesirable by our Board of Directors. These include
provisions:
|
|
|
authorizing blank check preferred stock, which could be issued with voting, liquidation,
dividend and other rights superior to our common stock; |
|
|
|
limiting the liability of, and providing indemnification to, directors and officers; |
|
|
|
limiting the ability of our stockholders to call special meetings; |
|
|
|
requiring advance notice of stockholder proposals for business to be conducted at
meetings of our stockholders and for nominations of candidates for election to our Board of
Directors; |
|
|
|
controlling the procedures for conduct of Board and stockholder meetings and election
and removal of directors; and |
|
|
|
specifying that stockholders may take action only at a duly called annual or special
meeting of stockholders. |
16
INSIGHT ENTERPRISES, INC.
These provisions, alone or together, could deter or delay hostile takeovers, proxy contests
and changes in control or management. As a Delaware corporation, we are also subject to provisions
of Delaware law, including Section 203 of the Delaware General Corporation Law, which prevents some
stockholders from engaging in certain business combinations without approval of the holders of
substantially all of our outstanding common stock.
Our bylaws provide that the Company will seek stockholder approval prior to its adoption of
any stockholder rights plan, unless the Board, in the exercise of its fiduciary duties, determines
that, under the circumstances existing at the time, it is in the best interest of our stockholders
to adopt or extend a stockholder rights plan without delay. The amendment further provides that a
stockholder rights plan adopted or extended by the Board without prior stockholder approval must
provide that it will expire unless ratified by the stockholders of the Company within one year of
adoption. Despite these bylaw provisions, we could adopt a stockholder rights plan for a limited
period of time, and such a plan could have the effect of delaying or deterring a change of control
that could limit the opportunity for stockholders to receive a premium for their shares.
Additionally, we have employment agreements with 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. If such persons were
terminated without cause or under certain circumstances after a change of control, and the
severance payments under the current employment agreements were to become payable, the severance
payments would generally range from three months of a teammates annual salary up to two times the
teammates annual salary and bonus.
Any provision of our certificate of incorporation, bylaws, employment agreements or Delaware
law that has the effect of delaying or deterring a change in control could limit the opportunity
for our stockholders to receive a premium for their shares of our common stock and also could
affect the price that some investors are willing to pay for our common stock.
Sales of additional common stock and securities convertible into our common stock may dilute
the voting power of current holders. We may issue equity securities in the future whose terms and
rights are superior to those of our common stock. Our certificate of incorporation authorizes the
issuance of up to 3,000,000 shares of preferred stock. These are blank check preferred shares,
meaning that our Board of Directors is authorized, from time to time, to issue the shares and
designate their voting, conversion and other rights, including rights superior, or preferential, to
rights of already outstanding shares, all without stockholder consent. No preferred shares are
outstanding, and we currently do not intend to issue any shares of preferred stock. Any shares of
preferred stock that may be issued in the future could be given voting and conversion rights that
could dilute the voting power and equity of existing holders of shares of common stock and have
preferences over shares of common stock with respect to dividends and liquidation rights.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal executive offices are located at 6820 South Harl Avenue, Tempe, Arizona 85283.
We believe that our facilities will be suitable and adequate for our present purposes, and we
anticipate that we will be able to extend our existing leases on terms satisfactory to us or, if
necessary, to locate substitute facilities on acceptable terms. At December 31, 2009, we owned or
leased a total of approximately 1.5 million square feet of office and warehouse space, and, while
approximately 70% of the square footage is in the United States, we own or lease office and
warehouse facilities in twelve countries in EMEA.
17
INSIGHT ENTERPRISES, INC.
Information about significant sales, distribution, services and administration facilities in
use as of December 31, 2009 is summarized in the following table:
|
|
|
|
|
|
|
Operating Segment |
|
Location |
|
Primary Activities |
|
Own or Lease |
Headquarters
|
|
Tempe, Arizona, USA
|
|
Executive Offices, Sales and
Administration
|
|
Own |
|
|
|
|
|
|
|
North America
|
|
Tempe, Arizona, USA
|
|
Sales and Administration
|
|
Own |
|
|
Tempe, Arizona, USA
|
|
Sales and Administration
|
|
Lease |
|
|
Bloomingdale, Illinois, USA
|
|
Sales and Administration
|
|
Own |
|
|
Hanover Park, Illinois, USA
|
|
Services, Distribution
and Administration
|
|
Lease |
|
|
Plano, Texas, USA
|
|
Sales and Administration
|
|
Lease |
|
|
Liberty Lake, Washington, USA
|
|
Sales and Administration
|
|
Lease |
|
|
Winnipeg, Manitoba, Canada
|
|
Sales and Administration
|
|
Lease |
|
|
Montreal, Quebec, Canada
|
|
Sales and Administration
|
|
Own |
|
|
Mississauga, Ontario, Canada
|
|
Sales and Administration
|
|
Lease |
|
|
Montreal, Quebec, Canada
|
|
Distribution
|
|
Lease |
|
|
|
|
|
|
|
EMEA
|
|
Sheffield, United Kingdom
|
|
Sales and Administration
|
|
Own |
|
|
Sheffield, United Kingdom
|
|
Distribution
|
|
Lease |
|
|
Uxbridge, United Kingdom
|
|
Sales and Administration
|
|
Lease |
|
|
Munich, Germany
|
|
Sales and Administration
|
|
Lease |
|
|
Paris, France
|
|
Sales and Administration
|
|
Lease |
|
|
|
|
|
|
|
APAC
|
|
Sydney, New South Wales,
Australia
|
|
Sales and Administration
|
|
Lease |
In addition to those listed above, we have leased sales offices in various cities across North
America, EMEA and APAC. For additional information on operating leases, see Note 8 to the
Consolidated Financial Statements in Part II, Item 8 of this report. These properties are not
included in the table above. In March 2009, we vacated our former headquarters building located in
Tempe, Arizona, which is owned by the Company but is currently unoccupied. We also have leased
facilities in the United Kingdom that are no longer in use following our consolidation of office
space. These properties are also not included in the table above. A portion of the administration
facilities that we own in Tempe, Arizona included in the table above is currently leased to Direct
Alliance Corporation, a discontinued operation that was sold to a third party in 2006. The parent
company that bought Direct Alliance is the guarantor under the lease.
Item 3. 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. 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 this report.
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. The plaintiffs in two of these lawsuits voluntarily dismissed their complaints in May and
June 2009, and the court appointed a lead plaintiff and lead counsel on June 24, 2009. The
plaintiff in the remaining action amended their class action complaint in September 2009. The
amended complaint seeks unspecified damages and asserts claims under the federal securities laws
relating to our February 9, 2009 announcement that we expected to restate our financial statements
for the year ended December 31, 2007 and for the first three quarters of 2008 and that the
restatement would include a material reduction of retained earnings. In addition to claims
relating to our earlier restatement, the amended complaint also includes additional allegations
regarding other purported accounting and revenue recognition issues during the class period. The
amended complaint also contends that we issued false and misleading financial statements and issued
misleading public statements about our results of operations, and it adds our independent
registered public accounting firm as a defendant. All defendants have filed motions to dismiss the
amended complaint, and oral argument on the motions to dismiss is currently calendared for March
2010. In June 2009, we were notified that three shareholder derivative lawsuits had been filed,
two in the Superior Court in Maricopa County, Arizona (the State derivative actions) and one in
the U.S. District Court for the
18
INSIGHT ENTERPRISES, INC.
District of Arizona (the Federal derivative action), by persons identifying themselves as
Insight shareholders and purporting to act on behalf of Insight, naming Insight as a nominal
defendant and current and former officers and directors as defendants. Initially, the three
derivative action complaints, like the purported class action complaint, primarily arose out of our
February 9, 2009 announcement. The two State derivative actions were consolidated into a single
action, and the plaintiff filed an amended complaint on the consolidated action on October 30, 2009
that alleges breaches of fiduciary duties of loyalty and good faith, breach of fiduciary duties for
insider selling and misappropriation of information, and unjust enrichment. In November 2009, the
plaintiffs moved to appoint themselves as lead plaintiffs, their counsel as lead counsel, and
their local counsel as liaison counsel. We opposed this motion as unnecessary. Also in November
2009, we moved to stay the State derivative actions pending the resolution of the Federal
derivative action. The Court heard oral argument on both motions on February 18, 2010 and took
both motions under advisement. The Federal derivative action was dismissed without prejudice, and
the judge gave the plaintiff thirty days (through February 8, 2010) to file a second amended
complaint. On February 8, 2010, the plaintiff filed the second amended complaint, which omitted
claims arising from the February 9, 2009 announcement and instead focused primarily on our prior
investigation of historical stock option granting practices. The amount of damages sought by the
plaintiffs is not specified in the complaints. In July and September 2009, we received, from the
plaintiff in the Federal derivative action, separate demands to inspect our books and records
pursuant to Section 220 of the Delaware General Corporation Law, and we objected to both demands as
improper. In November 2009, that same plaintiff also filed a lawsuit in the Court of Chancery of
the State of Delaware seeking to compel the inspection of certain books and records. In January
2010, we filed a motion to dismiss that complaint, and oral argument on the motions to dismiss is
currently calendared for March 2010. 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.
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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market Information
Our common stock trades under the symbol NSIT on The Nasdaq Global Select Market. The
following table shows, for the calendar quarters indicated, the high and low sales price per share
for our common stock as reported on the Nasdaq Global Select Market.
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
High Price |
|
|
Low Price |
|
Year 2009 |
|
|
|
|
|
|
|
|
Fourth Quarter |
|
$ |
14.00 |
|
|
$ |
10.14 |
|
Third Quarter |
|
|
12.43 |
|
|
|
8.44 |
|
Second Quarter |
|
|
9.80 |
|
|
|
3.41 |
|
First Quarter |
|
|
7.20 |
|
|
|
2.06 |
|
Year 2008 |
|
|
|
|
|
|
|
|
Fourth Quarter |
|
$ |
13.38 |
|
|
$ |
3.40 |
|
Third Quarter |
|
|
17.11 |
|
|
|
10.70 |
|
Second Quarter |
|
|
18.20 |
|
|
|
11.00 |
|
First Quarter |
|
|
19.00 |
|
|
|
15.49 |
|
19
INSIGHT ENTERPRISES, INC.
As of February 19, 2010, we had 45,973,309 shares of common stock outstanding held by
approximately 100 stockholders of record. This figure does not include an estimate of the number
of beneficial holders whose shares are held of record by brokerage firms and clearing agencies.
We have never paid a cash dividend on our common stock. 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. Our senior revolving credit facility contains restrictions on the payment of cash
dividends.
Issuer Purchases of Equity Securities
Although we did not repurchase shares of our common stock during the year ended December 31,
2009, we have repurchased shares of our common stock in the past and may consider doing so again in
the foreseeable future. Additional information about our prior and existing share repurchase
programs can be found in Note 15 to the Consolidated Financial Statements in Part II, Item 8 of
this report and is incorporated by reference herein.
Stock Price Performance Graph
Set forth below is a graph comparing the percentage change in the cumulative total stockholder
return on our common stock with the cumulative total return of the Nasdaq Stock Market U.S.
Companies (Market Index) and the Nasdaq Retail Trade Stocks (Peer Index) for the period starting
January 1, 2005 and ending December 31, 2009. The graph assumes that $100 was invested on January
1, 2005 in our common stock and in each of the two Nasdaq indices, and that, as to such indices,
dividends were reinvested. We have not, since our inception, paid any cash dividends on our common
stock. Historical stock price performance shown on the graph is not necessarily indicative of
future price performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 1, |
|
|
Dec. 31, |
|
|
Dec. 31, |
|
|
Dec. 31, |
|
|
Dec. 31, |
|
|
Dec. 31, |
|
|
|
2005 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Insight Enterprises, Inc.
Common Stock (NSIT) |
|
|
100.00 |
|
|
|
96.32 |
|
|
|
92.68 |
|
|
|
89.59 |
|
|
|
33.89 |
|
|
|
56.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nasdaq Stock Market U.S.
Companies (Market Index) |
|
|
100.00 |
|
|
|
102.13 |
|
|
|
112.19 |
|
|
|
121.68 |
|
|
|
58.64 |
|
|
|
84.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nasdaq Retail Trade
Stocks (Peer Index) |
|
|
100.00 |
|
|
|
100.95 |
|
|
|
110.24 |
|
|
|
100.31 |
|
|
|
69.99 |
|
|
|
97.21 |
|
20
INSIGHT ENTERPRISES, INC.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction with our
Consolidated Financial Statements and the Notes thereto in Part II, Item 8 and Managements
Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of
this report. The selected consolidated financial data presented below under the captions
Consolidated Statements of Operations Data and Consolidated Balance Sheet Data as of and for
each of the years in the five-year period ended December 31, 2009 is derived, with respect to the
years ended December 31, 2009, 2008, 2007 and 2006, from our audited consolidated financial
statements, and, with respect to the year ended December 31, 2005 (as restated), from the selected
financial data of the Company included in our Form 10-K for the year ended December 31, 2008. The
consolidated financial statements as of December 31, 2009 and 2008, and for each of the years in
the three-year period ended December 31, 2009, which have been audited by KPMG LLP, our independent
registered public accounting firm, are included in Part II, Item 8 of this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands, except per share data) |
|
Consolidated Statements of Operations Data (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
4,136,905 |
|
|
$ |
4,825,489 |
|
|
$ |
4,805,474 |
|
|
$ |
3,599,937 |
|
|
$ |
2,920,135 |
|
Costs of goods sold |
|
|
3,568,291 |
|
|
|
4,161,906 |
|
|
|
4,146,848 |
|
|
|
3,133,751 |
|
|
|
2,561,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
568,614 |
|
|
|
663,583 |
|
|
|
658,626 |
|
|
|
466,186 |
|
|
|
358,616 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
502,102 |
|
|
|
561,987 |
|
|
|
542,322 |
|
|
|
376,722 |
|
|
|
281,934 |
|
Goodwill impairment |
|
|
|
|
|
|
397,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and restructuring expenses |
|
|
13,608 |
|
|
|
8,595 |
|
|
|
2,595 |
|
|
|
729 |
|
|
|
11,962 |
|
Reductions in liabilities assumed in a previous
acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(664 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
|
52,904 |
|
|
|
(304,246 |
) |
|
|
113,709 |
|
|
|
88,735 |
|
|
|
65,384 |
|
Non-operating (income) expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
(424 |
) |
|
|
(2,387 |
) |
|
|
(2,078 |
) |
|
|
(4,355 |
) |
|
|
(3,394 |
) |
Interest expense |
|
|
10,790 |
|
|
|
13,479 |
|
|
|
12,852 |
|
|
|
5,985 |
|
|
|
1,850 |
|
Net foreign currency exchange (gain) loss |
|
|
(328 |
) |
|
|
9,629 |
|
|
|
(3,887 |
) |
|
|
(1,135 |
) |
|
|
72 |
|
Other expense, net |
|
|
1,123 |
|
|
|
1,107 |
|
|
|
1,531 |
|
|
|
901 |
|
|
|
782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before
income taxes |
|
|
41,743 |
|
|
|
(326,074 |
) |
|
|
105,291 |
|
|
|
87,339 |
|
|
|
66,074 |
|
Income tax expense (benefit) |
|
|
10,970 |
|
|
|
(86,347 |
) |
|
|
40,686 |
|
|
|
30,882 |
|
|
|
26,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from continuing operations |
|
|
30,773 |
|
|
|
(239,727 |
) |
|
|
64,605 |
|
|
|
56,457 |
|
|
|
40,065 |
|
Earnings from discontinued operations, net of taxes
(2) |
|
|
2,801 |
|
|
|
|
|
|
|
4,151 |
|
|
|
13,084 |
|
|
|
8,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) before cumulative effect of
change in accounting principle |
|
|
33,574 |
|
|
|
(239,727 |
) |
|
|
68,756 |
|
|
|
69,541 |
|
|
|
49,040 |
|
Cumulative effect of change in accounting
principle, net of taxes (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(649 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
33,574 |
|
|
$ |
(239,727 |
) |
|
$ |
68,756 |
|
|
$ |
69,541 |
|
|
$ |
48,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
INSIGHT ENTERPRISES, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands, except per share data) |
|
Consolidated Statements of Operations Data (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from continuing operations |
|
$ |
0.67 |
|
|
$ |
(5.15 |
) |
|
$ |
1.32 |
|
|
$ |
1.17 |
|
|
$ |
0.83 |
|
Net earnings from discontinued operations (2) |
|
|
0.06 |
|
|
|
|
|
|
|
0.08 |
|
|
|
0.27 |
|
|
|
0.18 |
|
Cumulative effect of change in accounting
principle (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share |
|
$ |
0.73 |
|
|
$ |
(5.15 |
) |
|
$ |
1.40 |
|
|
$ |
1.44 |
|
|
$ |
1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from continuing operations |
|
$ |
0.67 |
|
|
$ |
(5.15 |
) |
|
$ |
1.29 |
|
|
$ |
1.15 |
|
|
$ |
0.82 |
|
Net earnings from discontinued operations (2) |
|
|
0.06 |
|
|
|
|
|
|
|
0.08 |
|
|
|
0.27 |
|
|
|
0.18 |
|
Cumulative effect of change in accounting
principle (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share |
|
$ |
0.73 |
|
|
$ |
(5.15 |
) |
|
$ |
1.37 |
|
|
$ |
1.42 |
|
|
$ |
0.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
45,838 |
|
|
|
46,573 |
|
|
|
49,055 |
|
|
|
48,373 |
|
|
|
48,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
46,271 |
|
|
|
46,573 |
|
|
|
50,120 |
|
|
|
49,006 |
|
|
|
49,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Consolidated Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital (4) |
|
$ |
297,485 |
|
|
$ |
318,867 |
|
|
$ |
418,474 |
|
|
$ |
383,483 |
|
|
$ |
346,469 |
|
Total assets (4) |
|
|
1,603,321 |
|
|
|
1,607,503 |
|
|
|
1,890,730 |
|
|
|
1,800,758 |
|
|
|
934,997 |
|
Short-term debt |
|
|
875 |
|
|
|
|
|
|
|
15,000 |
|
|
|
30,000 |
|
|
|
66,309 |
|
Long-term debt |
|
|
149,349 |
|
|
|
228,000 |
|
|
|
187,250 |
|
|
|
224,250 |
|
|
|
|
|
Stockholders equity |
|
|
467,574 |
|
|
|
421,968 |
|
|
|
741,738 |
|
|
|
663,629 |
|
|
|
547,729 |
|
Cash dividends declared per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our consolidated statements of operations data above includes results of the
acquisitions from their dates of acquisition: MINX from July 10, 2008; Calence from April 1,
2008; and Software Spectrum from September 7, 2006. |
|
(2) |
|
Earnings from Discontinued Operations. During the year ended December 31, 2009, we
recorded earnings from a discontinued operation of $4.5 million, $2.8 million net of tax, as a
result of the favorable settlement on July 7, 2009 of an arbitrated claim related to the sale
of Direct Alliance, a former subsidiary that was sold on June 30, 2006. The amount recognized
was net of payments to holders of 1,997,500 exercised stock options of the former subsidiary
and a broker success fee with respect to the settlement totaling $540,000. During the year
ended December 31, 2007, we sold PC Wholesale, a division of our North American operating
segment. During the year ended December 31, 2006, we sold Direct Alliance, a business process
outsourcing provider in the U.S. Accordingly, we have accounted for these entities as
discontinued operations and have reported their results of operations as discontinued
operations in the Consolidated Statements of Operations. Included in earnings from
discontinued operations for the years ended December 31, 2007 and 2006 are the gain on the
sale of PC Wholesale of $5.6 million, $3.4 million net of taxes, and the gain on the sale of
Direct Alliance of $14.9 million, $9.0 million net of taxes, respectively. |
|
(3) |
|
During 2005, we adopted a new accounting standard related to the accounting for
conditional asset retirement obligations and recorded a non-cash cumulative effect of a change
in accounting principle of $979,000 ($649,000 net of tax), representing cumulative
amortization of leasehold improvements and accretion of long-term liabilities since inception
dates of certain facility leases. |
(4) |
|
Certain balance sheet amounts as of December 31, 2007, 2006 and 2005 have been reclassified
to conform to the presentation as of December 31, 2009. Such reclassifications had the effect of
increasing working capital by $900,000, $500,000 and $400,000 as of December 31, 2007, 2006 and 2005,
respectively. Such reclassifications had the effect of increasing total assets by $1.6 million, $708,000
and $1.7 million as of December 31, 2007, 2006 and 2005, respectively. |
22
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of our operations
should be read in conjunction with the Consolidated Financial Statements and notes thereto included
in Part II, Item 8 of this report. Our actual results could differ materially from those contained
in these forward-looking statements due to a number of factors, including those discussed in Risk
Factors in Part I, Item 1A and elsewhere in this report.
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 currently only include software and select software-related services.
Our strategic vision is to be the trusted advisor to our clients, helping them enhance their
business performance through innovative technology solutions. Our strategy is to grow profitable
market share through the continued transformation of Insight into a complete IT solutions company,
differentiating us in the marketplace and giving us a competitive advantage.
On a consolidated basis, for the year ended December 31, 2009, our net sales and resulting
gross profit declined by 14%, while gross margin declined less than 10 basis points to 13.7%. Net
sales for the year ended December 31, 2009 compared to the year ended December 31, 2008 declined
16% in North America, 12% in EMEA and 6% in APAC. We reported net earnings from continuing
operations of $30.8 million and diluted net earnings from continuing operations per share of $0.67
for the year ended December 31, 2009. In 2009, we also reported net earnings from a discontinued
operation of $2.8 million, net of tax, or $0.06 per share, as a result of the favorable settlement
on July 7, 2009 of an arbitrated claim related to the sale of Direct Alliance, a former subsidiary
that was sold on June 30, 2006. In 2008, we reported a net loss from continuing operations of
$239.7 million and a diluted net loss from continuing operations per share of $5.15 for the year,
primarily as a result of a $276.7 million, net of tax, goodwill impairment charge taken in the
prior year. Net earnings from continuing operations for the year ended December 31, 2007 and
diluted net earnings from continuing operations per share were $64.6 million and $1.29,
respectively.
The results of operations for the year ended December 31, 2009 include the effect of the
following items:
|
|
|
severance and restructuring expenses of $13.6 million, $8.8 million net of tax; |
|
|
|
professional fees and costs associated with the trade credits restatement
remediation and related litigation of $8.3 million, $5.1 million net of tax, and
interest expense related to our anticipated unclaimed property settlement under
two state programs of $2.0 million, $1.2 million net of tax; |
|
|
|
a non-cash charge related to the termination of an equity incentive
compensation plan of $5.5 million, $3.5 million net of tax; |
|
|
|
a tax benefit of $3.3 million related to a recapitalization of one of our
foreign subsidiaries and the true-up of certain foreign tax assets; |
|
|
|
a $1.5 million tax benefit from the true-up of foreign tax credits after filing
the Companys 2008 U.S. federal tax return and the recognition of certain tax
benefits from the settlement of audits; and |
|
|
|
a tax charge related to the remeasurement of certain deferred tax assets of
$600,000. |
The results of operations for the year ended December 31, 2008 include the effect of the
following items:
|
|
|
goodwill impairment charge of $397.2 million, $276.7 million net of tax; |
|
|
|
foreign currency losses of $9.6 million, $6.6 million net of tax; |
|
|
|
severance and restructuring expenses of $8.6 million, $5.7 million net of tax;
and |
|
|
|
foreign tax credit impairment of $8.7 million. |
23
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The results of operations for the year ended December 31, 2007 include the following items:
|
|
|
expenses of $13.0 million, $7.9 million net of tax, for professional fees and
costs associated with our stock option review; |
|
|
|
gain on sale of a discontinued operation of $5.6 million, $3.4 million net of
tax; |
|
|
|
foreign currency gains of $3.9 million, $2.5 million net of tax; and |
|
|
|
severance and restructuring expenses of $2.6 million, $1.5 million net of tax. |
Net of tax amounts referenced above were computed using the effective tax rate for the taxing
jurisdictions in the operating segment in which the related expense was recorded. The majority of
the 2008 goodwill impairment charges in EMEA and APAC were non-deductible and therefore had no tax
effect.
On July 10, 2008, we acquired MINX Limited (MINX), a United Kingdom-based networking
services company with annual net sales of approximately $25.0 million, for a cash purchase price of
approximately $1.5 million and the assumption of approximately $3.9 million of existing debt.
Founded in 2002, MINX is a network integrator with Cisco Gold Partner accreditation in the United
Kingdom. We believe this acquisition has significantly enhanced our capabilities in the sale,
implementation and management of network infrastructure services and solutions in our EMEA
operating segment and complements our April 1, 2008 acquisition of Calence in our North America
operating segment.
On April 1, 2008, we completed the acquisition of Calence, LLC (Calence), one of the
nations largest independent technology solutions providers specializing in Cisco networking
solutions, advanced communications and managed services, for a cash purchase price of $125.0
million plus a working capital adjustment of approximately $3.6 million. During the year ended
December 31, 2009 and 2008, we recorded an additional $14.6 million and $9.8 million, respectively,
of purchase price consideration and $1.2 million and $532,000, respectively, of accrued interest
thereon as a result of Calence achieving certain performance targets during each year. Such
amounts were recorded as additional goodwill. See discussion relating to goodwill in Note 3 to the
Consolidated Financial Statements in Part II, Item 8 of this report. We also assumed Calences
existing debt totaling approximately $7.3 million, of which $7.1 million was repaid by us at
closing in 2008.
Our discussion and analysis of financial condition and results of operations is intended to
assist in the understanding of our consolidated financial statements, the changes in certain key
items in those consolidated financial statements from year to year and the primary factors that
contributed to those changes, as well as how certain critical accounting estimates affect our
Consolidated Financial Statements.
Critical Accounting Estimates
General
Our consolidated financial statements have been prepared in accordance with U.S. generally
accepted accounting principles (GAAP). For a summary of significant accounting policies, see
Note 1 to the Consolidated Financial Statements in Part II, Item 8 of this report. 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.
We consider the following to be our critical accounting estimates used in the preparation of
our Consolidated Financial Statements:
Sales Recognition
Sales are recognized when title and risk of loss are passed to the client, there is persuasive
evidence of an arrangement for sale, delivery has occurred and/or services have been rendered, the
sales price is fixed or determinable and collectibility is reasonably assured. Our usual sales
terms are F.O.B. shipping point or equivalent, at which time title and risk of loss have passed to
the client. However, because we either (i) have a general practice of covering client losses while
products are in transit despite title and risk of loss contractually transferring at the point of
shipment or (ii) have specifically stated
F.O.B. destination contractual terms with the client, delivery is not deemed to have occurred until
the point in time when the product is received by the client.
24
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
We make provisions for estimated product returns that we expect to occur under our return
policy based upon historical return rates. Our manufacturers warrant most of the products we
market, and it is our policy to request that clients return their defective products directly to
the manufacturer for warranty service. On selected products, and for selected client service
reasons, we may accept returns directly from the client and then either credit the client or ship a
replacement product. We generally offer a limited 15- to 30-day return policy for unopened
products and certain opened products, which are consistent with manufacturers terms; however, for
some products we may charge the client restocking fees. Products returned opened are processed and
returned to the manufacturer or partner for repair, replacement or credit to us. We resell most
unopened products returned to us. Products that cannot be returned to the manufacturer for
warranty processing, but are in working condition, are sold to inventory liquidators, to end users
as previously sold or used products, or through other channels to reduce our losses from
returned products.
We record freight billed to our clients as net sales and the related freight costs as costs of
goods sold. We report sales net of any sales-based taxes assessed by governmental authorities that
are imposed on and concurrent with sales transactions.
Revenue is recognized from software sales when clients acquire the right to use or copy
software under license, but in no case prior to the commencement of the term of the initial
software license agreement, provided that all other revenue recognition criteria have been met
(i.e., delivery, evidence of the arrangement exists, the fee is fixed or determinable and
collectibility of the fee is probable).
From time to time, the sale of hardware and software products may also include the provision
of services and the associated contracts contain multiple elements or non-standard terms and
conditions. Sales of services currently represent a small percentage of our net sales, and a
significant amount of services that are performed in conjunction with hardware and software sales
are completed in our facilities prior to shipment of the product. In these circumstances, net
sales for the hardware, software and services are recognized upon delivery. Net sales of services
that are performed at client locations are often service-only contracts and are recorded as sales
when the services are performed and completed. If the service is performed at a client location
in conjunction with a hardware, software or other services sale, we recognize net sales for
delivered items only when all of the following criteria are satisfied:
|
|
|
the delivered item(s) has value to the client on a stand-alone basis; |
|
|
|
there is objective and reliable evidence of the fair value of the undelivered item(s);
and |
|
|
|
if the arrangement includes a general right of return relative to the delivered item,
delivery or performance of the undelivered item(s) is considered probable and substantially
in our control. |
We sell certain third-party service contracts and software assurance or subscription products
for which we are not the primary obligor. These sales do not meet the criteria for gross sales
recognition, and thus are recorded on a net sales recognition basis. As we enter into contracts
with third-party service providers or vendors, we evaluate whether the subsequent sales of such
services should be recorded as gross sales or net sales. We determine whether we act as a
principal in the transaction and assume the risks and rewards of ownership or if we are simply
acting as an agent or broker. Under gross sales recognition, the entire selling price is recorded
in sales and our cost to the third-party service provider or vendor is recorded in costs of goods
sold. Under net sales recognition, the cost to the third-party service provider or vendor is
recorded as a reduction to sales, resulting in net sales equal to the gross profit on the
transaction, and there are no costs of goods sold.
Additionally, we sell certain professional services contracts on a fixed fee basis. Revenues
for fixed fee professional services contracts are recognized based on the ratio of costs incurred
to total estimated costs. Net sales for these service contracts are not a significant portion of
our consolidated net sales.
Partner Funding
We receive payments and credits from partners, including consideration pursuant to volume
sales incentive programs, volume purchase incentive programs and shared marketing expense programs.
Partner funding received pursuant to volume sales incentive programs is recognized as a reduction
to costs of goods sold. Partner funding received pursuant to volume purchase incentive programs is
allocated to inventories based on the applicable incentives from each partner and is recorded in
costs of goods sold as the inventory is sold. Changes in estimates of anticipated achievement
levels under individual partner programs may affect our results of operations and our cash flows.
25
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
See Note 1 to the Consolidated Financial Statements in Part II, Item 8 of this report for
further discussion of our accounting policies related to partner funding.
Stock-Based Compensation
We recognize stock-based compensation net of an estimated forfeiture rate and only recognize
compensation expense for those shares expected to vest over the requisite service period of the
award. Starting in 2006, we elected to primarily issue service-based and performance-based
restricted stock units (RSUs). The number of RSUs ultimately awarded under performance-based
RSUs varies based on whether we achieve certain financial results. We record compensation expense
each period based on our estimate of the most probable number of RSUs that will be issued under the
grants of performance-based RSUs. For any stock options awarded, modifications to previous awards
or awards of RSUs that are tied to specified market conditions, we use option pricing models or
lattice (binomial) models to determine fair value of the awards.
The estimated fair value of stock options is determined on the date of the grant using the
Black-Scholes-Merton (Black-Scholes) option-pricing model. The Black-Scholes model requires us
to apply highly subjective assumptions, including expected stock price volatility, expected life of
the option and the risk-free interest rate. A change in one or more of the assumptions used in the
option-pricing model may result in a material change to the estimated fair value of the stock-based
compensation.
See Note 11 to the Consolidated Financial Statements in Part II, Item 8 of this report for
further discussion of stock-based compensation.
Allowance for Doubtful Accounts
Our allowance for doubtful accounts is determined using estimated losses on accounts
receivable based on evaluation of the aging of the receivables, historical write-offs and the
current economic environment. Should our clients or vendors circumstances change or actual
collections of client and vendor receivables differ from our estimates, adjustments to the
provision for losses on accounts receivable and the related allowances for doubtful accounts would
be recorded. See further information on our allowance for doubtful accounts in Note 17 to the
Consolidated Financial Statements in Part II, Item 8 of this report.
Valuation of Long-Lived Assets Including Purchased Intangible Assets and Goodwill
We review property, plant and equipment and purchased intangible assets for impairment
whenever events or changes in circumstances indicate the carrying value of an asset may not be
recoverable. If such events or changes in circumstances indicate a possible impairment, our asset
impairment review assesses the recoverability of the assets based on the estimated undiscounted
future cash flows expected to result from the use of the asset plus net proceeds expected from
disposition of the asset (if any) and compares that value to the carrying value. Such impairment
test is based on the lowest level for which identifiable cash flows are largely independent of the
cash flows of other groups of assets and liabilities. If the carrying value exceeds the fair
value, an impairment loss is recognized for the difference. This approach uses our estimates of
future market growth, forecasted net sales and costs, expected periods the assets will be utilized,
and appropriate discount rates.
We perform an annual review in the fourth quarter of every year, or more frequently if
indicators of potential impairment exist, to determine if the carrying value of our recorded
goodwill is impaired. We continually assess whether any indicators of impairment exist, which
requires a significant amount of judgment. Events or circumstances that could trigger an
impairment review include a significant adverse change in legal factors or in the business climate,
unanticipated competition, significant changes in the manner of our use of the acquired assets or
the strategy for our overall business, significant negative industry or economic trends,
significant declines in our stock price for a sustained period or significant underperformance
relative to expected historical or projected future cash flows or results of operations. Any
adverse change in these factors, among others, could have a significant effect on the
recoverability of goodwill and could have a material effect on our consolidated financial
statements.
26
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The goodwill impairment test is performed at the reporting unit level. A reporting unit is an
operating segment or one level below an operating segment (referred to as a component). A
component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial
information is available and segment management regularly reviews the operating results of that
component. When two or more components of an operating segment have similar economic
characteristics, the components may be aggregated and deemed a single reporting unit. An operating
segment shall be deemed to be a reporting unit if all of its components are similar, if none of its
components is a reporting unit, or if the segment comprises only a single component. Insight has
three reporting units, which are equivalent to our operating segments.
The goodwill impairment test is a two step analysis. In testing for a potential impairment of
goodwill, we first compare the estimated fair value of each reporting unit in which the goodwill
resides to its book value, including goodwill. Management must apply judgment in determining the
estimated fair value of our reporting units. Multiple valuation techniques can be used to assess
the fair value of the reporting unit, including the market and income approaches. All of these
techniques include the use of estimates and assumptions that are inherently uncertain. Changes in
these estimates and assumptions could materially affect the determination of fair value or goodwill
impairment, or both. These estimates and assumptions primarily include, but are not limited to, an
appropriate control premium in excess of the market capitalization of the Company, future market
growth, forecasted sales and costs and appropriate discount rates. Due to the inherent uncertainty
involved in making these estimates, actual results could differ from those estimates. Management
evaluates the merits of each significant assumption, both individually and in the aggregate, used
to determine the fair value of the reporting units. If the estimated fair value exceeds book
value, goodwill is considered not to be impaired and no additional steps are necessary. To ensure
the reasonableness of the estimated fair values of our reporting units, we perform a reconciliation
of our total market capitalization to the estimated fair value of the all of our reporting units.
If the fair value of the reporting unit is less than its book value, then we are required to
perform the second step of the impairment analysis by comparing the carrying amount of the goodwill
with its implied fair value. In step two of the analysis, we utilize the fair value of the
reporting unit computed in the first step to perform a hypothetical purchase price allocation to
the fair value of the assets and liabilities of the reporting unit. The difference between the fair
value of the reporting unit calculated in step one and the fair value of the underlying assets and
liabilities of the reporting unit is the implied fair value of the reporting units goodwill.
Management must also apply judgment in determining the estimated fair value of these individual
assets and liabilities and may include independent valuations of certain internally generated and
unrecognized intangible assets, such as trademarks. Management also evaluates the merits of each
significant assumption, both individually and in the aggregate, used to determine the fair values
of these individual assets and liabilities. If the carrying amount of our goodwill exceeds the
implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to
the excess.
See further information on the carrying value of goodwill and the impairment charges recorded
in 2008 in Note 3 to the Consolidated Financial Statements in Part II, Item 8 of this report.
Severance and Restructuring Activities
We have taken, and may continue to take, severance and restructuring actions which require us
to utilize significant estimates related primarily to employee termination benefits, estimated
costs to terminate leases or remaining lease commitments on unused facilities, net of estimated
subleases. Should the actual amounts differ from our estimates, adjustments to severance and
restructuring expenses in subsequent periods would be necessary. A detailed description of our
severance, restructuring and acquisition integration activities and remaining accruals for these
activities at December 31, 2009 can be found in Note 9 to the Consolidated Financial Statements in
Part II, Item 8 of this report.
Income Taxes
Our effective tax rate includes the effect of certain undistributed foreign earnings for which
no U.S. taxes have been provided because such earnings are planned to be reinvested indefinitely
outside the U.S. Earnings remittance amounts are planned based on the projected cash flow needs as
well as the working capital and long-term investment requirements of our foreign subsidiaries and
our domestic operations. Material changes in our estimates of cash, working capital and long-term
investment requirements could affect our effective tax rate.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more
likely than not to be realized. We consider past operating results, future market growth,
forecasted earnings, historical and projected taxable income, the mix of earnings in the
jurisdictions in which we operate, prudent and feasible tax planning strategies and statutory tax
law changes in determining the need for a valuation allowance. If we were to determine that it is
more likely than not that we would not be able to realize all or part of our net deferred tax
assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the
period such determination is made. Likewise, if we later determine that it is more likely than not
that the net deferred tax assets would be realized, the previously provided valuation allowance
would be reversed. Effective January 1, 2009, any change in a valuation allowance established in
purchase accounting will be a benefit to, or charge against, earnings. Additional information
about the valuation allowance can be found in Note 10 to the Consolidated Financial Statements in
Part II, Item 8 of this report.
27
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Contingencies
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 if it is both probable that a liability has been
incurred and the amount of the loss can be reasonably estimated. 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. Additional
information about contingencies can be found in Note 16 to the Consolidated Financial Statements in
Part II, Item 8 of this report.
RESULTS OF OPERATIONS
The following table sets forth for the periods presented certain financial data as a
percentage of net sales for the years ended December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Costs of goods sold |
|
|
86.3 |
|
|
|
86.2 |
|
|
|
86.3 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
13.7 |
|
|
|
13.8 |
|
|
|
13.7 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
12.1 |
|
|
|
11.7 |
|
|
|
11.3 |
|
Goodwill impairment |
|
|
|
|
|
|
8.2 |
|
|
|
|
|
Severance and restructuring expenses |
|
|
0.3 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
|
1.3 |
|
|
|
(6.3 |
) |
|
|
2.4 |
|
Non-operating expense, net |
|
|
0.3 |
|
|
|
0.5 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before
income taxes |
|
|
1.0 |
|
|
|
(6.8 |
) |
|
|
2.2 |
|
Income tax expense (benefit) |
|
|
0.3 |
|
|
|
(1.8 |
) |
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from continuing operations |
|
|
0.7 |
|
|
|
(5.0 |
) |
|
|
1.3 |
|
Earnings from discontinued operations, net of taxes |
|
|
0.1 |
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
|
0.8 |
% |
|
|
(5.0 |
%) |
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
|
|
Throughout this Results of Operations section of Managements 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 year.
2009 Compared to 2008
Net Sales. Net sales for the year ended December 31, 2009 decreased 14% to $4.1 billion
compared to the year ended December 31, 2008. Our net sales by operating segment for the years
ended December 31, 2009 and 2008 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
North America |
|
$ |
2,840,786 |
|
|
$ |
3,362,544 |
|
|
|
(16 |
%) |
EMEA |
|
|
1,151,749 |
|
|
|
1,309,365 |
|
|
|
(12 |
%) |
APAC |
|
|
144,370 |
|
|
|
153,580 |
|
|
|
(6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
4,136,905 |
|
|
$ |
4,825,489 |
|
|
|
(14 |
%) |
|
|
|
|
|
|
|
|
|
|
|
28
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Net sales in North America decreased $521.8 million or 16% for the year ended December 31,
2009 compared to the year ended December 31, 2008, reflecting the effects of the challenging
economic climate during 2009. Hardware and software net sales in North America for the year ended
December 31, 2009 decreased 21% and 13%, respectively, while net sales from services increased 26%
year over year. The decline in software sales year over year primarily relates to program changes
with our largest software partner. The increase in services net sales is primarily due to several
large professional services engagements during the year ended December 31, 2009, particularly a
large professional services engagement that spanned the last three quarters of the year. We
continued to increase the mix of services as a percentage of our net sales, which increased from 6%
of net sales to 8% of net sales year over year.
Net sales in EMEA decreased $157.6 million or 12% for the year ended December 31, 2009
compared to the year ended December 31, 2008. Excluding the effects of foreign currency movements,
net sales in EMEA decreased only $24.7 million or 2% year over year. In U.S. dollars, the negative
year over year comparison resulted from a 16% decline in hardware net sales and a 10% decline in
software net sales, partially offset by an increase in services, which grew 14% year over year.
These results reflect the challenging global IT demand environment as well as the previously
announced changes in programs with our largest software partner. The year over year improvement in
sales of services primarily resulted from the contribution of MINX Limited (a networking solutions
provider), acquired in July 2008.
Our APAC segment recognized net sales of $144.4 million for the year ended December 31, 2009,
a decrease of $9.2 million or 6%, compared to the year ended December 31, 2008, primarily as a
result of the previously announced changes in programs with our largest software partner, offset by
increased public sector spending in Australia. Excluding the effects of foreign currency
movements, net sales in APAC decreased by $5.3 million or 4% year over year.
Net sales by category for North America, EMEA and APAC were as follows for the years ended
December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
EMEA |
|
|
APAC |
|
|
|
Years Ended December 31, |
|
|
Years Ended December 31, |
|
|
Years Ended December 31, |
|
Sales Mix |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Hardware |
|
|
60 |
% |
|
|
63 |
% |
|
|
34 |
% |
|
|
35 |
% |
|
|
1 |
% |
|
|
|
|
Software |
|
|
32 |
% |
|
|
31 |
% |
|
|
65 |
% |
|
|
64 |
% |
|
|
98 |
% |
|
|
100 |
% |
Services |
|
|
8 |
% |
|
|
6 |
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 select software-related services.
Gross Profit. Gross profit decreased 14% to $568.6 million for the year ended December 31,
2009 compared to the year ended December 31, 2008, with a 10 basis point decrease in gross margin.
Our gross profit and gross profit as a percent of net sales by operating segment for the years
ended December 31, 2009 and 2008 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
2009 |
|
|
Sales |
|
|
2008 |
|
|
Sales |
|
North America |
|
$ |
389,717 |
|
|
|
13.7 |
% |
|
$ |
449,186 |
|
|
|
13.4 |
% |
EMEA |
|
|
159,109 |
|
|
|
13.8 |
% |
|
|
190,673 |
|
|
|
14.6 |
% |
APAC |
|
|
19,788 |
|
|
|
13.7 |
% |
|
|
23,724 |
|
|
|
15.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
568,614 |
|
|
|
13.7 |
% |
|
$ |
663,583 |
|
|
|
13.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Americas gross profit declined by $59.5 million or 13% for the year ended December 31,
2009 compared to the year ended December 31, 2008, but as a percentage of net sales, gross margin
increased 30 basis points year over year, primarily due to higher margins in the services category.
Gross profit on services net sales contributed 87 basis points to the increase in margin year over
year, reflecting the several large professional services engagements during the year ended December
31, 2009 discussed above, and gross profit generated by freight contributed 9 basis points to the
increase in margin year over year. In addition, the extinguishment of $3.5 million of certain
restatement-related trade credits during the year ended December 31, 2009, through negotiated
settlement or other legal release of the recorded liabilities, contributed 12 basis points to the
increase in margin. These increases were offset partially by decreases in
agency fees for enterprise software agreement renewals of 34 basis points and market pricing
pressures which have driven decreases in product margin, which includes partner funding, of 45
basis points.
29
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
EMEAs gross profit decreased for the year ended December 31, 2009 by $31.6 million or 17%
compared to the year ended December 31, 2008. Excluding the effects of foreign currency movements,
gross profit was down $11.8 million or 7% compared to the prior year. As a percentage of net
sales, gross profit decreased by 80 basis points from 2008 to 2009 due primarily to decreases in
product margin, which includes partner funding, of 46 basis points, a decrease in supplier
discounts of 17 basis points and a decrease in agency fees for enterprise software agreement
renewals of 11 basis points. These results reflect a change in client mix, which now includes more
public sector sales at lower margins, and the effects of partner program changes.
APACs gross profit decreased for the year ended December 31, 2009 by $3.9 million or 17%
compared to the year ended December 31, 2008. Excluding the effects of foreign currency movements,
gross profit was down $2.9 million or 13% compared to the prior year. As a percentage of net
sales, gross profit decreased 170 basis points from 2008 to 2009 due primarily to lower margin on
public sector sales and a decrease in agency fees for enterprise software agreement renewals.
Operating Expenses.
Selling and Administrative Expenses. Selling and administrative expenses decreased $59.9
million or 11% in the year ended December 31, 2009 compared to the year ended December 31, 2008 due
primarily to the benefits of aggressive expense management and cost reduction actions taken
throughout 2009. Selling and administrative expenses increased 50 basis points as a percentage of
net sales for the year ended December 31, 2009 compared to the year ended December 31, 2008.
Selling and administrative expenses as a percent of net sales by operating segment for the years
ended December 31, 2009 and 2008 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
2009 |
|
|
Sales |
|
|
2008 |
|
|
Sales |
|
North America |
|
$ |
346,306 |
|
|
|
12.2 |
% |
|
$ |
391,629 |
|
|
|
11.6 |
% |
EMEA |
|
|
140,380 |
|
|
|
12.2 |
% |
|
|
152,617 |
|
|
|
11.7 |
% |
APAC |
|
|
15,416 |
|
|
|
10.7 |
% |
|
|
17,741 |
|
|
|
11.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
502,102 |
|
|
|
12.1 |
% |
|
$ |
561,987 |
|
|
|
11.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Americas selling and administrative expenses decreased $45.3 million or 12% for the
year ended December 31, 2009 compared to the year ended December 31, 2008. The decrease in selling
and administrative expenses is primarily attributable to the realization of the effects of cost
reduction initiatives we have implemented over the past year, and, to a lesser extent, the effect
of lower variable costs. Salaries, sales incentives and benefits accounted for approximately $40.9
million of the decrease, with an additional $5.1 million decline in travel and entertainment and a
$3.3 million decline in marketing expenses.
Offsetting the effect of the cost reduction initiatives on North Americas selling and
administrative expenses are the following:
|
|
|
Approximately $12.4 million of selling and administrative expenses associated with
Calence, are reflected in the three months ended March 31, 2009 with no comparable expenses
in the three months ended March 31, 2008, as Calence was acquired on April 1, 2008; |
|
|
|
Professional fees and costs for the year ended December 31, 2009 of $8.3 million
associated with the trade credits restatement remediation and related litigation; |
|
|
|
Non-cash stock-based compensation expense of $4.1 million associated with the
termination of the long-term incentive award for our former Chief Executive Officer and the
former President of our North America operating segment discussed in Note 11 to our
Consolidated Financial Statements in Part II, Item 8 of this report; and |
|
|
|
An increase in bad debt expense of $3.0 million primarily associated with the specific
identification of a single significant account for which we determined during the fourth
quarter of 2009 that collection was doubtful. |
30
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
EMEAs selling and administrative expenses decreased $12.2 million or 8% for the year ended
December 31, 2009 compared to the year ended December 31, 2008. Excluding the effects of foreign
currency movements, selling and administrative expenses increased $4.1 million or 3% year over year. The increase in selling
and administrative expenses is primarily attributable to salaries and wages and employee-related
expenses, which increased due to increases in sales employee headcount, sales incentive programs
and recruitment costs. Selling and administrative expenses in 2009 include a non-cash stock-based
compensation expense of $1.4 million associated with the termination of the long-term incentive
award for our former Chief Executive Officer and the President of our EMEA operating segment
discussed in Note 11 to our Consolidated Financial Statements in Part II, Item 8 of this report.
APACs selling and administrative expenses decreased $2.3 million or 13% for the year ended
December 31, 2009 compared to the year ended December 31, 2008. Excluding the effects of foreign
currency movements, selling and administrative expenses decreased $1.2 million or 7% year over
year.
Goodwill Impairment. During the year ended December 31, 2009, we recorded goodwill of $15.8
million for additional purchase price consideration and the related accrued interest thereon as a
result of Calence, acquired April 1, 2008, achieving certain performance targets. The results of
our annual assessment of goodwill during the fourth quarter of 2009 indicated that this goodwill
was not impaired. See Note 3 to the Consolidated Financial Statements in Part II, Item 8 of this
report for further discussion of goodwill.
Severance and Restructuring Expenses. During the year ended December 31, 2009, North America,
EMEA and APAC recorded severance expense of $10.3 million, $3.0 million and $302,000, respectively,
related to the departure of Insights former President and Chief Executive Officer and ongoing
restructuring efforts to reduce operating expenses. An adjustment of $708,000 was recorded as a
reduction of severance and restructuring expenses recorded during the year ended December 31, 2009
and the related lease accrual in EMEA due to a change in estimate of the costs of exiting the
related leased facilities upon negotiation of the final settlement with the landlord. The leases
expired in October 2009. During the year ended December 31, 2008, North America, EMEA and APAC
recorded severance expense of $4.6 million, $3.9 million and $39,000, respectively, related to
restructuring efforts. See Note 9 to the Consolidated Financial Statements in Part II, Item 8 of
this report for further discussion of severance and restructuring activities.
Non-Operating (Income) Expense.
Interest Income. Interest income for the years ended December 31, 2009 and 2008 was generated
through short-term investments. The decrease in interest income year over year is primarily due to
decreases in interest rates.
Interest Expense. Interest expense primarily relates to borrowings under our financing
facilities and capital lease obligation and imputed interest under our inventory financing
facility. In 2009, we also accrued $2.0 million for interest expense related to our anticipated
unclaimed property settlement under two state programs in 2010. Imputed interest was $1.8 million for the year ended December 31, 2009. The decrease in interest
expense for the year ended December 31, 2009 compared to the year ended December 31, 2008 is due
primarily to lower interest rates and decreases in the weighted average borrowings outstanding as
we have been successful in our cash management initiatives and have used excess cash to pay down
our debt balances.
Net Foreign Currency Exchange Gains/Losses. These gains/losses result from foreign currency
transactions, including the period-end remeasurement of intercompany balances that are not
considered long-term in nature. The change from net foreign currency exchange losses in the prior
year to a modest gain in the current year is due primarily to less volatility in the applicable
exchange rates and the effects of our use of foreign exchange forward contracts in 2009 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 income tax expense from continuing operations for the year ended
December 31, 2009 was $11.0 million compared to an income tax benefit from continuing operations of
$86.3 million for the year ended December 31, 2008. The change from a benefit in 2008 to expense
in 2009 was primarily the result of the impairment charge related to deductible goodwill during
2008 that resulted in a pre-tax loss from continuing operations for the year ended December 31,
2008. In addition, our 2009 effective tax rate of 26.3% was less than the federal statutory rate
of 35.0% primarily due to the recapitalization of one of our foreign subsidiaries and the true-up
of certain foreign tax assets. See Note 10 to the Consolidated Financial Statements in Part II,
Item 8 of this report for further discussion of income tax expense.
31
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Earnings from Discontinued Operations. During the year ended December 31, 2009, we recorded
earnings from a discontinued operation of $4.5 million, $2.8 million net of tax, as a result of the
favorable settlement on July 7, 2009 of an arbitrated claim related to the 2006 sale of a former
subsidiary. The amount recognized was net of payments to holders of approximately 2.0 million
exercised stock options of the former subsidiary and a broker success fee with respect to the
settlement totaling $540,000. See Note 19 to the Consolidated Financial Statements in Part II,
Item 8 of this report for further discussion.
2008 Compared to 2007
Net Sales. Net sales for the year ended December 31, 2008 were essentially flat compared to
the year ended December 31, 2007. Our net sales by operating segment for the years ended December
31, 2008 and 2007 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
North America |
|
$ |
3,362,544 |
|
|
$ |
3,367,998 |
|
|
|
|
|
EMEA |
|
|
1,309,365 |
|
|
|
1,329,682 |
|
|
|
(2 |
%) |
APAC |
|
|
153,580 |
|
|
|
107,794 |
|
|
|
42 |
% |
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
4,825,489 |
|
|
$ |
4,805,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales in North America remained flat for the year ended December 31, 2008 compared to the
year ended December 31, 2007 as the 55% growth in our networking and connectivity hardware sales
with the acquisition of Calence on April 1, 2008 was more than offset by declines in our legacy
hardware business such that overall hardware net sales in North America for the year ended December
31, 2008 decreased 3% year over year. Hardware net sales, other than networking and connectivity,
declined 14% year over year reflecting the effects of the difficult 2008 market. Software net
sales for the year ended December 31, 2008 decreased 2% compared to the year ended December 31,
2007. Net sales from services, which also benefited from the acquisition of Calence, increased 88%
year over year, which includes 16% growth in the legacy services business in North America.
Net sales in EMEA decreased $20.3 million or 2% for the year ended December 31, 2008 compared
to the year ended December 31, 2007. The negative year over year comparison resulted from an 8%
decline in hardware sales, partially offset by increases in software and services, which grew 2%
and 25% respectively, year over year. The results were also significantly negatively affected by
foreign currency translation, which accounted for $12.5 million, or 62% of the year over year
dollar decline.
Our APAC segment recognized net sales of $153.6 million for the year ended December 31, 2008,
an increase of $45.8 million or 42%, compared to the year ended December 31, 2007 as the segment
benefited from the hiring of incremental experienced software sales and support teammates early in
2008.
Net sales by category for North America, EMEA and APAC were as follows for the years ended
December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
EMEA |
|
|
APAC |
|
|
|
Years Ended December 31, |
|
|
Years Ended December 31, |
|
|
Years Ended December 31, |
|
Sales Mix |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Hardware |
|
|
63 |
% |
|
|
65 |
% |
|
|
35 |
% |
|
|
37 |
% |
|
|
|
|
|
|
|
|
Software |
|
|
31 |
% |
|
|
32 |
% |
|
|
64 |
% |
|
|
62 |
% |
|
|
100 |
% |
|
|
100 |
% |
Services |
|
|
6 |
% |
|
|
3 |
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Gross Profit. Gross profit increased 1% for the year ended December 31, 2008 compared to the
year ended December 31, 2007, with a 10 basis point increase in gross margin. Our gross profit and
gross profit as a percent of net sales by operating segment for the years ended December 31, 2008
and 2007 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
2008 |
|
|
Sales |
|
|
2007 |
|
|
Sales |
|
North America |
|
$ |
449,186 |
|
|
|
13.4 |
% |
|
$ |
463,163 |
|
|
|
13.8 |
% |
EMEA |
|
|
190,673 |
|
|
|
14.6 |
% |
|
|
174,766 |
|
|
|
13.1 |
% |
APAC |
|
|
23,724 |
|
|
|
15.4 |
% |
|
|
20,697 |
|
|
|
19.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
663,583 |
|
|
|
13.8 |
% |
|
$ |
658,626 |
|
|
|
13.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Americas gross profit decreased 3% for the year ended December 31, 2008 compared to the
year ended December 31, 2007. As a percentage of net sales, gross profit decreased 40 basis points
year over year primarily due to decreases in agency fees for enterprise software agreement renewals
of 35 basis points, market pricing pressures which have driven decreases in product margin, which
includes partner funding, of 28 basis points, and a 25 basis point decline attributable to
decreases in margin generated by freight due to a decrease in hardware sales and increased
transportation costs that we were not able to pass on to clients in full. These decreases were
offset partially by a 62 basis point improvement in gross margin resulting from increased sales of
higher margin services, primarily from our acquisition of Calence.
EMEAs gross profit increased for the year ended December 31, 2008 by 9% compared to the year
ended December 31, 2007. As a percentage of net sales, gross profit increased by 150 basis points
from 2007 to 2008 due primarily to increases in product margin, which includes partner funding, of
approximately 80 basis points and an increase in agency fees for enterprise software agreement
renewals of approximately 70 basis points. More specifically, the improvement in partner funding
includes an increase in amounts earned under rebate programs with hardware distributors as well as
some publishers other than Microsoft.
APACs gross profit increased for the year ended December 31, 2008 by $3.0 million or 15%
compared to the year ended December 31, 2007 with the increase in net sales in the segment. As a
percentage of net sales, gross profit decreased 380 basis points from 2007 to 2008 due primarily to
a decrease in agency fees for enterprise software agreement renewals and lower margin on public
sector sales.
Operating Expenses.
Selling and Administrative Expenses. Selling and administrative expenses increased in the
year ended December 31, 2008 compared to the year ended December 31, 2007 due primarily to the
acquisition of Calence on April 1, 2008, partially offset by the benefit of the expense actions we
took throughout 2008. Selling and administrative expenses increased 4% and increased as a
percentage of net sales for the year ended December 31, 2008 compared to the year ended December
31, 2007. Selling and administrative expenses as a percent of net sales by operating segment for
the years ended December 31, 2008 and 2007 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
2008 |
|
|
Sales |
|
|
2007 |
|
|
Sales |
|
North America |
|
$ |
391,629 |
|
|
|
11.6 |
% |
|
$ |
383,390 |
|
|
|
11.4 |
% |
EMEA |
|
|
152,617 |
|
|
|
11.7 |
% |
|
|
143,611 |
|
|
|
10.8 |
% |
APAC |
|
|
17,741 |
|
|
|
11.6 |
% |
|
|
15,321 |
|
|
|
14.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
561,987 |
|
|
|
11.6 |
% |
|
$ |
542,322 |
|
|
|
11.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Americas selling and administrative expenses increased $8.2 million or 2% for the year
ended December 31, 2008 compared to the year ended December 31, 2007. Incremental selling and
administrative expenses relating to Calence since April 1, 2008 of $39.6 million, including $4.8
million of amortization of acquired intangible assets, were partially offset by decreases in
selling and administrative expenses in the legacy Insight business as a result of our expense
management initiatives as well as reduced performance-based compensation expense due to our
financial performance. Additionally, the 2008 period benefited from the fact that there were no
professional fees associated with the review of our historical stock option practices, whereas
selling and administrative expenses in the year ended December 31, 2007 included $12.5 million of
such professional fees.
EMEAs selling and administrative expenses increased $9.0 million or 6% for the year ended
December 31, 2008 compared to the year ended December 31, 2007. The increase in selling and
administrative expenses is primarily attributable to salaries and wages, employee-related expenses
and contract labor, which increased due to increases in sales incentive programs, increases in
recruitment costs and employee headcount. In addition, facility related expenses
accounted for $1.1 million of the year over year increase. The effect of currency exchange
rates between the U.S. dollar as compared to the various European currencies in which we do
business accounted for approximately $4.3 million of the net year over year increase.
33
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
APACs selling and administrative expenses increased $2.4 million or 16% for the year ended
December 31, 2008 compared to the year ended December 31, 2007 primarily due to the hiring of
experienced software sales and support teammates during the first quarter of 2008.
Goodwill Impairment. We recorded a non-cash goodwill impairment charge during the year ended
December 31, 2008 of $397.2 million, which represented the entire goodwill balance recorded in all
three of our operating segments as of December 31, 2008. The goodwill impairment charge in North
America in the second quarter of 2008 was a result of the deteriorating economic environment,
particularly its effect on our legacy hardware business, which contributed to lower than expected
net sales and caused management to reassess our expectations about future domestic market growth.
By the fourth quarter of 2008, the effects of the global recession were negatively affecting our
results of operations in all of our operating segments, indicating a need for management to again
reassess projections of future domestic and foreign market growth, leading to the incremental
goodwill impairment charge in the fourth quarter of 2008 in all three of our operating segments.
See Note 3 to the Consolidated Financial Statements in Part II, Item 8 of this report for further
discussion of goodwill.
Severance and Restructuring Expenses. During the year ended December 31, 2008, North America,
EMEA and APAC recorded severance expense of $4.6 million, $3.9 million and $39,000, respectively,
related to on-going restructuring efforts. During the year ended December 31, 2007, North America,
EMEA and APAC recorded severance expense of $3.0 million, $177,000 and $64,000, respectively,
primarily associated with the retirement of our former chief financial officer. Additionally, a
$606,000 benefit related to a reduction in EMEAs restructuring liability for remaining lease
obligations on a previously vacated legacy Insight office property following a successful
renegotiation of a portion of the long-term lease was recorded during 2007. See Note 9 to the
Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of
severance and restructuring activities.
Non-Operating (Income) Expense.
Interest Income. Interest income for the years ended December 31, 2008 and 2007 was generated
through short-term investments. The increase in interest income year over year is due to improved
cash management, partially offset by decreases in interest rates.
Interest Expense. Interest expense for the years ended December 31, 2008 and 2007 primarily
relates to borrowings under our financing facilities. Interest expense remained relatively flat
from 2007 to 2008 as a result of the increase in the weighted average borrowings outstanding
subsequent to the acquisition of Calence, offset by decreases in interest rates on the refinanced
debt in 2008. In conjunction with our refinancing of our existing term loan and revolving credit
facility on April 1, 2008 (discussed in Note 6 to the Consolidated Financial Statements in Part II,
Item 8 if this report), we recorded a loss on debt extinguishment of $591,000 in the second quarter
of 2008 to write off a portion of our deferred financing fees to interest expense.
Net Foreign Currency Exchange Gains/Losses. These gains/losses result from foreign currency
transactions, including the period end remeasurement of intercompany balances that are not
considered long-term in nature. The net foreign currency exchange loss in 2008 is due primarily to
increases in the volume of software licenses sold in various foreign currencies and procured in
U.S. dollars, changes in intercompany balances of our foreign subsidiaries and the volatility of
the related foreign currency exchange rates, specifically the Canadian dollar, the Euro and the
British Pound Sterling.
Other Expense, Net. Other expense, net, consists primarily of bank fees associated with our
cash management activities.
Income Tax Expense. Our income tax benefit from continuing operations for the year ended
December 31, 2008 was $86.3 million compared to income tax expense of $40.7 million for the year
ended December 31, 2007. The change from expense in 2007 to a benefit in 2008 was primarily the
result of the impairment charge related to deductible goodwill during 2008 that resulted in a
pre-tax loss from continuing operations for the year ended December 31, 2008.
34
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Earnings from Discontinued Operations. On March 1, 2007, we completed the sale of PC
Wholesale. The gain on the sale of PC Wholesale of $5.6 million, $3.4 million net of taxes, and
the results of operations attributable to PC Wholesale were classified as a discontinued operation
in 2007. See Note 19 to the Consolidated Financial Statements in Part II, Item 8 of this report
for further discussion.
Liquidity and Capital Resources
The following table sets forth for the periods presented certain consolidated cash flow
information for the years ended December 31, 2009, 2008 and 2007 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net cash provided by operating activities |
|
$ |
122,674 |
|
|
$ |
141,746 |
|
|
$ |
76,788 |
|
Net cash used in investing activities |
|
|
(36,420 |
) |
|
|
(153,813 |
) |
|
|
(7,645 |
) |
Net cash (used in) provided by financing activities |
|
|
(70,269 |
) |
|
|
12,904 |
|
|
|
(76,982 |
) |
Foreign currency exchange effect on cash flow |
|
|
2,906 |
|
|
|
(8,380 |
) |
|
|
9,860 |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
18,891 |
|
|
|
(7,543 |
) |
|
|
2,021 |
|
Cash and cash equivalents at beginning of year |
|
|
49,175 |
|
|
|
56,718 |
|
|
|
54,697 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
68,066 |
|
|
$ |
49,175 |
|
|
$ |
56,718 |
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Flow
Our primary uses of cash during 2009 were to fund working capital requirements and capital
expenditures, to pay down debt and to fund the first two payments, in April and November 2009, of
the additional purchase price consideration and accrued interest thereon as a result of Calence
achieving certain performance targets subsequent to the acquisition. Operating activities provided
$122.7 million in cash, a 13% decrease from the year ended December 31, 2008. Our operating cash
flows enabled us to reduce our long-term debt under our revolving credit facilities by $81.0
million and fund the $21.7 million of additional purchase price consideration to the former owners
of Calence, while still increasing cash and cash equivalent balances by $18.9 million since
December 31, 2008. Capital expenditures were $14.7 million for the year, a 45% decrease from 2008
due primarily to the completion of our IT systems upgrade project in North America in late 2008.
Additionally, 2009 benefited from a $2.9 million positive effect of foreign currency exchange rates
on cash flow while 2008 was burdened by an $8.4 million negative effect of foreign currency
exchange rates on cash flow.
During the year ended December 31, 2009, we recorded earnings from a discontinued operation of
$4.5 million, $2.8 million net of tax, as a result of the favorable settlement on July 7, 2009 of
an arbitrated claim related to the 2006 sale of Direct Alliance, a former subsidiary that was sold
on June 30, 2006. Since this amount had been deferred as of the original sale date in 2006, the
settlement in 2009 resulted in no cash flows to Insight related to the recognition of the non-cash
gain.
We sold PC Wholesale in March 2007 and have presented it as a discontinued operation in our
2007 Statement of Operations. Excluding net earnings, amounts related to the discontinued
operation have not been removed from the 2007 Statement of Cash Flows because the effect is
immaterial.
Net cash provided by operating activities. Cash flows from operating activities for the year
ended December 31, 2009 reflect our net earnings, adjusted for
depreciation, amortization, non-cash stock-based compensation expense, write-downs of inventories,
the provision for losses on accounts receivable, the non-cash gain from the Direct Alliance
arbitrated claim and deferred income taxes. Also contributing to the cash flows from operating activities were increases in
deferred revenue and decreases in accounts receivable. The decreases in
accounts receivable reflect the decrease in net sales compared to the prior year as well as our
focus on cash management. These increases in operating cash flows were partially offset by
decreases in accounts payable in the normal course of business. Cash flows from operating
activities for the year ended December 31, 2008 resulted
primarily from our net loss before the non-cash goodwill impairment charge, including the resulting
increase in deferred tax assets associated with the goodwill impairment charge, and before
depreciation and amortization. Also contributing to the cash flows from operating activities were
decreases in accounts receivable and other current assets, partially offset by decreases in
accounts payable in the normal course of business. Cash flows from operations for the year ended
December 31, 2007 resulted primarily from our net earnings before
depreciation and amortization and an increase in accounts payable. These increases in operating
cash flows were partially offset by a
significant increase in accounts receivable. The increase in accounts payable can be primarily
attributed to an increase in net sales, and the related costs of goods sold. The higher accounts
receivable balance at December 31, 2007 compared to December 31, 2006 can be primarily attributed
to an increase in net sales as well as to a slowdown in collections in our North American and EMEA
operations due to internal collection productivity issues and slower customer payments.
35
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Our consolidated cash flow operating metrics as of December 31, 2009, 2008 and 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Days sales outstanding in ending accounts receivable (DSOs) (a) |
|
|
78 |
|
|
|
79 |
|
|
|
76 |
|
Days inventory outstanding (excluding inventories not available for
sale) (b) |
|
|
8 |
|
|
|
10 |
|
|
|
9 |
|
Days purchases outstanding in ending accounts payable (DPOs) (c) |
|
|
63 |
|
|
|
62 |
|
|
|
53 |
|
|
|
|
(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
period plus inventories at the end of the period 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. |
DSOs decreased slightly for the quarter ended December 31, 2009 compared to the quarter ended
December 31, 2008. In North America, reductions in past due accounts receivable balances as a
percent of total accounts receivable were offset by the effects of a higher percentage of accounts
receivable subject to longer payment terms, resulting in fairly flat performance. These results
were offset by a reduction in DSOs in our EMEA and APAC segments due primarily to the timing of
sales and collections occurring earlier in the quarter compared to the prior year period. Days
inventory outstanding decreased from year to year as we realized the benefits of our focus in 2009
on improving our purchasing efficiency. DPOs increased slightly during the fourth quarter of 2009
reflecting the expanded use of our inventory financing facility in the 2009 quarter compared to the
same quarter in 2008.
The increase in DSOs from the quarter ended December 31, 2007 to the quarter ended December
31, 2008 resulted from the increase in the proportion of consolidated net sales in our foreign
operations, which have generally longer payment terms. The increase in DPOs from the quarter ended
December 31, 2007 to the quarter ended December 31, 2008 is driven primarily by enhanced management
of working capital, including the establishment of a new inventory financing facility, which
provides for interest free inventory purchases as long as the accounts payable are paid within
extended stated vendor terms (ranging from 30 to 60 days). These operating metrics include the
effect of the Calence acquisition in higher accounts receivable and accounts payable balances at
December 31, 2008 compared to December 31, 2007.
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 2010 in excess of working capital needs to pay down our outstanding debt balances and
support our capital expenditures for the year. Also, we expect to complete our work to gain
compliance under state unclaimed property programs in early 2010 and as a result, we expect to make
cash payments to settle trade credit liabilities of approximately $20.0 to $22.0 million in 2010.
Net cash used in investing activities. Capital expenditures of $14.7 million, $26.6 million
and $36.3 million for the years ended December 31, 2009, 2008 and 2007, respectively, primarily
related to investments to upgrade our IT systems. Capital expenditures during 2009 primarily
related to expenditures to upgrade our IT systems in EMEA. We expect total capital expenditures in
2010 to be between $25.0 million and $30.0 million, primarily for the IT systems upgrade in our
EMEA operations and other facility and technology related maintenance and upgrade projects.
During the year ended December 31, 2009, we made payments totaling $21.7 million to the former
owners of Calence for additional purchase price consideration and the related accrued interest
thereon as a result of Calence achieving certain performance targets during 2008 and 2009. During
the year ended December 31, 2008, we made a payment of $900,000 to resolve certain post-closing contingencies related to the sale of a
discontinued operation. During the year ended December 31, 2007, we received net proceeds of $28.6
million from the sale of a discontinued operation.
36
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Net cash provided by (used in) financing activities. During the year ended December 31, 2009,
we made net repayments on our debt facilities that reduced our outstanding debt balances under our
revolving credit facility by $81.0 million. As of December 31, 2009, the only current portion of
our long-term debt relates to our new capital lease obligation for certain IT equipment. During
the year ended December 31, 2009, we had a net increase in our obligations under our inventory
financing facility of $13.4 million, which is included in accounts payable. During the year ended
December 31, 2008, we increased our outstanding debt by $25.8 million and subsequent to the
acquisition of Calence on April 1, 2008, had a net increase in our obligations under our new
inventory financing facility of $48.9 million. These positive cash flows in 2008 were partially
offset by the funding of $50.0 million of repurchases of our common stock and the repayment of
$11.0 million of debt assumed in the acquisitions of Calence and MINX during 2008. During the year
ended December 31, 2007, we reduced our outstanding debt by $52.0 million and funded repurchases of
$50.0 million of our common stock. These uses of cash were partially offset by $24.5 million of
proceeds from sales of common stock under employee stock plans.
As of December 31, 2009, our long-term debt balance consisted of $147.0 million outstanding
under our $300.0 million senior revolving credit facility. Our objective is to pay our debt
balances down as quickly as possible while retaining adequate cash balances to meet overall
business objectives.
The one-year term of our $150.0 million accounts receivable securitization financing facility
(the ABS facility) expires on July 23, 2010. We currently anticipate that we will be able to
renew the ABS facility prior to its maturity. No amounts were outstanding under the ABS facility
as of December 31, 2009, and as such, we had no current debt on our balance sheet as of December
31, 2009 other than the current portion of our capital lease obligation of $875,000. We utilize
the ABS facility primarily to meet short-term, seasonal spikes in our working capital needs and
expect that we will continue using the facility to meet those needs in 2010. The most significant
seasonal spike occurs in July of each year as a result of payments due to our largest supplier for
purchases occurring primarily in June. We believe that the current availability under our ABS
facility along with capacity under our senior revolving credit facility will be sufficient to fund
the anticipated seasonal spike in cash needs. As our operations generate cash, we are typically
able to begin paying down debt within a few days of the seasonal spike. If we were unable to renew
our ABS facility in 2010, we believe that cash flows from operations and extending payment terms
with key partners by foregoing early pay discounts, together with the funds available under our
existing long-term senior revolving credit facility, will be adequate to support our anticipated
working capital requirements for operations over the next twelve months. Additionally, we may be
able to support our working capital needs by negotiating extended payment terms with our largest
supplier and exercising our option to expand the size of our senior revolving credit facility,
however, this expansion would likely result in significantly higher costs for the facility compared
to the favorable rates in effect today.
Our borrowing capacity under our ABS facility is limited by the value and quality of the
accounts receivable under the facility. On July 24, 2009, we amended our ABS facility, which was
to have expired on September 17, 2009, to, among other changes, (i) add software receivables from
the legacy Software Spectrum business as eligible receivables under the facility, (ii) reduce our
eligible receivables under the facility to reflect our accounts receivable related trade credit
liabilities as well as certain other accounts receivable related to sales where revenue recognition
from the sale has been deferred, (iii) establish a new 364-day term ending July 23, 2010 and (iv)
increase the variable interest rate by approximately 75 basis points for funds provided under the
ABS facility, calculated as the specified Pooled Commercial Paper Rate, as defined in the ABS
facility, plus 2.25%. The $150.0 million maximum borrowing capacity and the maximum leverage,
minimum fixed charge and minimum asset coverage ratio financial covenant requirements under the ABS
facility were not modified as part of the amendment. While the ABS facility has a stated maximum
amount, the actual availability under the facility is limited by the quantity and quality of the
underlying accounts receivable, which reduced the maximum borrowing capacity from $150.0 million to
$97.7 million as of December 31, 2009.
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 Companys 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, (iv) non-cash
goodwill impairment and (v) non-cash stock-based compensation (referred to herein as adjusted
earnings). The maximum leverage ratio permitted under the agreements is 2.75 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 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 Companys consolidated maximum debt capacity. As a
result of this limitation, of the $450.0 million of aggregate maximum debt capacity available under
our senior revolving credit facility and our ABS facility, the Companys debt balance that could
have been outstanding as of December 31, 2009 was limited to $286.3 million based on 2.75 times the
Companys trailing twelve-month adjusted earnings. Our debt balance as of December 31, 2009 was
only $150.2 million, including our capital lease obligation, well below the quarter-end limitation.
37
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 December 31, 2009, we had approximately $57.5
million in cash and cash equivalents in certain of our foreign subsidiaries where we consider
undistributed earnings for these foreign subsidiaries to be permanently reinvested. As part of our
working capital management strategy, we used our excess cash balances in the United States to pay
down debt as of December 31, 2009. As of December 31, 2009, the majority of our foreign cash
resides in Canada, Australia, the United Kingdom and the Netherlands. Certain of these cash
balances could and 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 its foreign subsidiaries. The undistributed earnings of foreign subsidiaries
that are deemed to be indefinitely invested outside of the U.S. were approximately $24.3 million at
December 31, 2009. Undistributed earnings will be used for general business purposes in the
foreign jurisdictions as well as to fund our EMEA IT system, various facility upgrades and the
hardware expansion to non-UK EMEA countries.
On November 13, 2007, our Board of Directors authorized the repurchase of up to $50.0 million
of our common stock through September 30, 2008. During the year ended December 31, 2008, we
purchased 3.5 million shares of our common stock on the open market at an average price of $14.31
per share, which represented the full amount authorized under the repurchase program. All shares
repurchased were retired. We did not repurchase any of our common stock during 2009.
See Note 6 to the Consolidated Financial Statements in Part II, Item 8 of this report for a
description of our financing facilities, including terms and covenants, amounts outstanding,
amounts available and weighted average borrowings and interest rates during the year.
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 16 to the Consolidated
Financial Statements in Part II, Item 8 of this report. We believe that none of our off-balance
sheet arrangements have, or are reasonably likely to have, a material current or future effect on
our financial condition, sales or expenses, results of operations, liquidity, capital expenditures
or capital resources.
38
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Contractual Obligations for Continuing Operations
At December 31, 2009, our contractual obligations for continuing operations were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
Less than |
|
|
1-3 |
|
|
3-5 |
|
|
More than |
|
|
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Long-term debt (a) |
|
$ |
147,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
147,000 |
|
|
$ |
|
|
Capital lease obligations |
|
|
3,351 |
|
|
|
935 |
|
|
|
1,870 |
|
|
|
546 |
|
|
|
|
|
Inventory financing facility (b) |
|
|
94,282 |
|
|
|
94,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
|
56,014 |
|
|
|
13,941 |
|
|
|
20,545 |
|
|
|
16,401 |
|
|
|
5,127 |
|
Severance and restructuring obligations (c) |
|
|
3,466 |
|
|
|
3,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other contractual obligations (d) |
|
|
32,079 |
|
|
|
7,163 |
|
|
|
15,597 |
|
|
|
4,981 |
|
|
|
4,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
336,192 |
|
|
$ |
119,787 |
|
|
$ |
38,012 |
|
|
$ |
168,928 |
|
|
$ |
9,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Amounts included in our contractual obligations table above reflect the $147.0 million
outstanding at December 31, 2009 under our senior revolving credit facility as due in April
2013, the date at which the facility matures. See further discussion in Note 6 to the
Consolidated Financial Statements in Part II, Item 8 of this report. |
|
(b) |
|
See further discussion in Note 6 to the Consolidated Financial Statements in Part II,
Item 8 of this report. As of December 31, 2009, $94.3 million was included in accounts
payable related to this facility and has been included in our contractual obligations table
above as being due within the 30- to 60-day stated vendor terms. |
|
(c) |
|
As a result of approved severance and restructuring plans, we expect future cash
expenditures related to employee termination benefits and facilities based costs. See
further discussion in Note 9 to the Consolidated Financial Statements in Part II, Item 8 of
this report. |
|
(d) |
|
The table above includes: |
|
I. |
|
Estimated interest payments of $3.8 million in each of the next three
years and $1.0 million in the first three months of 2013, based on the current debt
balance of $147.0 million at December 31, 2009 under the senior revolving credit
facility, multiplied by the weighted average interest rate for the year ended
December 31, 2009 of 2.6% per annum. |
|
|
II. |
|
Amounts totaling $5.7 million over the next four years to the Valley of
the Sun Bowl Foundation for sponsorship of the Insight Bowl and $6.6 million over
the next six years for advertising and marketing events with the Arizona Cardinals
NFL team at the University of Phoenix stadium. See further discussion in Note 16 to
the Consolidated Financial Statements in Part II, Item 8 of this report. |
|
|
III. |
|
We estimate that we will owe $7.4 million in future years in connection
with the obligations to perform asset-retirement activities that are conditional on
a future event. |
The table above excludes $5.9 million of unrecognized tax benefits as we are unable to
reasonably estimate the ultimate amount or timing of settlement. See further discussion in Note 10
to the Consolidated Financial Statements in Part II, Item 8 of this report.
Although we set purchase targets with our partners tied to the amount of supplier
reimbursements we receive, we have no material contractual purchase obligations.
Acquisitions
Our strategy may include the possible acquisition of or investments in other businesses to
expand or complement our operations. The magnitude, timing and nature of any future acquisitions
or investments will depend on a number of factors, including the availability of suitable
candidates, the negotiation of acceptable terms, our financial capabilities and general economic
and business conditions. Financing for future transactions would result in the utilization of
cash, incurrence of additional debt, issuance of stock or some combination of the three.
Inflation
We have historically not been adversely affected by inflation, as technological advances and
competition within the IT industry have generally caused the prices of the products we sell to
decline and product life cycles tend to be short. This requires our growth in unit sales to exceed
the decline in prices in order to increase our net sales. We believe that most price increases
could be passed on to our clients, as prices charged by us are not set by long-term contracts;
however, as a result of competitive pressure, there can be no assurance that the full effect of any
such price increases could be passed on to our clients.
39
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Recently Issued Accounting Standards
See Note 1 to the Consolidated Financial Statements in Part II, Item 8 of this report for a
description of recent accounting pronouncements, including our expected dates of adoption and the
estimated effects on our results of operations and financial condition.
2010 Perspective
We expect that diluted earnings per share from continuing operations for the full year of 2010
will be between $0.95 and $1.05. This outlook reflects the following:
|
|
|
continued uncertainty in the economy and our view that market demand will improve
gradually throughout 2010; |
|
|
|
the full-year effect of partner program changes that were effective beginning in the
second quarter of 2009; |
|
|
|
a decline in the sales of services in 2010 due to the completion of a significant
services engagement in 2009 that is not currently expected to be replaced fully in 2010;
and |
|
|
|
an effective tax rate of approximately 36% 39% for 2010 compared to 26% in 2009. |
This outlook does not include the effect of any severance and restructuring expenses, or
expenses associated with the restatement remediation or ongoing related litigation.
40
INSIGHT ENTERPRISES, INC.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We have interest rate exposure arising from our financing facilities, which have variable
interest rates. These variable interest rates are affected by changes in short-term interest
rates. We currently do not hedge our interest rate exposure.
We do not believe that the effect of reasonably possible near-term changes in interest rates
will be material to our financial position, results of operations and cash flows. Our financing
facilities expose net earnings to changes in short-term interest rates since interest rates on the
underlying obligations are variable. We had $147.0 million outstanding under our senior revolving
credit facility and no amounts outstanding under our accounts receivable securitization financing
facility at December 31, 2009. The interest rates attributable to the borrowings under out senior
revolving credit facility and the accounts receivable securitization financing facility were 1.65%
and 2.62%, respectively, per annum at December 31, 2009. The change in annual net earnings from
continuing operations, pretax, resulting from a hypothetical 10% increase or decrease in the
highest applicable interest rate would approximate $243,000.
Foreign Currency Exchange Risk
We use the U.S. dollar as our reporting currency. The functional currencies of our
significant foreign subsidiaries are generally the local currencies. Accordingly, assets and
liabilities of the subsidiaries are translated into U.S. dollars at the exchange rate in effect at
the balance sheet dates. Income and expense items are translated at the average exchange rate for
each month within the year. Translation adjustments are recorded directly in other comprehensive
income as a separate component of stockholders equity. Net foreign currency transaction
gains/losses, including transaction gains/losses on intercompany balances that are not of a
long-term investment nature, are reported as a separate component of non-operating (income)
expense, net in our consolidated statements of operations. We also maintain cash accounts
denominated in currencies other than the functional currency which expose us to foreign exchange
rate movements. Remeasurement of these cash balances results in gains/losses that are also
reported as a separate component of non-operating (income) expense.
We monitor our foreign currency exposure and have begun to enter, selectively, into forward
exchange contracts to mitigate risk associated with certain non-functional currency monetary assets
and liabilities related to foreign denominated payables, receivables, and cash balances.
Transaction gains and losses resulting from non-functional currency assets and liabilities are
offset by forward contracts in non-operating (income) and expense, net. The Company does not have
a significant concentration of credit risk with any single counterparty.
The Company generally enters into forward contracts with maturities of three months or less.
The derivatives entered into during 2009 were not designated as hedges. The following derivative
contracts were entered into during the year ended December 31, 2009, and remained open and
outstanding at December 31, 2009. All U.S. dollar and foreign currency amounts (Euros, Canadian
Dollars and British Pounds) are presented in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy |
|
|
|
Buy |
|
|
|
Buy |
|
Foreign Currency |
|
|
EURO |
|
|
|
CAD |
|
|
|
GBP |
|
Foreign Amount |
|
|
10,000 |
|
|
|
5,000 |
|
|
|
2,000 |
|
Exchange Rate |
|
|
1.4262 |
|
|
|
1.0410 |
|
|
|
1.5942 |
|
USD Equivalent |
|
|
$14,262 |
|
|
|
$4,803 |
|
|
|
$3,188 |
|
Maturity Date |
|
|
January 6, 2010 |
|
|
|
January 11, 2010 |
|
|
|
January 6, 2010 |
|
The Company does not enter into derivative contracts for speculative or trading purposes. The
fair value of all forward contracts at December 31, 2009 was $105,000.
41
INSIGHT ENTERPRISES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Item 8. Financial Statements and Supplementary Data
42
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Insight Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Insight Enterprises, Inc. and
subsidiaries (the Company) as of December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders equity and comprehensive income (loss), and cash flows for
each of the years in the three-year period ended December 31, 2009. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Insight Enterprises, Inc. and subsidiaries as of
December 31, 2009 and 2008, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2009, in conformity with U.S. generally
accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the Company has elected to change
its method of accounting for book overdrafts from financing activities to operating activities in
the consolidated statements of cash flows for each of the years in the three-year period ended
December 31, 2009.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Insight Enterprises, Inc.s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated
February 24, 2010 expressed an unqualified opinion on the effectiveness of the Companys internal
control over financial reporting.
/s/ KPMG LLP
Phoenix, Arizona
February 24, 2010
43
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Insight Enterprises, Inc.:
We have audited Insight Enterprises, Inc.s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Insight
Enterprises, Inc.s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Item 9A (a), Managements Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Insight Enterprises, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on criteria established in Internal
Control Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Insight Enterprises, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of
operations, stockholders equity and comprehensive income (loss), and cash flows for each of the
years in the three-year period ended December 31, 2009, and our report dated February 24, 2010
expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Phoenix, Arizona
February 24, 2010
44
INSIGHT ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
68,066 |
|
|
$ |
49,175 |
|
Accounts receivable, net |
|
|
998,770 |
|
|
|
995,737 |
|
Inventories |
|
|
82,380 |
|
|
|
103,130 |
|
Inventories not available for sale |
|
|
43,036 |
|
|
|
30,507 |
|
Deferred income taxes |
|
|
35,750 |
|
|
|
40,075 |
|
Other current assets |
|
|
32,318 |
|
|
|
31,647 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,260,320 |
|
|
|
1,250,271 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
150,103 |
|
|
|
157,334 |
|
Goodwill |
|
|
15,829 |
|
|
|
|
|
Intangible assets, net |
|
|
82,483 |
|
|
|
93,400 |
|
Deferred income taxes |
|
|
78,489 |
|
|
|
89,757 |
|
Other assets |
|
|
16,097 |
|
|
|
16,741 |
|
|
|
|
|
|
|
|
|
|
$ |
1,603,321 |
|
|
$ |
1,607,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
695,549 |
|
|
$ |
680,151 |
|
Accrued expenses and other current liabilities |
|
|
212,276 |
|
|
|
211,483 |
|
Current portion of long-term debt |
|
|
875 |
|
|
|
|
|
Deferred revenue |
|
|
54,135 |
|
|
|
39,770 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
962,835 |
|
|
|
931,404 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
149,349 |
|
|
|
228,000 |
|
Deferred income taxes |
|
|
3,054 |
|
|
|
2,291 |
|
Other liabilities |
|
|
20,509 |
|
|
|
23,840 |
|
|
|
|
|
|
|
|
|
|
|
1,135,747 |
|
|
|
1,185,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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; 45,956 and 45,595
shares issued and outstanding in 2009 and 2008, respectively |
|
|
460 |
|
|
|
456 |
|
Additional paid-in capital |
|
|
372,021 |
|
|
|
371,664 |
|
Retained earnings |
|
|
73,864 |
|
|
|
40,290 |
|
Accumulated other comprehensive income foreign currency translation
adjustments |
|
|
21,229 |
|
|
|
9,558 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
467,574 |
|
|
|
421,968 |
|
|
|
|
|
|
|
|
|
|
$ |
1,603,321 |
|
|
$ |
1,607,503 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
45
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net sales |
|
$ |
4,136,905 |
|
|
$ |
4,825,489 |
|
|
$ |
4,805,474 |
|
Costs of goods sold |
|
|
3,568,291 |
|
|
|
4,161,906 |
|
|
|
4,146,848 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
568,614 |
|
|
|
663,583 |
|
|
|
658,626 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
502,102 |
|
|
|
561,987 |
|
|
|
542,322 |
|
Goodwill impairment |
|
|
|
|
|
|
397,247 |
|
|
|
|
|
Severance and restructuring expenses |
|
|
13,608 |
|
|
|
8,595 |
|
|
|
2,595 |
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss)
from operations |
|
|
52,904 |
|
|
|
(304,246 |
) |
|
|
113,709 |
|
Non-operating (income) expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
(424 |
) |
|
|
(2,387 |
) |
|
|
(2,078 |
) |
Interest expense |
|
|
10,790 |
|
|
|
13,479 |
|
|
|
12,852 |
|
Net foreign currency exchange (gain) loss |
|
|
(328 |
) |
|
|
9,629 |
|
|
|
(3,887 |
) |
Other expense, net |
|
|
1,123 |
|
|
|
1,107 |
|
|
|
1,531 |
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss)
from continuing operations before income
taxes |
|
|
41,743 |
|
|
|
(326,074 |
) |
|
|
105,291 |
|
Income tax expense (benefit) |
|
|
10,970 |
|
|
|
(86,347 |
) |
|
|
40,686 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
from continuing operations |
|
|
30,773 |
|
|
|
(239,727 |
) |
|
|
64,605 |
|
Earnings from discontinued
operations, net of taxes of $1,659
and $1,719, respectively, in 2009
and 2007 and including a gain on
sale in 2007 |
|
|
2,801 |
|
|
|
|
|
|
|
4,151 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
33,574 |
|
|
$ |
(239,727 |
) |
|
$ |
68,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
from continuing operations |
|
$ |
0.67 |
|
|
$ |
(5.15 |
) |
|
$ |
1.32 |
|
Net earnings from
discontinued operations |
|
|
0.06 |
|
|
|
|
|
|
|
0.08 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
per share |
|
$ |
0.73 |
|
|
$ |
(5.15 |
) |
|
$ |
1.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
from continuing operations |
|
$ |
0.67 |
|
|
$ |
(5.15 |
) |
|
$ |
1.29 |
|
Net earnings from
discontinued operations |
|
|
0.06 |
|
|
|
|
|
|
|
0.08 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
per share |
|
$ |
0.73 |
|
|
$ |
(5.15 |
) |
|
$ |
1.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
45,838 |
|
|
|
46,573 |
|
|
|
49,055 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
46,271 |
|
|
|
46,573 |
|
|
|
50,120 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
46
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Other |
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
Treasury Stock |
|
|
Paid-in |
|
|
Comprehensive |
|
|
Retained |
|
|
Stockholders |
|
|
|
Shares |
|
|
Par Value |
|
|
Shares |
|
|
Par Value |
|
|
Capital |
|
|
Income |
|
|
Earnings |
|
|
Equity |
|
Balances at December 31, 2006 |
|
|
48,868 |
|
|
$ |
489 |
|
|
|
|
|
|
$ |
|
|
|
$ |
366,163 |
|
|
$ |
28,802 |
|
|
$ |
268,175 |
|
|
$ |
663,629 |
|
Issuance of common stock under
employee stock plans |
|
|
1,546 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
24,506 |
|
|
|
|
|
|
|
|
|
|
|
24,521 |
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,083 |
|
|
|
|
|
|
|
|
|
|
|
14,083 |
|
Tax benefit from employee gains
on stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,791 |
|
|
|
|
|
|
|
|
|
|
|
1,791 |
|
Repurchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
(1,956 |
) |
|
|
(50,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,000 |
) |
Retirement of treasury stock |
|
|
(1,956 |
) |
|
|
(19 |
) |
|
|
1,956 |
|
|
|
50,000 |
|
|
|
(15,163 |
) |
|
|
|
|
|
|
(34,818 |
) |
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustment,
net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,958 |
|
|
|
|
|
|
|
18,958 |
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,756 |
|
|
|
68,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007 |
|
|
48,458 |
|
|
|
485 |
|
|
|
|
|
|
|
|
|
|
|
391,380 |
|
|
|
47,760 |
|
|
|
302,113 |
|
|
|
741,738 |
|
Issuance of common stock under
employee stock plans, net of
shares withheld for payroll
taxes |
|
|
631 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
2,905 |
|
|
|
|
|
|
|
|
|
|
|
2,911 |
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,985 |
|
|
|
|
|
|
|
|
|
|
|
7,985 |
|
Tax shortfall from stock-based
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,737 |
) |
|
|
|
|
|
|
|
|
|
|
(2,737 |
) |
Repurchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
(3,494 |
) |
|
|
(50,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,000 |
) |
Retirement of treasury stock |
|
|
(3,494 |
) |
|
|
(35 |
) |
|
|
3,494 |
|
|
|
50,000 |
|
|
|
(27,869 |
) |
|
|
|
|
|
|
(22,096 |
) |
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustment,
net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,202 |
) |
|
|
|
|
|
|
(38,202 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(239,727 |
) |
|
|
(239,727 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(277,929 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008 |
|
|
45,595 |
|
|
|
456 |
|
|
|
|
|
|
|
|
|
|
|
371,664 |
|
|
|
9,558 |
|
|
|
40,290 |
|
|
|
421,968 |
|
Issuance of common stock under
employee stock plans, net of
shares withheld for payroll
taxes |
|
|
361 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
(695 |
) |
|
|
|
|
|
|
|
|
|
|
(691 |
) |
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,764 |
|
|
|
|
|
|
|
|
|
|
|
7,764 |
|
Tax shortfall from stock-based
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,712 |
) |
|
|
|
|
|
|
|
|
|
|
(6,712 |
) |
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustment,
net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,671 |
|
|
|
|
|
|
|
11,671 |
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,574 |
|
|
|
33,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009 |
|
|
45,956 |
|
|
$ |
460 |
|
|
|
|
|
|
$ |
|
|
|
$ |
372,021 |
|
|
$ |
21,229 |
|
|
$ |
73,864 |
|
|
$ |
467,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
47
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from continuing operations |
|
$ |
30,773 |
|
|
$ |
(239,727 |
) |
|
$ |
64,605 |
|
Plus: net earnings from discontinued operations |
|
|
2,801 |
|
|
|
|
|
|
|
4,151 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
|
33,574 |
|
|
|
(239,727 |
) |
|
|
68,756 |
|
Adjustments to reconcile net earnings (loss) to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment |
|
|
|
|
|
|
397,247 |
|
|
|
|
|
Depreciation and amortization |
|
|
41,163 |
|
|
|
41,239 |
|
|
|
34,663 |
|
Provision for losses on accounts receivable |
|
|
7,377 |
|
|
|
3,452 |
|
|
|
2,646 |
|
Write-downs of inventories |
|
|
7,444 |
|
|
|
7,614 |
|
|
|
6,900 |
|
Non-cash stock-based compensation |
|
|
7,764 |
|
|
|
7,985 |
|
|
|
14,083 |
|
Non-cash gain from arbitrated claim, net of tax |
|
|
(2,801 |
) |
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations |
|
|
|
|
|
|
|
|
|
|
(5,587 |
) |
Excess tax benefit from employee gains on stock-based
compensation |
|
|
|
|
|
|
(111 |
) |
|
|
(497 |
) |
Deferred income taxes |
|
|
8,214 |
|
|
|
(108,088 |
) |
|
|
(4,224 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable |
|
|
10,981 |
|
|
|
45,463 |
|
|
|
(70,508 |
) |
Decrease (increase) in inventories |
|
|
1,813 |
|
|
|
(11,901 |
) |
|
|
326 |
|
Decrease in other current assets |
|
|
1,461 |
|
|
|
9,632 |
|
|
|
4,159 |
|
Decrease (increase) in other assets |
|
|
2,743 |
|
|
|
9,085 |
|
|
|
(454 |
) |
(Decrease) increase in accounts payable |
|
|
(15,207 |
) |
|
|
(22,318 |
) |
|
|
8,267 |
|
Increase (decrease) in deferred revenue |
|
|
16,806 |
|
|
|
(7,506 |
) |
|
|
1,502 |
|
Increase in accrued expenses and other
liabilities |
|
|
1,342 |
|
|
|
9,680 |
|
|
|
16,756 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities |
|
|
122,674 |
|
|
|
141,746 |
|
|
|
76,788 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Calence, net of cash acquired |
|
|
(21,713 |
) |
|
|
(124,671 |
) |
|
|
|
|
Acquisition of MINX, net of cash acquired |
|
|
|
|
|
|
(1,595 |
) |
|
|
|
|
Proceeds from sale of discontinued operations, net of
direct expenses |
|
|
|
|
|
|
(900 |
) |
|
|
28,631 |
|
Purchases of property and equipment |
|
|
(14,707 |
) |
|
|
(26,647 |
) |
|
|
(36,276 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(36,420 |
) |
|
|
(153,813 |
) |
|
|
(7,645 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on senior revolving credit facility |
|
|
1,043,373 |
|
|
|
989,606 |
|
|
|
|
|
Repayments on senior revolving credit facility |
|
|
(1,124,373 |
) |
|
|
(761,606 |
) |
|
|
|
|
Borrowings on accounts receivable securitization
financing facility |
|
|
165,000 |
|
|
|
466,874 |
|
|
|
682,000 |
|
Repayments on accounts receivable securitization
financing facility |
|
|
(165,000 |
) |
|
|
(612,874 |
) |
|
|
(704,000 |
) |
Repayments on term loan |
|
|
|
|
|
|
(56,250 |
) |
|
|
(15,000 |
) |
Payments on capital lease obligation |
|
|
(324 |
) |
|
|
|
|
|
|
|
|
Net borrowings under inventory financing facility |
|
|
13,378 |
|
|
|
48,889 |
|
|
|
|
|
Net repayments on line of credit |
|
|
|
|
|
|
|
|
|
|
(15,000 |
) |
Repayments on debt assumed in Calence and MINX
acquisitions |
|
|
|
|
|
|
(10,978 |
) |
|
|
|
|
Payment of deferred financing fees |
|
|
(1,632 |
) |
|
|
(3,779 |
) |
|
|
|
|
Proceeds from sales of common stock under employee stock
plans |
|
|
|
|
|
|
5,031 |
|
|
|
24,521 |
|
Excess tax benefit from employee gains on stock-based
compensation |
|
|
|
|
|
|
111 |
|
|
|
497 |
|
Payment of payroll taxes on stock-based compensation through shares withheld |
|
|
(691 |
) |
|
|
(2,120 |
) |
|
|
|
|
Repurchases of common stock |
|
|
|
|
|
|
(50,000 |
) |
|
|
(50,000 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(70,269 |
) |
|
|
12,904 |
|
|
|
(76,982 |
) |
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange effect on cash flows |
|
|
2,906 |
|
|
|
(8,380 |
) |
|
|
9,860 |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
18,891 |
|
|
|
(7,543 |
) |
|
|
2,021 |
|
Cash and cash equivalents at beginning of year |
|
|
49,175 |
|
|
|
56,718 |
|
|
|
54,697 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
68,066 |
|
|
$ |
49,175 |
|
|
$ |
56,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest |
|
$ |
5,207 |
|
|
$ |
12,328 |
|
|
$ |
12,834 |
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for income taxes |
|
$ |
4,101 |
|
|
$ |
34,420 |
|
|
$ |
39,622 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
48
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Operations and Summary of Significant Accounting Policies
Description of Business
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 currently only
include software and select software-related services.
Acquisitions and Dispositions
On July 10, 2008, we acquired MINX Limited (MINX), a United Kingdom-based networking
services company for an initial cash purchase price of approximately $1,500,000 and the assumption
of approximately $3,900,000 of existing debt. Founded in 2002, MINX was a network integrator with
Cisco Gold Partner accreditation in the United Kingdom.
On April 1, 2008, we completed the acquisition of Calence, LLC (Calence), one of the
nations largest independent technology service providers specializing in Cisco networking
solutions, unified communications and managed services, for a cash purchase price of $125,000,000
plus working capital adjustments of $3,649,000. During the years ended December 31, 2009 and 2008,
we recorded an additional $14,587,000 and $9,830,000, respectively, of purchase price consideration
and $1,242,000 and $532,000, respectively, of accrued interest thereon as a result of Calence
achieving certain performance targets during the year. Such amounts were recorded as additional
goodwill (see Note 3). We also assumed Calences existing debt totaling approximately $7,311,000,
of which $7,100,000 was repaid by us at closing. The Calence acquisition was funded, in part,
using borrowings under our senior revolving credit facility.
On March 1, 2007, we completed the sale of PC Wholesale, a division of our North America
operating segment. As a result of the disposition, PC Wholesales results of operations for 2007
are classified as a discontinued operation. See further information in Note 19.
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of Insight Enterprises, Inc. and
its wholly owned subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation. References to the Company, Insight, we, us, our and other
similar words refer to Insight Enterprises, Inc. and its consolidated subsidiaries, unless the
context suggests otherwise.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally
accepted accounting principles (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 sales and expenses during the reporting 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.
49
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Cash Equivalents
We consider all highly liquid investments with maturities at the date of purchase of three
months or less to be cash equivalents.
Allowance for Doubtful Accounts
We establish an allowance for doubtful accounts using estimated losses on accounts receivable
based on evaluation of the aging of the receivables, historical write-offs and the current economic
environment. We write off individual accounts against the reserve when we become aware of a
clients or vendors inability to meet its financial obligations, such as in the case of bankruptcy
filings, or deterioration in the clients or vendors operating results or financial position.
Inventories
We state inventories, principally purchased IT hardware, at the lower of weighted average cost
(which approximates cost under the first-in, first-out method) or market. We evaluate inventories
for excess, obsolescence or other factors that may render inventories unmarketable at normal
margins. Write-downs are recorded so that inventories reflect the approximate net realizable value
and take into account our contractual provisions with our partners governing price protection,
stock rotation and return privileges relating to obsolescence.
Inventories not available for sale relate to product sales transactions in which we are
warehousing the product and will be deploying the product to clients designated locations
subsequent to period-end. Additionally, we may perform services on a portion of the product prior
to shipment to our clients and will be paid a fee for doing so. Although the product contracts are
non-cancelable with customary credit terms beginning the date the inventories are segregated in our
warehouse and invoiced to the client and the warranty periods begin on the date of invoice, these
transactions do not meet the sales recognition criteria under GAAP. Therefore, we do not record
sales and the inventories are classified as inventories not available for sale on our
consolidated balance sheet until the product is delivered. If clients remit payment before we
deliver product to them, we record the payments received as deferred revenue on our consolidated
balance sheet until such time as the product is delivered.
Property and Equipment
We record property and equipment at cost. We capitalize major improvements and betterments,
while maintenance, repairs and minor replacements are expensed as incurred. Depreciation or
amortization is provided using the straight-line method over the following estimated economic lives
of the assets:
|
|
|
|
|
|
|
Estimated Economic Life |
|
Leasehold improvements |
|
Shorter of underlying lease term or asset life |
Furniture and fixtures |
|
2 - 7 years |
Equipment |
|
3 - 5 years |
Software |
|
3 - 10 years |
Buildings |
|
29 years |
Costs incurred to develop internal-use software during the application development stage,
including capitalized interest, are also recorded in property and equipment at cost. External
direct costs of materials and services consumed in developing or obtaining internal-use computer
software and payroll and payroll-related costs for teammates who are directly associated with and
who devote time to internal-use computer software development projects, to the extent of the time
spent directly on the project and specific to application development, are capitalized.
Reviews are regularly performed to determine whether facts and circumstances exist which
indicate that the useful life is shorter than originally estimated or the carrying amount of assets
may not be recoverable. When an indication exists that the carrying amount of long-lived assets
may not be recoverable, we assess the recoverability of our assets by comparing the projected
undiscounted net cash flows associated with the related asset or group of assets over their
remaining lives against their respective carrying amounts. Such impairment test is based on the
lowest level for which identifiable cash flows are largely independent of the cash flows of other
groups of assets and liabilities. Impairment, if any, is based on the excess of the carrying
amount over the estimated fair value of those assets.
50
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Goodwill
Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated
fair value of net identified tangible and intangible assets acquired. We perform an annual review
in the fourth quarter of every year, or more frequently if indicators of potential impairment
exist, to determine if the carrying value of recorded goodwill is impaired. The impairment review
process compares the fair value of the reporting unit in which goodwill resides to its carrying
value. See additional discussion of the impairment review process and impairments recorded in 2008
at Note 3.
Intangible Assets
We amortize intangible assets acquired in the acquisitions of MINX, Calence and Software
Spectrum using the straight-line method over the following estimated economic lives of the
intangible assets from the date of acquisition:
|
|
|
|
|
|
|
Estimated Economic Life |
|
Customer relationships |
|
8 - 11 years |
Acquired technology related assets |
|
5 years |
Backlog |
|
10 months - 5 years |
Non-compete agreements |
|
1 - 2 years |
Trade names |
|
< 1 year |
We regularly perform reviews to determine if facts and circumstances exist which indicate that
the useful lives of our long-lived assets are shorter than originally estimated or the carrying
amount of these assets may not be recoverable. When an indication exists that the carrying amount
of long-lived assets may not be recoverable, we assess the recoverability of our assets by
comparing the projected undiscounted net cash flows associated with the related asset or group of
assets over their remaining lives against their respective carrying amounts. Such impairment test
is based on the lowest level for which identifiable cash flows are largely independent of the cash
flows of other groups of assets and liabilities. Impairment, if any, is based on the excess of the
carrying amount over the estimated fair value of those assets.
Book Overdrafts
Book overdrafts represent the amount by which outstanding checks issued, but not yet presented
to our banks for disbursement, exceed balances on deposit in applicable bank accounts and a legal
right of offset with our positive cash balances in other financial institution accounts does not
exist. Our book overdrafts, which are not directly linked to a credit facility or other bank
overdraft arrangement, do not result in an actual bank financing, but rather constitute normal
unpaid trade payables at the end of a reporting period. These amounts are included within our
accounts payable balance in our consolidated balance sheets. The changes in these book overdrafts
are included as a component of cash flows from operating activities in our consolidated statements
of cash flows.
Trade Credits
Trade
credit liabilities arise from aged unclaimed credit memos, duplicate payments, payments for
returned product or overpayments made to us by our clients, and, to a lesser extent, from goods
received by us from a supplier for which we were never invoiced. Trade credit liabilities are
included in accrued expenses and other current liabilities in our consolidated balance sheet. We
derecognize the liability if and only if it has been extinguished, upon either (1) our payment of
the liability to relieve our obligation or (2) our legal release from the related obligation.
During the year ended December 31, 2009, $3,866,000 was recorded as a reduction of costs of goods
sold as result of the negotiated settlement or other legal release of trade credits.
Self Insurance
We are self-insured in the U.S. for medical insurance up to certain annual stop-loss limits
and workers compensation claims up to certain deductible limits. We establish reserves for
claims, both reported and incurred but not reported, using currently available information as well
as our historical claims experience. As of December 31, 2009, we have $700,000 on deposit with our
claims administrator which acts as security for our future payment obligations under our workers
compensation program.
51
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Foreign Currencies
We use the U.S. dollar as our reporting currency. The functional currencies of our
significant foreign subsidiaries are generally the local currencies. Accordingly, assets and
liabilities of the subsidiaries are translated into U.S. dollars at the exchange rate in effect at
the balance sheet dates. Income and expense items are translated at the average exchange rate for
each month within the year. The resulting translation adjustments are recorded directly in
accumulated other comprehensive income as a separate component of stockholders equity. Net
foreign currency transaction gains/losses, including transaction gains/losses on intercompany
balances that are not of a long-term investment nature and non-functional currency cash balances,
are reported as a separate component of non-operating (income) expense in our consolidated
statements of operations.
Derivative Financial Instruments
We enter into forward foreign exchange contracts to mitigate the risk of non-functional
currency monetary assets and liabilities on our consolidated financial statements. These forward
contracts are not designated as hedge instruments. The fair value of all derivative assets and
liabilities are recorded gross in the other current assets and other current liabilities section of
the balance sheet. Gains/losses are recorded net in non-operating (income) expense.
Treasury Stock
We record repurchases of our common stock as treasury stock at cost. We also record the
subsequent retirement of these treasury shares at cost. The excess of the cost of the shares
retired over their par value is allocated between additional paid-in capital and retained earnings.
The amount recorded as a reduction of paid-in capital is based on the excess of the average
original issue price of the shares over par value. The remaining amount is recorded as a reduction
of retained earnings.
Sales Recognition
Sales are recognized when title and risk of loss are passed to the client, there is persuasive
evidence of an arrangement for sale, delivery has occurred and/or services have been rendered, the
sales price is fixed or determinable and collectibility is reasonably assured. Usual sales terms
are F.O.B. shipping point or equivalent, at which time title and risk of loss have passed to the
client. However, because we either (i) have a general practice of covering client losses while
products are in transit despite title and risk of loss contractually transferring at the point of
shipment or (ii) have specifically stated F.O.B. destination contractual terms with the client,
delivery is not deemed to have occurred until the point in time when the product is received by the
client.
We make provisions for estimated product returns that we expect to occur under our return
policy based upon historical return rates. Our manufacturers warrant most of the products we
market, and it is our policy to request that clients return their defective products directly to
the manufacturer for warranty service. On selected products, and for selected client service
reasons, we may accept returns directly from the client and then either credit the client or ship a
replacement product. We generally offer a limited 15- to 30-day return policy for unopened
products and certain opened products, which are consistent with manufacturers terms; however, for
some products we may charge restocking fees. Products returned opened are processed and returned
to the manufacturer or partner for repair, replacement or credit to us. We resell most unopened
products returned to us. Products that cannot be returned to the manufacturer for warranty
processing, but are in working condition, are sold to inventory liquidators, to end users as
previously sold or used products, or through other channels to reduce our losses from returned
products.
We record freight billed to our clients as net sales and the related freight costs as costs of
goods sold. We report sales net of any sales-based taxes assessed by governmental authorities that
are imposed on and concurrent with sales transactions.
Revenue is recognized from software sales when clients acquire the right to use or copy
software under license, but in no case prior to the commencement of the term of the initial
software license agreement, provided that all other revenue recognition criteria have been met
(i.e., delivery, evidence of the arrangement exists, the fee is fixed or determinable and
collectibility of the fee is probable).
52
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
From time to time, the sale of hardware and software products may also include the provision
of services and the associated contracts contain multiple elements or non-standard terms and
conditions. Sales of services currently represent a small percentage of our net sales. Net sales
of services that are performed at client locations are often service-only contracts and are
recorded as sales when the services are performed and completed. If the service is performed at a
client location in conjunction with a hardware, software or other services sale, we recognize net
sales for delivered items only when all of the following criteria are satisfied:
|
|
|
the delivered item(s) has value to the client on a stand-alone basis; |
|
|
|
there is objective and reliable evidence of the fair value of the undelivered item(s);
and |
|
|
|
if the arrangement includes a general right of return relative to the delivered item,
delivery or performance of the undelivered item(s) is considered probable and substantially
in our control. |
We sell certain third-party service contracts and software assurance or subscription products
for which we are not the primary obligor. These sales do not meet the criteria for gross sales
recognition, and thus are recorded on a net sales recognition basis. As we enter into contracts
with third-party service providers or vendors, we evaluate whether the subsequent sales of such
services should be recorded as gross sales or net sales. We determine whether we act as a
principal in the transaction and assume the risks and rewards of ownership or if we are simply
acting as an agent or broker. Under gross sales recognition, the entire selling price is recorded
in sales and our cost to the third-party service provider or vendor is recorded in costs of goods
sold. Under net sales recognition, the cost to the third-party service provider or vendor is
recorded as a reduction to sales, resulting in net sales equal to the gross profit on the
transaction, and there are no costs of goods sold.
Additionally, we sell certain professional services contracts on a fixed fee basis. Revenues
for fixed fee professional services contracts are recognized based on the ratio of costs incurred
to total estimated costs. Net sales for these service contracts are not a significant portion of
our consolidated net sales.
Costs of Goods Sold
Costs of goods sold include product costs, direct costs incurred associated with delivering
services, outbound and inbound freight costs and provisions for inventory reserves. These costs
are reduced by provisions for supplier discounts and certain payments and credits received from
partners, as described under Partner Funding below.
Selling and Administrative Expenses
Selling and administrative expenses include salaries and wages, bonuses and incentives,
stock-based compensation expense, employee-related expenses, facility-related expenses, marketing
and advertising expense, reduced by certain payments and credits received from partners related to
shared marketing expense programs, as described under Partner Funding below, depreciation of
property and equipment, professional fees, amortization of intangible assets, provisions for losses
on accounts receivable and other operating expenses.
Partner Funding
We receive payments and credits from partners, including consideration pursuant to volume
sales incentive programs, volume purchase incentive programs and shared marketing expense programs.
Partner funding received pursuant to volume sales incentive programs is recognized as a reduction
to costs of goods sold. Partner funding received pursuant to volume purchase incentive programs is
allocated to inventories based on the applicable incentives from each partner and is recorded in
cost of goods sold as the inventory is sold. Partner funding received pursuant to shared marketing
expense programs is recorded as a reduction of the related selling and administrative expenses in
the period the program takes place only if the consideration represents a reimbursement of
specific, incremental, identifiable costs. Consideration that exceeds the specific, incremental,
identifiable costs is classified as a reduction of costs of goods sold. The amount of partner
funding recorded as a reduction of selling and administrative expenses totaled $19,755,000,
$21,523,000 and $17,876,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
Concentrations of Risk
Credit Risk
Although we are affected by the international economic climate, management does not believe
material credit risk concentration existed at December 31, 2009. We monitor our clients financial
condition and do not require collateral. No single client accounted for more than 3% of our
consolidated net sales in 2009.
53
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Supplier Risk
Purchases from Microsoft (a software publisher) and Ingram Micro (a distributor) accounted for
approximately 24% and 12%, respectively, of our aggregate purchases in 2009. No other partner
accounted for more than 10% of purchases in 2009. Our top five partners as a group for 2009 were
Microsoft, Ingram Micro, HP (a manufacturer), Cisco (a
manufacturer) and Tech Data (a distributor), and approximately 60% of our total purchases
during 2009 came from this group of partners. Although brand names and individual products are
important to our business, we believe that competitive sources of supply are available in
substantially all of our product categories such that, with the exception of Microsoft, we are not
dependent on any single partner for sourcing products.
Advertising Costs
Advertising costs are expensed as they are incurred. Advertising expense of $21,751,000,
$26,447,000 and $26,661,000 was recorded for the years ended December 31, 2009, 2008 and 2007,
respectively. These amounts were partially offset by partner funding received pursuant to shared
marketing expense programs recorded as a reduction of selling and administrative expenses, as
discussed above.
Stock-Based Compensation
Stock-based compensation is measured based on the fair value of the award on the date of grant
and the corresponding expense is recognized over the period during which an employee is required to
provide service in exchange for the reward. Stock-based compensation expense is classified in the
same line item of the consolidated statements of operations as other payroll-related expenses
specific to the employee. Compensation expense related to service-based RSUs is recognized on a
straight-line basis over the requisite service period for the entire award. Compensation expense
related to performance-based RSUs is recognized on a straight-line basis over the requisite service
period for each separately vesting portion of the award as if the award was, in-substance, multiple
awards (i.e., a graded vesting basis).
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable earnings in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in earnings in the period that includes the
enactment date.
Net Earnings (Loss) From Continuing Operations Per Share (EPS)
Basic EPS is computed by dividing net earnings (loss) from continuing operations available to
common stockholders by the weighted-average number of common shares outstanding during each year.
Diluted EPS is computed on the basis of the weighted average number of shares of common stock plus
the effect of dilutive potential common shares outstanding during the period using the treasury
stock method. Dilutive potential common shares include outstanding stock options, restricted stock
awards and restricted stock units. For periods with a net loss from continuing operations, no
potential common shares are included in the diluted EPS computations because they would result in
an antidilutive effect on the per share amount. A reconciliation of the denominators of the basic
and diluted EPS calculations follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from continuing operations |
|
$ |
30,773 |
|
|
$ |
(239,727 |
) |
|
$ |
64,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute basic EPS |
|
|
45,838 |
|
|
|
46,573 |
|
|
|
49,055 |
|
Potential dilutive common shares due to dilutive
stock options and restricted stock awards and units |
|
|
433 |
|
|
|
|
|
|
|
1,065 |
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute diluted EPS |
|
|
46,271 |
|
|
|
46,573 |
|
|
|
50,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from continuing operations per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.67 |
|
|
$ |
(5.15 |
) |
|
$ |
1.32 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.67 |
|
|
$ |
(5.15 |
) |
|
$ |
1.29 |
|
|
|
|
|
|
|
|
|
|
|
54
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following weighted-average outstanding stock options during the years ended December 31,
2009, 2008 and 2007 were not included in the diluted EPS calculations because the exercise prices
of these options were greater than the average market price of our common stock during the
respective periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Weighted-average
outstanding stock
options having no
dilutive effect |
|
|
1,554 |
|
|
|
|
|
|
|
615 |
|
|
|
|
|
|
|
|
|
|
|
No potential common shares were included in the diluted EPS computation for the year ended
December 31, 2008 because of the net loss from continuing operations for the year, which would
result in an antidilutive effect on the per share amount.
Reclassifications
We reclassified certain current asset and current liability amounts in the accompanying
consolidated balance sheet as of December 31, 2008 to conform to the presentation as of December
31, 2009. Such reclassifications were required to conform presentation among all of our
subsidiaries. Such reclassifications had no effect on previously reported net
earnings (loss) or operating cash flow amounts. The following table summarizes the effect of the
reclassifications on the previously reported balance sheet line items as of December 31, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Reclassifications |
|
|
As Reclassified |
|
Accounts receivable, net |
|
$ |
990,026 |
|
|
$ |
5,711 |
|
|
$ |
995,737 |
|
Other current assets |
|
|
37,495 |
|
|
|
(5,848 |
) |
|
|
31,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
$ |
(137 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
720,833 |
|
|
$ |
(40,682 |
) |
|
$ |
680,151 |
|
Accrued expenses and other current liabilities |
|
|
175,769 |
|
|
|
35,714 |
|
|
|
211,483 |
|
Deferred revenue |
|
|
36,339 |
|
|
|
3,431 |
|
|
|
39,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
(1,537 |
) |
|
|
|
|
Other liabilities |
|
|
22,440 |
|
|
|
1,400 |
|
|
|
23,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
$ |
(137 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We revised the classification of the net decrease in book overdrafts of $3,693,000 and
$23,216,000 for the years ended December 31, 2008 and 2007, respectively, from a financing activity
to an operating activity in our consolidated statements of cash flows. We concluded this
classification is preferable as our book overdrafts, which are not directly linked to a credit
facility or other bank overdraft arrangement, do not result in an actual bank financing, but rather
constitute normal unpaid trade payables at the end of a reporting period. The revision in
classification had no effect on our consolidated balance sheet or reported net earnings in any
period.
Recently Issued Accounting Standards
Effective January 1, 2009, we adopted the provisions of Accounting Standards Codification
(ASC) 805, Business Combinations, previously Statement of Financial Accounting Standards
(SFAS) No. 141 (revised 2007), Business Combinations, ASC 350, Intangibles Goodwill and
Other, previously FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets, and
ASC 815, Derivatives and Hedging, previously SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities an amendment of FASB Statement 133. Other than the
additional disclosures required by ASC 815 (see Note 12), the adoption of this accounting guidance
had no effect on our financial statements.
Effective June 30, 2009, we adopted the provisions of ASC 855, Subsequent Events, previously
SFAS No. 165 (revised 2007), Subsequent Events. Other than the additional disclosures required
by ASC 855 (see Note 21), the adoption of this accounting guidance had no effect on our financial
statements.
55
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In September 2009, the FASB issued EITF Issue No. 08-1 Revenue Arrangements with Multiple
Deliverables. EITF No. 08-1 amends ASC 605 Revenue Recognition Multiple-Element Arrangements,
previously EITF Issue No.
00-21, Revenue Arrangements with Multiple Deliverables, to eliminate the requirement that
all undelivered elements have objective and reliable evidence of their fair value before an entity
can recognize the portion of an overall arrangement fee that is attributable to items that already
have been delivered. In the absence of objective and reliable evidence of the standalone selling
price for one or more delivered or undelivered elements in a multiple element arrangement, entities
will be required to estimate the selling prices of those elements. The overall arrangement fee
will be allocated to each element (both delivered and undelivered items) based on their relative
selling prices, regardless of whether those selling prices are based on objective and reliable
evidence or the entitys estimated selling price. Application of the residual method of
allocating an overall arrangement fee between delivered and undelivered elements will no longer be
permitted upon adoption of EITF 08-1. Additionally, the new guidance will require entities to
disclose more information about their multiple element revenue arrangements. Adoption of this
amendment to ASC 605 is required for revenue arrangements entered into or materially modified
during the Companys fiscal year beginning January 1, 2011. Early adoption is permitted. We are
in the process of determining the effect that the adoption of this accounting guidance will have on
our consolidated financial statements and related disclosures.
In September 2009, the FASB issued EITF Issue No. 09-3 Certain Revenue Arrangements That
Include Software Elements. EITF 09-3 amends ASC 985 Software, previously AICPA Statement of
Position No. 97-2, Software Revenue Recognition and its related interpretive guidance, to exclude
from its scope tangible products that contain both software and non-software components that
function together to deliver a products essential functionality. Adoption of this amendment to
ASC 985 is also required for revenue arrangements entered into or materially modified during the
Companys fiscal year beginning January 1, 2011. Early adoption is permitted. We are in the
process of determining the effect that the adoption of this accounting guidance will have on our
consolidated financial statements and related disclosures.
(2) Property and Equipment
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Software |
|
$ |
120,451 |
|
|
$ |
114,221 |
|
Buildings |
|
|
72,874 |
|
|
|
69,381 |
|
Equipment |
|
|
57,810 |
|
|
|
48,935 |
|
Furniture and fixtures |
|
|
33,122 |
|
|
|
31,836 |
|
Leasehold improvements |
|
|
19,082 |
|
|
|
17,036 |
|
Land |
|
|
7,668 |
|
|
|
7,558 |
|
|
|
|
|
|
|
|
|
|
|
311,007 |
|
|
|
288,967 |
|
Accumulated depreciation and amortization |
|
|
(160,904 |
) |
|
|
(131,633 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
150,103 |
|
|
$ |
157,334 |
|
|
|
|
|
|
|
|
In 2009, subsequent to vacating our former headquarters building located in Tempe, Arizona, we
performed an impairment analysis comparing the carrying value of the property to the current market
value. No impairment was indicated. No other indicators of impairment were identified during
2009.
Depreciation and amortization expense related to property and equipment was $26,663,000,
$26,122,000 and $24,182,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
Depreciation and amortization expense in 2009 includes $1,252,000 of accelerated amortization associated with
certain software licenses due to our decision to not utilize them in the future.
Interest charges in the amount of $9,000, $121,000 and $515,000 were capitalized in connection with
internal-use software development projects in the years ended December 31, 2009, 2008 and 2007,
respectively.
56
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(3) Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2009 and 2008
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
EMEA |
|
|
APAC |
|
|
Consolidated |
|
Balance at December 31, 2007 |
|
$ |
220,331 |
|
|
$ |
67,377 |
|
|
$ |
16,865 |
|
|
$ |
304,573 |
|
Goodwill recorded in
connection with the
acquisition of Calence |
|
|
104,071 |
|
|
|
|
|
|
|
|
|
|
|
104,071 |
|
Goodwill recorded in
connection with the
acquisition of MINX |
|
|
|
|
|
|
9,108 |
|
|
|
|
|
|
|
9,108 |
|
Impairment charge |
|
|
(323,422 |
) |
|
|
(59,852 |
) |
|
|
(13,973 |
) |
|
|
(397,247 |
) |
Other adjustments |
|
|
(980 |
) |
|
|
(16,633 |
) |
|
|
(2,892 |
) |
|
|
(20,505 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill recorded as
additional purchase price
consideration relating to
Calence |
|
|
15,829 |
|
|
|
|
|
|
|
|
|
|
|
15,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
15,829 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
15,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill is required to be tested for impairment at the reporting unit level on an annual
basis and between annual tests if an event occurs or circumstances change that would more likely
than not reduce the fair value of the reporting unit below its carrying value. Multiple valuation
techniques can be used to assess the fair value of the reporting unit. All of these techniques
include the use of estimates and assumptions that are inherently uncertain. Changes in these
estimates and assumptions could materially affect the determination of fair value or goodwill
impairment, or both. The Company has three reporting units, which are the same as our operating
segments. At December 31, 2007, our goodwill balance of $304,573,000 was allocated among all three
of our operating segments, which represented the purchase price in excess of the net amount
assigned to assets acquired and liabilities assumed in connection with previous acquisitions,
adjusted for changes in foreign currency exchange rates. We tested goodwill for impairment during
the fourth quarter of 2007. At that time, we concluded that the fair value of each of our
reporting units was in excess of the carrying value.
On April 1, 2008, we acquired Calence, which has been integrated into our North America
business. On July 10, 2008, we acquired MINX, which has been integrated into our EMEA business.
Under the purchase method of accounting, the purchase price for each acquisition was allocated to
the tangible and identifiable intangible assets acquired and liabilities assumed based on their
estimated fair values. The excess purchase price over fair value of net assets acquired of
$93,709,000 and $9,108,000 for Calence and MINX, respectively, was recorded as goodwill in the
respective reporting unit. During the year ended December 31, 2008, we accrued an additional
$9,830,000 of purchase price consideration (the earnout) and $532,000 of accrued interest thereon
as a result of Calence achieving certain performance targets during 2008. Such amounts were
recorded as additional goodwill. The Calence acquisition and resulting additional goodwill of
$104,071,000, including the earnout and accrued interest amounts, was recorded as part of our North
America reporting unit.
In consideration of market conditions and the decline in our overall market capitalization
resulting from decreases in the market price of Insights publicly traded common stock during the
three months ended June 30, 2008, we evaluated whether an event (a triggering event) had occurred
during the second quarter that would require us to perform an interim period goodwill impairment
test. Subsequent to the first quarter of 2008, the Company experienced a relatively consistent
decline in market capitalization due to deteriorating market conditions and a significant decline
subsequent to our announcement of preliminary first quarter 2008 results on April 23, 2008. During
the first quarter of 2008, the market price of Insights publicly traded common stock ranged from a
high of $19.00 to a low of $15.49, ending the quarter at $17.50 on March 31, 2008. During the
second quarter of 2008, the market price of Insights publicly traded common stock ranged from a
high of $18.20 to a low of $11.00 on April 24, 2008, when the price dropped by 22.5% and did not
return to levels previous to that single day drop through the end of the quarter. Based on the
sustained significant decline in the market price of our common stock during the second quarter of
2008, we concluded that a triggering event had occurred subsequent to March 31, 2008, which would
more likely than not reduce the fair value of one or more of our reporting units below its
respective carrying value.
57
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As a result, we performed the first step of the two-step goodwill impairment test in the
second quarter of 2008 and compared the fair values of our reporting units to their carrying
values. The fair values of our reporting units were determined using established valuation
techniques, specifically the market and income approaches. We determined that
the fair value of the North America reporting unit was less than the carrying value of the net
assets of the reporting unit, and thus, we performed step two of the impairment test for the North
America reporting unit. The results of the first step of the two-step goodwill impairment test
indicated that the fair value of each of our EMEA and APAC reporting units was in excess of the
carrying value, and thus we did not perform step two of the impairment test for EMEA or APAC.
In step two of the impairment test, we determined the implied fair value of the goodwill in
our North America reporting unit and compared it to the carrying value of the goodwill. We
allocated the fair value of the North America reporting unit to all of its assets and liabilities
as if the reporting unit had been acquired in a business combination and the fair value of the
North America reporting unit was the price paid to acquire the reporting unit. The excess of the
fair value of the reporting unit over the amounts assigned to its assets and liabilities is the
implied fair value of goodwill. Our step two analysis resulted in no implied fair value of
goodwill for the North America reporting unit, and therefore, we recognized a non-cash goodwill
impairment charge of $313,776,000, which represented the entire goodwill balance recorded in our
North America operating segment as of June 30, 2008, including the entire amount of the goodwill
recorded in connection with the Calence acquisition, including the earnout through June 30, 2008.
The charge is included in the loss from continuing operations for the year ended December 31, 2008.
Subsequent to the announcement of our results of operations for the second quarter of 2008 on
August 11, 2008, the Company experienced a relatively consistent increase in market capitalization.
During the third quarter of 2008, the market price of Insights publicly traded common stock
ranged from a low of $10.70 to a high of $17.11, ending the quarter at $13.41 on September 30,
2008. We concluded that during the third quarter of 2008, a triggering event had not occurred that
would more likely than not reduce the fair value of one or more of our reporting units below its
respective carrying value.
We performed our annual review of goodwill in the fourth quarter of 2008. The fair values of
our reporting units were determined using established valuation techniques, specifically the market
and income approaches. We determined that the fair value of each of our three reporting units was
less than the carrying value of the net assets of the respective reporting unit, and thus we
performed step two of the impairment test for each of our three reporting units. Our step two
analyses resulted in no implied fair value of goodwill for any of our three reporting units, and
therefore, we recognized a non-cash goodwill impairment charge of $83,471,000, which represented
the entire amount of the goodwill recorded all three of our operating segments as of December 31,
2008, including goodwill recorded in connection with the earnout associated with the Calence
acquisition, part of our North America operating segment, since June 30, 2008. The charge is
included in the loss from continuing operations for the year ended December 31, 2008.
The total non-cash charge of $397,247,000 for the year ended December 31, 2008 did not affect
our debt covenant compliance, cash flows or ongoing results of operations.
The other adjustments to goodwill in 2008 primarily consist of foreign currency translation
adjustments. During the year ended December 31, 2008, the adjustments in EMEA also include the
reversal of valuation allowances totaling $5,800,000 relating to our United Kingdom and France net
operating loss carryforward deferred tax assets (see Note 10).
During the year ended December 31, 2009, we recorded $15,829,000 of additional purchase price
consideration and the related accrued interest thereon as a result of Calence, acquired April 1,
2008, achieving certain performance targets during 2009. The additional goodwill was recorded as
part of our North America reporting unit. In April and November 2009, cash payments of $12,834,000
and $8,879,000, respectively, were made to the former owners of Calence related to additional
purchase price consideration and the related interest thereon earned in 2008 and 2009 prior to each
scheduled payment date. Such amounts are reflected as an investing activity within our
consolidated statement of cash flows. Additional purchase price consideration and the related
accrued interest thereon of $4,478,000 that was earned subsequent to the last scheduled payment
date through December 31, 2009 is included in accrued expenses and other current liabilities within
our consolidated balance sheet. Such amount is expected to be paid to the former owners of Calence
in 2010. If Calence achieves the remaining targets, we will recognize approximately $646,000,
including accrued interest, in additional purchase price consideration in the first quarter of
2010. Subject to the achievement of such targets, we anticipate making a final cash payment to the
former owners of Calence in the second quarter of 2010.
During 2009, we continually assessed whether any indicators of impairment existed which would
require us to perform an interim impairment review. As of each interim period end during the year,
we concluded that a triggering event had not occurred that would more likely than not reduce the
fair value of our North America reporting unit (the only reporting unit with a goodwill balance at
any period end) below its carrying value. We performed our annual test of goodwill for impairment
during the fourth quarter of 2009. The results of the first step of the two-step goodwill
impairment test indicated that the fair value of our North America reporting unit was in
excess of the carrying value, and thus we did not perform step two of the impairment test.
58
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(4) Intangible Assets
Intangible assets acquired in the acquisition of MINX, Calence and Software Spectrum consist
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Customer relationships |
|
$ |
112,295 |
|
|
$ |
109,576 |
|
Backlog |
|
|
7,405 |
|
|
|
7,446 |
|
Acquired technology related assets |
|
|
1,700 |
|
|
|
1,700 |
|
Non-compete agreements |
|
|
270 |
|
|
|
191 |
|
Trade names |
|
|
|
|
|
|
150 |
|
|
|
|
|
|
|
|
|
|
|
121,670 |
|
|
|
119,063 |
|
Accumulated amortization |
|
|
(39,187 |
) |
|
|
(25,663 |
) |
|
|
|
|
|
|
|
Intangible assets, net |
|
$ |
82,483 |
|
|
$ |
93,400 |
|
|
|
|
|
|
|
|
During 2009, we continually assessed whether any indicators of impairment existed related to
our intangible assets. We concluded that a triggering event had not occurred that would more
likely than not reduce the fair value of our intangible assets below their carrying value.
Amortization expense recognized for the years ended December 31, 2009, 2008 and 2007 was
$12,429,000, $13,868,000 and $9,749,000, respectively. Future amortization expense is estimated as
follows (in thousands):
|
|
|
|
|
Years Ending December 31, |
|
Amortization Expense |
|
2010 |
|
$ |
12,451 |
|
2011 |
|
|
12,238 |
|
2012 |
|
|
12,021 |
|
2013 |
|
|
11,058 |
|
2014 |
|
|
11,058 |
|
Thereafter |
|
|
23,657 |
|
|
|
|
|
Total amortization expense |
|
$ |
82,483 |
|
|
|
|
|
(5) Accrued Expenses and Other Current Liabilities
Included in accrued expenses and other current liabilities as of December 31, 2009 and 2008 is
$62,289,000 and $65,455,000, respectively, of trade credit liabilities.
Included in accrued expenses and other current liabilities as of December 31, 2009 and 2008 is
an accrual for $62,760,000 and $44,252,000, respectively, of sales tax, value-added tax and other
indirect taxes.
(6) Debt, Capital Lease Obligation and Inventory Financing Facility
Debt
Our long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Senior revolving credit facility |
|
$ |
147,000 |
|
|
$ |
228,000 |
|
Accounts receivable securitization financing facility (the ABS facility) |
|
|
|
|
|
|
|
|
Capital lease obligation |
|
|
3,224 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
150,224 |
|
|
|
228,000 |
|
Less: current portion of obligation under capital lease |
|
|
(875 |
) |
|
|
|
|
Less: current portion of revolving credit facilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
149,349 |
|
|
$ |
228,000 |
|
|
|
|
|
|
|
|
59
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On April 1, 2008, we entered into a new five-year $300,000,000 senior revolving credit
facility. Amounts outstanding under the new senior revolving credit facility bear interest,
payable quarterly, at a floating rate equal to the
prime rate or, at our option, a LIBOR rate plus a pre-determined spread of 0.75% to 1.75%. In
addition, we pay a commitment fee on the unused portion of the facility of 0.175% to 0.35%. The
weighted average interest rate on amounts outstanding under our senior revolving credit facility,
including the commitment fee and origination costs incurred, was 2.6% and 4.8% during the years
ended December 31, 2009 and 2008, respectively. As of December 31, 2009, $153,000,000 was
available under the senior revolving credit facility. The senior revolving credit facility matures
on April 1, 2013.
In connection with the new inventory financing facility discussed below, on September 17,
2008, we amended certain provisions in the senior revolving credit facility to, among other
provisions, permit up to $100,000,000 in outstanding indebtedness under the new inventory financing
facility and the liens securing such indebtedness.
We have a $150,000,000 accounts receivable securitization financing facility (the ABS
facility) pursuant to which we can sell receivables periodically to a special purpose accounts
receivable and financing entity (the SPE), which is exclusively engaged in purchasing receivables
from us. The SPE is a wholly-owned, bankruptcy-remote entity that we have included in our
consolidated financial statements. The SPE funds its purchases by selling undivided interests in
eligible trade accounts receivable to a multi-seller conduit administered by an independent
financial institution. The SPEs assets are available first and foremost to satisfy the claims of
the creditors of the conduit. We maintain effective control over the receivables that are sold.
Accordingly, the receivables remain recorded on our Consolidated Balance Sheets. At December 31,
2009 and 2008, the SPE owned $525,178,000 and $346,235,000, respectively, of receivables recorded
at fair value and included in our Consolidated Balance Sheets. On July 24, 2009, we amended our
ABS facility, which was to have expired on September 17, 2009, to, among other changes, (i) add
software receivables from the legacy Software Spectrum business as eligible receivables under the
facility, (ii) reduce our eligible receivables under the facility to reflect our accounts
receivable related trade credit liabilities as well as certain other accounts receivable related to
sales where revenue recognition from the sale has been deferred, (iii) establish a new 364-day term
ending July 23, 2010 and (iv) increase the variable interest rate by approximately 75 basis points
for funds provided under the ABS facility, calculated as the specified Pooled Commercial Paper
Rate, as defined in the ABS facility, plus 2.25%. The $150,000,000 maximum borrowing capacity and
the maximum leverage, minimum fixed charge and asset coverage ratio financial covenant requirements
under the ABS facility were not modified as part of the amendment. While the ABS facility has a
stated maximum amount, the Companys ability to borrow up to the full $150,000,000 under the ABS
facility is based on formulae relating to the amount and quality of the Companys accounts
receivable in the U.S. Total availability under our ABS facility at December 31, 2009 was
$97,715,000. We currently anticipate that we will be able to renew the ABS facility prior to its
maturity on July 23, 2010.
No amounts are outstanding under the ABS facility at December 31, 2009 or 2008. Interest is
payable monthly, and the interest rate which would have been applicable at December 31, 2009 had
there been outstanding balances was 2.6% per annum, which includes the origination costs associated
with the 2009 amendment. During the years ended December 31, 2009 and 2008, our weighted average
interest rate per annum and weighted average borrowings under the facility were 8.5% and
$27,449,000 and 4.30% and $128,420,000, respectively.
Capital Lease Obligation
In July 2009, we entered into a four-year lease for certain IT equipment. Subsequently, in
November 2009, we amended this lease to include additional IT equipment to be used in the same
manner as the initial lease. These obligations under the capitalized lease are included in
long-term debt in our consolidated balance sheet as of December 31, 2009. The current and
long-term portions of the obligation are included in the table above. The capital lease was a
non-cash transaction and, accordingly, is not reflected in our consolidated statement of cash flows
for the year ended December 31, 2009.
The value of the equipment held under the capitalized lease, $3,548,000, is included in
property and equipment. These capital lease assets are amortized on a straight-line basis over the
lease term. The related amortization expense is included in selling and administrative expenses in
our consolidated statement of operations for the year ended December 31, 2009. As of December 31,
2009, accumulated amortization on the capital lease assets was $333,000.
60
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Future minimum payments under the capitalized lease consist of the following as of December
31, 2009 (in thousands):
|
|
|
|
|
Years Ending December 31, |
|
|
|
|
2010 |
|
$ |
935 |
|
2011 |
|
|
935 |
|
2012 |
|
|
935 |
|
2013 |
|
|
546 |
|
|
|
|
|
Total minimum lease payments |
|
|
3,351 |
|
Less amount representing interest |
|
|
(127 |
) |
|
|
|
|
Present value of minimum lease payments |
|
$ |
3,224 |
|
|
|
|
|
Inventory Financing Facility
On September 17, 2008, we entered into an agreement which provides for a facility to purchase
inventory from a list of approved vendors. The aggregate availability for vendor purchases under
the inventory financing facility is $90,000,000, and the facility matures on April 1, 2013 but may
be cancelled with 90 days notice. Additionally, the facility may be renewed under certain
circumstances described in the agreement for successive twelve month periods. Interest does not
accrue on accounts payable under this facility provided the accounts payable are paid within stated
vendor terms (ranging from 30 to 60 days). We impute interest on the average daily balance
outstanding during these stated vendor terms based on our blended incremental borrowing rate during
the period under our senior revolving credit facility and our ABS facility. Imputed interest of
$1,798,000 and $581,000 was recorded in 2009 and 2008, respectively. If balances are not paid
within stated vendor terms, they will accrue interest at prime plus 1.25%. The facility is
guaranteed by the Company and each of its material domestic subsidiaries and is secured by a lien
on substantially all of the Companys domestic assets that is of equal priority to the liens
securing borrowings under our senior revolving credit facility. As of December 31, 2009 and 2008,
$94,282,000 and $80,904,000, respectively, was included in accounts payable related to this
facility. Although the $90,000,000 maximum was exceeded as of December 31, 2009, it was
non-interest bearing, was paid down below the $90,000,000 maximum on January 4, 2010 and had no
effect on our debt covenant compliance.
Covenants
Our financing facilities contain various covenants customary for transactions of this type,
including the requirement that we comply with maximum leverage, minimum fixed charge and minimum
asset coverage ratio requirements and meet weekly, 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.
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 Companys 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, (iv) non-cash
goodwill impairment and (v) non-cash stock-based compensation (referred to herein as adjusted
earnings). The maximum leverage ratio permitted under the agreements was 2.75 times as of
December 31, 2009. A significant drop in 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
Companys consolidated maximum debt capacity. As a result of this limitation, of the $450.0
million of aggregate maximum debt capacity available under our senior revolving credit facility and
our ABS facility, the Companys debt balance that could have been outstanding as of December 31,
2009 was limited to $286.3 million based on 2.75 times the Companys trailing twelve-month
adjusted earnings.
As discussed above, our senior revolving credit facility and inventory financing facility both
mature on April 1, 2013. The term of our ABS facility is scheduled to expire on July 23, 2010. If
we were unable to renew our ABS facility in 2010, we believe that cash flows from operations and
extending payment terms with key partners by foregoing early pay discounts, together with the funds
available under our existing long-term senior revolving credit facility, will be adequate to
support our anticipated working capital requirements for operations over the next twelve months.
61
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(7) Market Risk Management
Interest Rate Risk
We have interest rate exposure arising from our financing facilities, which have variable
interest rates. These variable interest rates are affected by changes in short-term interest
rates. We currently do not hedge our interest rate exposure.
We do not believe that the effect of reasonably possible near-term changes in interest rates
will be material to our financial position, results of operations and cash flows. Our financing
facilities expose net earnings to changes in short-term interest rates since interest rates on the
underlying obligations are variable. We had $147,000,000 outstanding under our senior revolving
credit facility and no amounts outstanding under our ABS facility at December 31, 2009. The
interest rates attributable to the borrowings under our senior revolving credit facility and the
ABS facility were 1.65% and 2.62%, respectively, per annum at December 31, 2009. The change in
annual net earnings from continuing operations, pretax, resulting from a hypothetical 10% increase
or decrease in the highest applicable interest rate would approximate $243,000.
Foreign Currency Exchange Risk
We use the U.S. dollar as our reporting currency. The functional currencies of our
significant foreign subsidiaries are generally the local currencies. Accordingly, assets and
liabilities of the subsidiaries are translated into U.S. dollars at the exchange rate in effect at
the balance sheet dates. Income and expense items are translated at the average exchange rate for
each month within the year. Translation adjustments are recorded in other comprehensive income as
a separate component of stockholders equity. Net foreign currency transaction gains/losses,
including transaction gains/losses on intercompany balances that are not of a long-term investment
nature, are reported as a separate component of non-operating (income) expense, net in our
consolidated statements of operations. We also maintain cash accounts denominated in currencies
other than the functional currency which expose us to foreign exchange rate movements.
Remeasurement of these cash balances results in gains/losses that are also reported as a separate
component of non-operating (income) expense.
We monitor our foreign currency exposure and have begun to enter, selectively, into forward
exchange contracts to mitigate risk associated with certain non-functional currency monetary assets
and liabilities related to foreign denominated payables, receivables, and cash balances.
Transaction gains and losses resulting from non-functional currency assets and liabilities are
offset by forward contracts in non-operating (income) and expense, net. The Company does not have
a significant concentration of credit risk with any single counterparty.
The Company generally enters into forward contracts with maturities of three months or less.
The derivatives entered into during 2009 were not designated as hedges. The following derivative
contracts were entered into during the year ended December 31, 2009, and remained open and
outstanding at December 31, 2009. All U.S. dollar and foreign currency amounts (Euros, Canadian
Dollars and British Pounds) are presented in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy |
|
|
Buy |
|
|
Buy |
|
Foreign Currency |
|
|
EURO |
|
|
|
CAD |
|
|
|
GBP |
|
Foreign Amount |
|
|
10,000 |
|
|
|
5,000 |
|
|
|
2,000 |
|
Exchange Rate |
|
|
1.4262 |
|
|
|
1.0410 |
|
|
|
1.5942 |
|
USD Equivalent |
|
|
$14,262 |
|
|
|
$4,803 |
|
|
|
$3,188 |
|
Maturity Date |
|
|
January 6, 2010 |
|
|
|
January 11, 2010 |
|
|
|
January 6, 2010 |
|
The Company does not enter into derivative contracts for speculative or trading purposes. The
fair value of all forward contracts at December 31, 2009 was $105,000.
62
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(8) Leases
We have several non-cancelable operating leases with third parties, primarily for
administrative and distribution center space and computer equipment. Our facilities leases
generally provide for periodic rent increases and many contain escalation clauses and renewal
options. We recognize rent expense on a straight-line basis over the lease term. Rental expense
for these third-party operating leases was $15,561,000, $16,132,000 and $13,343,000 for the years
ended December 31, 2009, 2008 and 2007, respectively, and is included in selling and administrative
expenses in our consolidated statements of operations.
Future minimum lease payments under non-cancelable operating leases (with initial or remaining
lease terms in excess of one year) as of December 31, 2009 are as follows (in thousands):
|
|
|
|
|
Years Ending December 31, |
|
|
|
|
2010 |
|
$ |
13,941 |
|
2011 |
|
|
11,779 |
|
2012 |
|
|
8,766 |
|
2013 |
|
|
8,442 |
|
2014 |
|
|
7,959 |
|
Thereafter |
|
|
5,127 |
|
|
|
|
|
Total minimum lease payments |
|
$ |
56,014 |
|
|
|
|
|
(9) Severance, Restructuring and Acquisition Integration Activities
Severance Costs Expensed in 2009
During the year ended December 31, 2009, North America, EMEA and APAC recorded severance
expense totaling $10,515,000, $3,784,000 and $302,000, respectively, related to the departure of
our former President and Chief Executive Officer from the Company and ongoing restructuring efforts
to reduce operating expenses. The following table details the changes in these liabilities during
the year ended December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
EMEA |
|
|
APAC |
|
|
Consolidated |
|
Severance costs |
|
$ |
10,515 |
|
|
$ |
3,784 |
|
|
$ |
302 |
|
|
$ |
14,601 |
|
Foreign currency
translation adjustments |
|
|
|
|
|
|
118 |
|
|
|
|
|
|
|
118 |
|
Cash payments |
|
|
(10,477 |
) |
|
|
(1,998 |
) |
|
|
(302 |
) |
|
|
(12,777 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
38 |
|
|
$ |
1,904 |
|
|
$ |
|
|
|
$ |
1,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All remaining outstanding obligations are expected to be paid during 2010 and are
therefore included in accrued expenses and other current liabilities.
Severance Costs Expensed in 2008
During the year ended December 31, 2008, North America, EMEA and APAC recorded severance
expense totaling $4,633,000, $3,923,000 and $39,000, respectively, related to on-going
restructuring efforts to reduce operating expenses related to support and management functions as
well as certain sales functions. The following table details the changes in these liabilities
during the year ended December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
EMEA |
|
|
Consolidated |
|
Balance at December 31, 2008 |
|
$ |
775 |
|
|
$ |
1,939 |
|
|
$ |
2,714 |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
12 |
|
|
|
12 |
|
Adjustments |
|
|
(188 |
) |
|
|
(97 |
) |
|
|
(285 |
) |
Cash payments |
|
|
(568 |
) |
|
|
(1,784 |
) |
|
|
(2,352 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
19 |
|
|
$ |
70 |
|
|
$ |
89 |
|
|
|
|
|
|
|
|
|
|
|
All remaining outstanding obligations are expected to be paid during 2010 and are therefore
included in accrued expenses and other current liabilities. Adjustments of $188,000 and $97,000
were recorded as a reduction of severance and restructuring expense recorded during the year ended
December 31, 2009 and the related severance accrual in North America and EMEA, respectively, due to
changes in estimate as cash payments were made.
Severance Costs Expensed in 2007
During the year ended December 31, 2007, North America, EMEA and APAC recorded severance
expense of $2,960,000, $177,000 and $64,000, respectively, primarily associated with the retirement
of our chief financial officer. Of the severance amounts expensed in 2007, EMEA paid $177,000
during 2007. All other amounts were paid during 2008.
63
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Acquisition-Related Costs Capitalized in 2006 as a Cost of Acquisition of Software Spectrum
In 2006, we recorded $9,738,000 of employee termination benefits and $1,676,000 of facility
based costs in connection with the integration of Software Spectrum. These costs were recognized
as a liability assumed in the purchase business combination and included in the allocation of the
cost to acquire Software Spectrum.
The employee termination benefits relate to severance payments for Software Spectrum teammates
in North America and EMEA who have been or will be terminated in connection with integration plans.
The facilities based costs relate to future lease payments or lease termination costs associated
with vacating certain Software Spectrum facilities in EMEA.
The following table details the changes in these liabilities during the year ended December
31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
EMEA |
|
|
Consolidated |
|
Balance at December 31, 2008 |
|
$ |
341 |
|
|
$ |
2,806 |
|
|
$ |
3,147 |
|
Foreign
currency translation adjustments |
|
|
|
|
|
|
104 |
|
|
|
104 |
|
Adjustments |
|
|
(341 |
) |
|
|
(818 |
) |
|
|
(1,159 |
) |
Cash payments |
|
|
|
|
|
|
(734 |
) |
|
|
(734 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
|
|
|
$ |
1,358 |
|
|
$ |
1,358 |
|
|
|
|
|
|
|
|
|
|
|
All remaining outstanding obligations are expected to be paid during 2010 and are therefore
included in accrued expenses and other current liabilities. In 2009 adjustments of $341,000 and
$818,000 were recorded as a reduction of selling and administrative expenses and the related
severance accrual in North America and EMEA, respectively, due to changes in estimates of the costs
of the integration plan.
Restructuring Costs Expensed in 2005
During the year ended December 31, 2005, Insight UK moved into a new facility and recorded
facilities-based restructuring costs of $7,458,000.
The following table details the changes in this liability during the year ended December 31,
2009 (in thousands):
|
|
|
|
|
|
|
EMEA |
|
Balance at December 31, 2008 |
|
$ |
1,050 |
|
Foreign currency translation adjustments |
|
|
132 |
|
Adjustments |
|
|
(708 |
) |
Cash payments |
|
|
(397 |
) |
|
|
|
|
Balance at December 31, 2009 |
|
$ |
77 |
|
|
|
|
|
An adjustment of $708,000 was recorded as a reduction of severance and restructuring expenses
recorded during the year ended December 31, 2009 and the related lease accrual in EMEA due to a
change in estimate of the costs of exiting the leased facilities upon negotiation of the final
settlement with the landlord. An adjustment of $606,000 was recorded as a reduction of severance
and restructuring expenses recorded during the year ended December 31, 2007 following the
successful renegotiation of a portion of the lease during 2007. The leases expired in October
2009, and the remaining balance in the accrual is expected to be paid in 2010.
(10) Income Taxes
The following table presents the U.S. and foreign components of earnings (loss) from
continuing operations before income taxes and the related income tax expense (benefit) (in
thousands):
Earnings (loss) from continuing operations before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
U.S. |
|
$ |
14,644 |
|
|
$ |
(282,554 |
) |
|
$ |
56,728 |
|
Foreign |
|
|
27,099 |
|
|
|
(43,520 |
) |
|
|
48,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
41,743 |
|
|
$ |
(326,074 |
) |
|
$ |
105,291 |
|
|
|
|
|
|
|
|
|
|
|
64
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Income tax expense (benefit) from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal |
|
$ |
(4,804 |
) |
|
$ |
5,379 |
|
|
$ |
22,956 |
|
U.S. State and local |
|
|
(237 |
) |
|
|
360 |
|
|
|
2,170 |
|
Foreign |
|
|
8,876 |
|
|
|
14,674 |
|
|
|
17,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,835 |
|
|
|
20,413 |
|
|
|
42,217 |
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal |
|
|
6,293 |
|
|
|
(97,126 |
) |
|
|
(774 |
) |
U.S. State and local |
|
|
920 |
|
|
|
(10,254 |
) |
|
|
341 |
|
Foreign |
|
|
(78 |
) |
|
|
620 |
|
|
|
(1,098 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
7,135 |
|
|
|
(106,760 |
) |
|
|
(1,531 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,970 |
|
|
$ |
(86,347 |
) |
|
$ |
40,686 |
|
|
|
|
|
|
|
|
|
|
|
Income tax expense relating to discontinued operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
U.S. |
|
$ |
1,659 |
|
|
$ |
|
|
|
$ |
1,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,659 |
|
|
$ |
|
|
|
$ |
1,719 |
|
|
|
|
|
|
|
|
|
|
|
The following schedule reconciles the differences between the U.S. federal income taxes at the
U.S. statutory rate to our income tax expense (benefit) (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Expected expense (benefit) at U.S. Statutory rate of 35% |
|
$ |
14,610 |
|
|
$ |
(114,126 |
) |
|
$ |
36,852 |
|
Change resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
State income tax expense (benefit), net of federal
income tax benefit |
|
|
960 |
|
|
|
(9,227 |
) |
|
|
2,323 |
|
Audits and adjustments, net |
|
|
(267 |
) |
|
|
2,641 |
|
|
|
347 |
|
Change in valuation allowance |
|
|
386 |
|
|
|
8,707 |
|
|
|
313 |
|
Foreign income taxed at different rates |
|
|
(230 |
) |
|
|
460 |
|
|
|
(170 |
) |
Non-deductible goodwill impairment charges |
|
|
|
|
|
|
25,785 |
|
|
|
|
|
Recapitalization of foreign subsidiary |
|
|
(2,141 |
) |
|
|
|
|
|
|
|
|
True-up of foreign deferred tax assets |
|
|
(1,224 |
) |
|
|
|
|
|
|
|
|
Non-deductible compensation |
|
|
(302 |
) |
|
|
751 |
|
|
|
1,657 |
|
Other, net |
|
|
(822 |
) |
|
|
(1,338 |
) |
|
|
(636 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
$ |
10,970 |
|
|
$ |
(86,347 |
) |
|
$ |
40,686 |
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
26.3 |
% |
|
|
26.5 |
% |
|
|
38.6 |
% |
The total income tax expense in 2009 includes the recognition of certain tax benefits,
including a net U.S. tax benefit of $2,141,000 related to the recapitalization of one of our
foreign operations, $1,544,000 related primarily to the true-up of foreign tax credits resulting
from the filing of our 2008 U.S. federal tax return and the recognition of certain tax benefits
resulting from the settlement of audits and a $1,224,000 tax benefit related to the true-up of
certain foreign tax deferred items.
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 these earnings are reinvested
and, in the opinion of management, will continue to be reinvested indefinitely outside of the U.S.
The undistributed earnings of foreign subsidiaries that are deemed to be indefinitely invested
outside of the U.S. were approximately $24,300,000 at December 31, 2009. It is not practicable to
determine the unrecognized deferred tax liability on those earnings.
65
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The significant components of deferred tax assets and liabilities are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Trade credits |
|
$ |
17,854 |
|
|
$ |
18,920 |
|
Net operating loss carryforwards |
|
|
13,347 |
|
|
|
14,096 |
|
Miscellaneous accruals |
|
|
12,551 |
|
|
|
12,886 |
|
Stock-based compensation |
|
|
3,212 |
|
|
|
8,107 |
|
Allowance for doubtful accounts and returns |
|
|
7,352 |
|
|
|
6,918 |
|
Foreign tax credit carryforwards |
|
|
10,182 |
|
|
|
9,043 |
|
Accrued vacation and other payroll liabilities |
|
|
1,098 |
|
|
|
3,458 |
|
Write-downs of inventories |
|
|
1,743 |
|
|
|
1,711 |
|
Depreciation allowance carryforwards |
|
|
1,336 |
|
|
|
1,440 |
|
Amortization of goodwill and other intangibles |
|
|
84,032 |
|
|
|
92,116 |
|
Other, net |
|
|
|
|
|
|
903 |
|
|
|
|
|
|
|
|
Gross deferred tax assets |
|
|
152,707 |
|
|
|
169,598 |
|
Valuation allowance |
|
|
(21,943 |
) |
|
|
(21,888 |
) |
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
130,764 |
|
|
|
147,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
(17,380 |
) |
|
|
(19,653 |
) |
Prepaid expenses |
|
|
(538 |
) |
|
|
(516 |
) |
Other, net |
|
|
(1,661 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(19,579 |
) |
|
|
(20,169 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
111,185 |
|
|
$ |
127,541 |
|
|
|
|
|
|
|
|
The net current and non-current portions of deferred tax assets and liabilities are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Net current deferred tax asset |
|
$ |
35,750 |
|
|
$ |
40,075 |
|
Net non-current deferred tax asset |
|
|
75,435 |
|
|
|
87,466 |
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
111,185 |
|
|
$ |
127,541 |
|
|
|
|
|
|
|
|
As of December 31, 2009, we have U.S. state net operating loss carryforwards (NOLs) of
$1,400,000 that will expire between 2010 and 2029. We also have NOLs from various non-U.S.
jurisdictions of $49,479,000. While the majority of the non-U.S. NOLs has no expiration date,
$1,815,000 will fully expire in 2019.
On the basis of currently available information, we have provided valuation allowances for
certain of our deferred tax assets where we believe it is more likely than not that the related tax
benefits will not be realized. At December 31, 2009 and 2008, our valuation allowances totaled
$21,943,000 and $21,888,000, respectively, representing certain U.S. state NOLs, non-U.S. NOLs,
foreign depreciation allowances and foreign tax credits. In the future, if we determine that
additional realization of these deferred tax assets is more likely than not, the reversal of the
related valuation allowance will reduce income tax expense. Changes that occur after acquisition
date in deferred tax asset valuation allowances and income tax uncertainties resulting from a
business combination will generally affect income tax expense.
We believe it is more likely than not that forecasted income, including income that may be
generated as a result of prudent and feasible tax planning strategies, together with the tax
effects of deferred tax liabilities, will be sufficient to fully recover our remaining deferred tax
assets. In the future, if we determine that realization of the remaining deferred tax asset and
the availability of certain previously paid taxes to be refunded are not more likely than not, we
will need to increase our valuation allowance and record additional income tax expense.
66
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the change in the valuation allowance (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Valuation allowance at beginning of year |
|
$ |
21,888 |
|
|
$ |
19,975 |
|
(Decreases) increases in income tax expense |
|
|
(501 |
) |
|
|
7,000 |
|
Valuation allowances of Software Spectrum/MINX |
|
|
|
|
|
|
(3,459 |
) |
Foreign currency translation adjustments |
|
|
556 |
|
|
|
(1,628 |
) |
|
|
|
|
|
|
|
Valuation allowance at end of year |
|
$ |
21,943 |
|
|
$ |
21,888 |
|
|
|
|
|
|
|
|
A net tax shortfall of $6,712,000 related to the exercise of employee stock options and other
employee stock programs was applied to stockholders equity during the year ended December 31,
2009. A tax shortfall of $2,737,000 and a tax benefit of $1,791,000 related to the exercise of
employee stock options and other employee stock programs were applied to stockholders equity in
the years ended December 31, 2008 and 2007, respectively.
Various taxing jurisdictions are examining our tax returns for certain tax years. Although
the outcome of tax audits cannot be predicted with certainty, management believes the ultimate
resolution of these examinations will not result in a material adverse effect to our financial
position or results of operations.
As of December 31, 2009 and 2008, we had approximately $5,923,000 and $4,300,000,
respectively, of unrecognized tax benefits. Of these amounts, approximately $330,000 and $400,000,
respectively, relate to accrued interest. A reconciliation of the beginning and ending amount of
unrecognized tax benefits, excluding interest, is as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
3,900 |
|
Additions for tax positions in prior periods |
|
|
1,510 |
|
Additions for tax positions in current period |
|
|
1,087 |
|
Additions due to foreign currency translation |
|
|
65 |
|
Subtractions due to audit settlements |
|
|
(969 |
) |
|
|
|
|
Balance at December 31, 2009 |
|
$ |
5,593 |
|
|
|
|
|
Our policy is to classify interest and penalties relating to uncertain tax positions as a
component of income tax expense (benefit) in our consolidated statements of operations.
As of December 31, 2009, if recognized, $5,314,000 of the liability associated with uncertain
tax positions of $5,923,000 would affect our effective tax rate. The remaining $609,000 balance
arose from business combinations that, if recognized, ultimately would be recorded as an adjustment
to an indemnification receivable with no effect on our effective tax rate. We do not believe there
will be any changes over the next twelve months that would have a material effect on our effective
tax rate.
Several of our subsidiaries are currently under audit for the 2002 through 2008 tax years. It
is reasonably possible that the examination phase of these audits may conclude in the next twelve
months and that the related unrecognized tax benefits for uncertain tax positions will decrease.
However, based on the status of the examinations, an estimate of the range of reasonably possible
outcomes cannot be made at this time.
We, including our subsidiaries, file income tax returns in the U.S. federal jurisdiction, and
many state and local and non-U.S. jurisdictions. In the U.S., federal income tax returns for 2007
through 2008 remain open to examination. For U.S. state and local as well as non-U.S.
jurisdictions, the statute of limitations generally varies between three and ten years.
67
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(11) Stock-Based Compensation
We recorded the following pre-tax amounts for stock-based compensation, by operating segment,
in our consolidated financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
North America (1) |
|
$ |
5,466 |
|
|
$ |
5,794 |
|
|
$ |
11,576 |
|
EMEA (1) |
|
|
2,137 |
|
|
|
1,985 |
|
|
|
2,704 |
|
APAC (1) |
|
|
161 |
|
|
|
206 |
|
|
|
305 |
|
|
|
|
|
|
|
|
|
|
|
Total Continuing Operations |
|
$ |
7,764 |
|
|
$ |
7,985 |
|
|
$ |
14,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Recorded in selling and administrative expenses. |
Company Plans
On October 1, 2007, Insights Board of Directors approved the 2007 Omnibus Plan (the 2007
Plan), and the 2007 Plan became effective when it was approved by Insights stockholders at the
annual meeting on November 12, 2007. On August 12, 2008, the 2007 Plan was amended to clarify
certain provisions relating to forfeiture restrictions and grants of discretionary awards to
non-employee directors. The 2007 Plan is administered by the Compensation Committee of Insights
Board of Directors, and, except as provided below, the Compensation Committee has the exclusive
authority to administer the 2007 Plan, including the power to determine eligibility, the types of
awards to be granted, the price and the timing of awards. Under the 2007 Plan, the Compensation
Committee may delegate some of its authority to our Chief Executive Officer to grant awards to
individuals other than individuals who are subject to the reporting requirements of Section 16(a)
of the Securities Exchange Act of 1934, as amended. Teammates, officers and members of the Board
of Directors are eligible for awards under the 2007 Plan, and consultants and independent
contractors are also eligible if they provide bona fide services that are not related to capital
raising or promoting or maintaining a market for the Companys stock. The 2007 Plan allows for
awards of options, stock appreciation rights, restricted stock, RSUs, performance awards as well as
grants of cash awards. A total of 4,250,000 shares of stock are reserved for awards issued under
the 2007 Plan. As of December 31, 2009, 2,902,703 shares of stock were available for grant under
the 2007 Plan.
In 1997, we established the 1998 Long-Term Incentive Plan (the 1998 LTIP) for our officers,
teammates, directors, consultants and independent contractors. The 1998 LTIP, as amended,
authorized grants of incentive stock options, non-qualified stock options, stock appreciation
rights, performance shares, restricted common stock and performance-based awards. In 1998 and
1999, we also established the 1998 Employee Restricted Stock Plan for our teammates, the 1998
Officer Restricted Stock Plan for our officers and the 1999 Broad Based Employee Stock Option Plan
for our teammates. Upon stockholder approval of the 2007 Plan in November 2007, as discussed
above, there will be no further grants under these plans.
Accounting for Stock Options
We had no grants of stock options during the years ended December 31, 2009 and 2008 and one
grant in December 2007. In valuing the December 2007 award, we assumed a dividend yield of 0%,
expected volatility of 36%, a risk-free interest rate of 3.4% and an expected life of 3.5 years.
We considered the historical volatility of our stock price in determining our expected volatility.
The risk-free interest rate assumption is based upon observed interest rates appropriate for the
term of the stock options. The expected life of stock options represents the weighted-average
period the stock options are expected to remain outstanding.
For the years ended December 31, 2009, 2008 and 2007, we recorded in continuing operations
stock-based compensation expense related to stock options, net of forfeitures, of $368,000,
$524,000 and $3,249,000, respectively. As of December 31, 2009, total compensation cost related to
nonvested stock options not yet recognized is $354,000, which is expected to be recognized over the
next 0.61 years on a weighted-average basis.
68
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Included in the amount for the year ended December 31, 2007 is $366,000 of cash payments made
in May through August 2007 to teammates whose stock options expired during the period that
registration statements for our stock plans were suspended as a result of the delay in the filing
of our Annual Report on Form 10-K for the year ended December
31, 2006 and $136,000 of cash payments made to teammates pursuant to a formal tender offer
(the Tender Offer) which allowed teammates to amend certain options that had been retroactively
priced. A total of 63 teammates participated in the Tender Offer. Pursuant to the Tender Offer,
the exercise price per share in effect for each tendered option was amended to the fair market
value per share of our common stock on the measurement date determined for that option for
financial accounting purposes. Each participant who had an option with an exercise price that was
amended, in late 2007, also became entitled to receive, in early 2008, a cash payment with respect
to that option to compensate them for the spread lost in the amendment. The amount of the cash
payment for each eligible option was calculated by multiplying (i) the amount by which the new
exercise price of the option was higher than the exercise price per share previously in effect for
that option, by (ii) the number of shares of our common stock that the holder could acquire under
that option.
During 2007, we also recognized non-cash stock-based compensation expense for a 90-day
extension of the post termination exercise period for stock options related to the retirement of
our former chief financial officer. The modification expense of $186,000 was recorded in severance
and restructuring expenses.
The following table summarizes our stock option activity during the year ended December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
|
Remaining |
|
|
|
Number |
|
|
Weighted Average |
|
|
Intrinsic Value |
|
|
Contractual |
|
|
|
Outstanding |
|
|
Exercise Price |
|
|
(in-the-money options) |
|
|
Life (in years) |
|
Outstanding at the beginning
of year |
|
|
2,536,673 |
|
|
$ |
19.47 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(1,947,249 |
) |
|
|
19.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of year |
|
|
589,424 |
|
|
|
18.82 |
|
|
$ |
|
|
|
|
1.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at the end of year |
|
|
522,758 |
|
|
|
18.96 |
|
|
$ |
|
|
|
|
1.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest |
|
|
582,631 |
|
|
|
18.83 |
|
|
$ |
|
|
|
|
1.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date
fair value for options
granted during 2007 |
|
$ |
5.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic
value, based on our closing stock price of $11.42 as of December 31, 2009, which would have been
received by the option holders had all option holders exercised options and sold the underlying
shares on that date. Options exercisable during 2009 and 2008 had no aggregate intrinsic value
because there were no in-the-money options. The aggregate intrinsic value for options exercisable
during 2007 was $1,921,000.
The following table summarizes the status of outstanding stock options as of December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Remaining |
|
|
Exercise |
|
|
Number of |
|
|
Exercise |
|
|
|
Options |
|
|
Contractual |
|
|
Price Per |
|
|
Options |
|
|
Price Per |
|
Range of Exercise Prices |
|
Outstanding |
|
|
Life (in years) |
|
|
Share |
|
|
Exercisable |
|
|
Share |
|
$13.94 - 17.34 |
|
|
38,009 |
|
|
|
0.96 |
|
|
$ |
15.46 |
|
|
|
38,009 |
|
|
$ |
15.46 |
|
17.76 - 17.77 |
|
|
200,833 |
|
|
|
2.95 |
|
|
$ |
17.77 |
|
|
|
134,167 |
|
|
$ |
17.77 |
|
17.79 - 18.64 |
|
|
142,443 |
|
|
|
0.24 |
|
|
$ |
18.44 |
|
|
|
142,443 |
|
|
$ |
18.44 |
|
18.65 - 18.65 |
|
|
120,079 |
|
|
|
0.34 |
|
|
$ |
18.65 |
|
|
|
120,079 |
|
|
$ |
18.65 |
|
18.80 - 41.00 |
|
|
88,060 |
|
|
|
0.71 |
|
|
$ |
23.52 |
|
|
|
88,060 |
|
|
$ |
23.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
589,424 |
|
|
|
1.30 |
|
|
$ |
18.82 |
|
|
|
522,758 |
|
|
$ |
18.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Accounting for Restricted Stock
We have issued shares of restricted common stock and RSUs as incentives to certain officers
and teammates. We recognize compensation expense associated with the issuance of such shares and
RSUs over the vesting period for each respective share and RSU. Compensation expense related to
service-based RSUs is recognized on a straight-line basis over the requisite service period for the
entire award. Compensation expense related to performance-based RSUs is recognized on a
straight-line basis over the requisite service period for each separately vesting portion of the
award as if the award was, in-substance, multiple awards (i.e., a graded vesting basis). The total
compensation expense associated with restricted stock represents the value based upon the number of
shares or RSUs awarded multiplied by the closing price of our common stock on the date of grant.
Recipients of restricted stock shares are entitled to receive any dividends declared on our common
stock and have voting rights, regardless of whether such shares have vested. Recipients of RSUs do
not have voting or dividend rights until the vesting conditions are satisfied and shares are
released.
Starting in 2006, we have elected to primarily issue service-based and performance-based RSUs
instead of stock options and restricted stock shares. The number of RSUs ultimately awarded under
the performance-based RSUs will vary based on whether we achieve certain financial results. We
will record compensation expense each period based on the market price of our common stock on the
grant date and our estimate of the most probable number of RSUs that will be issued under the
grants of performance-based RSUs. Additionally, the compensation expense is adjusted for our
estimate of forfeitures.
For the years ended December 31, 2009, 2008 and 2007, we recorded in continuing operations
stock-based compensation expense, net of estimated forfeitures, related to restricted stock shares
and RSUs of $7,396,000, $7,461,000 and $10,834,000, respectively. As of December 31, 2009, total
compensation cost related to nonvested RSUs not yet recognized is $3,429,000, which is expected to
be recognized over the next 1.02 years on a weighted-average basis.
On January 23, 2008, the Compensation Committee of our Board of Directors approved a special
long-term incentive award for the former Chief Executive Officer, the former President of our North
America/APAC operating segments and the President of our EMEA operating segment. The plan provided
for the award of RSUs that were to be issued based upon achievement of specific stock price hurdles
within specific timeframes over a three-year period from 2009 2011. For the year ended December
31, 2008, we recorded stock-based compensation expense related to these RSUs of $961,000, which is
included in the 2008 stock-based compensation expense amount discussed above. However, due to the
economic climate and the decrease in Insights stock price, on February 19, 2009, the three
executives agreed to forfeit the awards, resulting in the termination of the awards. Accordingly,
no shares were, or will be, issued under these awards. A non-cash charge of $5,478,000 as a result
of the cancellation of these awards is included in selling and administrative expenses in the
Consolidated Statement of Operations for the year ended December 31, 2009.
The following table summarizes our restricted stock activity, including restricted stock
shares and RSUs, during the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Number |
|
|
Grant Date Fair Value |
|
|
Fair Value |
|
Nonvested at the beginning of year |
|
|
1,520,156 |
|
|
$ |
13.71 |
|
|
|
|
|
Granted |
|
|
1,234,022 |
|
|
$ |
3.14 |
|
|
|
|
|
Vested, including shares withheld
to cover taxes |
|
|
(488,320 |
) |
|
$ |
17.10 |
|
|
$ |
2,785,111 |
(a) |
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(1,139,061 |
) |
|
$ |
8.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at the end of year |
|
|
1,126,797 |
|
|
$ |
5.95 |
|
|
$ |
12,868,022 |
(b) |
|
|
|
|
|
|
|
|
|
|
|
Expected to vest |
|
|
1,003,257 |
|
|
$ |
|
|
|
$ |
11,457,195 |
(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. The
aggregate intrinsic value for vested restricted stock shares and RSUs during 2008 and 2007
was $7,733,859 and $5,319,942, respectively. |
|
(b) |
|
The aggregate fair value of the nonvested RSUs and the RSUs expected to vest
represents the total pre-tax fair value, based on our closing stock price of $11.42 as of
December 31, 2009, which would have been received by holders of RSUs had all such holders sold
their underlying shares on that date. |
70
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During the years ended December 31, 2009 and 2008, the restricted stock shares and RSUs that
vested for teammates in the United States were net-share settled such that we withheld shares with
value equivalent to the teammates minimum statutory United States tax obligation for the
applicable income and other employment taxes and remitted the cash to the appropriate taxing
authorities. The total shares withheld during the years ended December 31, 2009 and 2008 of
126,986 and 120,492, respectively, were based on the value of the restricted stock shares or RSUs
on their vesting dates as determined by our closing stock price on such dates. For the years ended
December 31, 2009 and 2008, total payments for the employees tax obligations to the taxing
authorities were $691,000 and $2,120,000, respectively, and are reflected as a financing activity
within the Consolidated Statements of Cash Flows. These net-share settlements had the effect of
repurchases of our 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 an expense to us.
Change in Accounting Estimate
In the fourth quarter of 2009, we recorded a reduction of stock-based compensation expense of
$1,060,000 as a result of a change in our estimate of future forfeitures.
(12) 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
hedges for hedge accounting.
We use foreign exchange forward contracts to hedge certain non-functional currency assets and
liabilities from changes in exchange rate movements. Our non-functional currency assets and
liabilities are primarily related to foreign currency denominated payables, receivables, and cash
balances. The foreign currency forward contracts, carried at fair value, typically have a maturity
of one month or less. We currently enter into approximately four foreign exchange forward
contracts per month with an average notional value of $7,500,000 and an average maturity of
approximately one week.
The counterparties associated with our foreign exchange forward contracts are large credit
worthy commercial banks. The derivatives transacted with these institutions are short in duration
and therefore we do not consider counterparty concentration and non-performance to be material
risks.
The following table summarizes our derivative financial instruments as of December 31, 2009
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
Balance Sheet Location |
|
|
Fair Value |
|
|
Balance Sheet Location |
|
|
Fair Value |
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
Other current assets |
|
$ |
105 |
|
|
Accrued expenses and other current liabilities |
|
$ |
65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging instruments |
|
|
|
|
|
$ |
105 |
|
|
|
|
|
|
$ |
65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the effect of our derivative financial instruments on our
results of operations during the year ended December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loss Recognized in |
|
|
|
|
|
|
|
Earnings on Derivatives |
|
Derivatives Not Designated as |
|
Location of Loss Recognized |
|
|
Year Ended |
|
Hedging Instruments |
|
in Earnings on Derivatives |
|
|
December 31, 2009 |
|
Foreign exchange forward contracts |
|
Net foreign currency exchange (gain) loss |
|
|
$ |
2,702 |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
2,702 |
|
|
|
|
|
|
|
|
|
71
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
(13) |
|
Fair Value Measurements |
The following table summarizes the valuation of our financial instruments by the following
three categories as of December 31, 2009 and 2008 (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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Prices |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Value as of |
|
|
in Active |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
December 31, |
|
|
Markets |
|
|
Inputs |
|
|
Inputs |
|
|
Balance Sheet |
|
|
|
2009 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Classification |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Derivatives |
|
$ |
105 |
|
|
$ |
|
|
|
$ |
105 |
|
|
$ |
|
|
|
Other current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets at Fair Value |
|
$ |
105 |
|
|
$ |
|
|
|
$ |
105 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Derivatives |
|
$ |
65 |
|
|
$ |
|
|
|
$ |
65 |
|
|
$ |
|
|
|
Accrued expenses and other current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities at Fair Value |
|
$ |
65 |
|
|
$ |
|
|
|
$ |
65 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Prices |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Value as of |
|
|
in Active |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
December 31, |
|
|
Markets |
|
|
Inputs |
|
|
Inputs |
|
|
Balance Sheet |
|
|
|
2008 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Classification |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Derivatives |
|
$ |
228 |
|
|
$ |
|
|
|
$ |
228 |
|
|
$ |
|
|
|
Other current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets at Fair Value |
|
$ |
228 |
|
|
$ |
|
|
|
$ |
228 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Derivatives |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Accrued expenses and
other current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities at Fair Value |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have elected to use the income approach to value the foreign exchange derivatives,
using observable Level 2 market expectations at the measurement date and standard valuation
techniques to convert future amounts to a single present value amount assuming that participants
are motivated, but not compelled, to transact. Level 2 inputs for the valuations are limited to
quoted prices for similar assets or liabilities in active markets and inputs other than quoted
prices that are observable for the asset or liability (specifically LIBOR rates, foreign exchange
rates, and foreign exchange forward points). Mid-market pricing is used as a practical expedient
for fair value measurements. Fair value measurement of an asset or liability must reflect the
nonperformance risk of the entity and the counterparty. Therefore, the impact of the
counterpartys creditworthiness when in an asset position and the Companys creditworthiness when
in a liability position has also been factored into the fair value measurement of the derivative
instruments and did not have a material impact on the fair value of these derivative instruments.
Both the counterparty and the Company are expected to continue to perform under the contractual
terms of the instruments.
As of December 31, 2009, we have no nonfinancial assets or liabilities that are measured on a
recurring basis and our other financial assets or liabilities generally consist of cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses and other current
liabilities. The estimated fair values of our cash and cash equivalents is determined based on
quoted prices in active markets for identical assets. The fair value of the other financial assets
and liabilities is based on the value that would be received or paid in an orderly transaction
between market participants and approximates the carrying value due to their nature and short
duration.
(14) Benefit Plans
We have adopted a defined contribution benefit plan (the Defined Contribution Plan) which
complies with section 401(k) of the Internal Revenue Code. On March 7, 2009, the Company suspended
discretionary matching contributions to the Defined Contribution Plan. Prior to March 2009, we
made discretionary matching contributions at the rate of 25% of the teammates pre-tax
contributions up to a maximum of 6% of eligible compensation per pay period. Contribution expense
under this plan was $380,000, $2,014,000 and $1,691,000 for the years ended December 31, 2009, 2008
and 2007, respectively.
72
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In November 2007, we established the Insight Nonqualified Deferred Compensation Plan
(Deferred Compensation Plan) with an effective date of January 1, 2008. The Deferred
Compensation Plan permits a select group of management or highly compensated employees as defined
by the Employee Retirement Income Security Act of 1974, as amended, to voluntarily defer receipt of
compensation and earn a rate of return on their deferred amounts based on their selection from a
variety of independently managed funds. All amounts in this plan are employee contributions and
all gains or losses on amounts held in the Deferred Compensation Plan are fully allocable to plan
participants. We do not provide a guaranteed rate of return on these deferred amounts nor do we
make any contributions to the Deferred Compensation Plan. As of December 31, 2009 and 2008, the
Deferred Compensation Plan related assets were $1,166,000 and $301,000, respectively. Liabilities
related to the Deferred Compensation Plan as of December 31, 2009 and 2008 were $857,000 and
$520,000, respectively.
(15) Share Repurchase Program
On December 5, 2005, our Board of Directors authorized the repurchase of up to $50,000,000 of
our common stock. During the year ended December 31, 2007, we purchased 1,955,646 shares of our
common stock on the open market at an average price of $25.57 per share, which represented the full
amount authorized under the repurchase program. All shares repurchased were retired.
On November 13, 2007, our Board of Directors authorized the repurchase of up to $50,000,000 of
our common stock through September 30, 2008. During the year ended December 31, 2008, we purchased
3,493,500 shares of our common stock on the open market at an average price of $14.31 per share,
which represented the full amount authorized under the repurchase program. All shares repurchased
were retired. We did not repurchase any shares of our common stock during 2009.
(16) Commitments and Contingencies
Contractual
We have entered into a sponsorship agreement through 2013 with the Valley of the Sun Bowl
Foundation, d/b/a Insight Bowl, which is the not-for-profit entity that conducts the Insight Bowl
post-season intercollegiate football game. We have committed to pay an aggregate amount of
approximately $5,700,000 through 2013 for sponsorship arrangements, ticket purchases and
miscellaneous expenses.
We have committed to pay the Arizona Cardinals an aggregate amount of approximately $6,600,000
through February 2014 for advertising and marketing events at the University of Phoenix stadium.
In the ordinary course of business, we issue performance bonds to secure our performance under
certain contracts or state tax requirements. As of December 31, 2009 and 2008, we had approximately
$14,116,000 and $24,623,000, respectively, of performance bonds outstanding. These bonds are issued
on our behalf by a surety company on an unsecured basis; however, if the surety company is ever
required to pay out under the bonds, we have contractually agreed to reimburse the surety company.
Employment Contracts 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.
Guaranties
In the ordinary course of business, we may guarantee the indebtedness of our subsidiaries to
vendors and clients. We have not recorded specific liabilities for these guaranties in the
consolidated financial statements because we have recorded the underlying liabilities associated
with the guaranties. In the event we are required to perform under the related contracts, we
believe the cost of such performance would not have a material adverse effect on our consolidated
financial position or results of operations.
73
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Indemnifications
From time to time, in the ordinary course of business, we enter into contractual arrangements
under which we agree to indemnify either our clients or third-party service providers from certain
losses incurred relating to services performed on our behalf or for losses arising from defined
events, which may include litigation or claims relating to past performance. These arrangements
include, but are not limited to, the indemnification of our landlords for certain claims arising
from our use of leased facilities and the indemnification of the lenders that provide our credit
facilities for certain claims arising from their extension of credit to us. Such indemnification
obligations may not be subject to maximum loss clauses.
Management believes that payments, if any, related to these indemnifications are not probable
at December 31, 2009. 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 individuals in connection with any action arising out of such individuals status or
service as our executive officers or directors (subject to exceptions such as where the individuals
failed to act in good faith or in a manner the individuals reasonably believed to be in or not
opposed to the best interests of the Company) and to advance expenses incurred by such individuals
with respect to which such individuals may be entitled to indemnification by us. Other than the
pending purported class action litigation, the State derivative actions and the Federal derivative
action discussed under Legal Proceedings below, there are no pending legal proceedings that
involve the indemnification of any of the Companys directors or officers.
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. 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 this report.
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. The plaintiffs in two of these lawsuits voluntarily dismissed their complaints in May and
June 2009, and the court appointed a lead plaintiff and lead counsel on June 24, 2009. The
plaintiff in the remaining action amended their class action complaint in September 2009. The
amended complaint seeks unspecified damages and asserts claims under the federal securities laws
relating to our February 9, 2009 announcement that we expected to restate our financial statements
for the year ended December 31, 2007 and for the first three quarters of 2008 and that the
restatement would include a material reduction of retained earnings. In addition to claims
relating to our earlier restatement, the amended complaint also includes additional allegations
regarding other purported accounting and revenue recognition issues during the class period. The
amended complaint also contends that we issued false and misleading financial statements and issued
misleading public statements about our results of operations, and it adds our independent
registered public accounting firm as a defendant. All defendants have filed motions to dismiss the
amended complaint, and oral argument on the motions to dismiss is currently calendared for March
2010. In June 2009, we were notified that three shareholder derivative lawsuits had been filed,
two in the Superior Court in Maricopa County, Arizona (the State derivative actions) and one in
the U.S. District Court for the District of Arizona (the Federal derivative action), by persons
identifying themselves as Insight shareholders and purporting to act on behalf of Insight, naming
Insight as a nominal defendant and current and former officers and directors as defendants.
Initially, the three derivative action complaints, like the purported class action complaint,
primarily arose out of our February 9, 2009 announcement. The two State derivative actions were
consolidated into a single action, and the plaintiff filed an amended complaint on the consolidated
action on October 30, 2009 that alleges breaches of fiduciary duties of loyalty and good faith,
breach of fiduciary duties for insider selling and misappropriation of information, and unjust
enrichment. In November 2009, the plaintiffs moved to appoint themselves as lead plaintiffs,
their counsel as lead counsel, and their local counsel as liaison counsel. We opposed this
motion as unnecessary. Also in November 2009, we moved to stay the State derivative actions
pending the resolution of the Federal derivative action. The Court heard oral argument on both
motions on February 18, 2010 and took both motions under advisement. The Federal derivative action
was dismissed without prejudice, and the judge gave the
74
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
plaintiff thirty days (through February 8,
2010) to file a second amended complaint. On February 8, 2010, the plaintiff filed the second amended complaint, which omitted
claims arising from the February 9, 2009 announcement and instead focused primarily on our prior
investigation of historical stock option granting practices. The amount of damages sought by the
plaintiffs is not specified in the complaints. In July and September 2009, we received, from the
plaintiff in the Federal derivative action, separate demands to inspect our books and records
pursuant to Section 220 of the Delaware General Corporation Law, and we objected to both demands as
improper. In November 2009, that same plaintiff also filed a lawsuit in the Court of Chancery of
the State of Delaware seeking to compel the inspection of certain books and records. In January
2010, we filed a motion to dismiss that complaint, and oral argument on the motions to dismiss is
currently calendared for March 2010. 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.
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.
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.
(17) Supplemental Financial Information
A summary of additions and deductions related to the allowances for doubtful accounts
receivable for the years ended December 31, 2009, 2008 and 2007 follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
Beginning |
|
|
|
|
|
|
|
|
|
|
End of |
|
|
|
of Year |
|
|
Additions |
|
|
Deductions |
|
|
Year |
|
Allowance for doubtful accounts receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009 |
|
$ |
20,156 |
|
|
$ |
7,377 |
|
|
$ |
(5,169 |
) |
|
$ |
22,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008 |
|
$ |
22,831 |
|
|
$ |
3,452 |
|
|
$ |
(6,127 |
) |
|
$ |
20,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 |
|
$ |
23,211 |
|
|
$ |
2,646 |
|
|
$ |
(3,026 |
) |
|
$ |
22,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18) |
|
Segment and Geographic 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 currently only include
software and select software-related services. Net sales by product or service type for North
America, EMEA and APAC were as follows for the years ended December 31, 2009 and 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
EMEA |
|
|
APAC |
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
Sales Mix |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Hardware |
|
$ |
1,689,526 |
|
|
$ |
2,127,694 |
|
|
$ |
387,813 |
|
|
$ |
460,122 |
|
|
$ |
1,025 |
|
|
$ |
338 |
|
Software |
|
|
916,876 |
|
|
|
1,049,538 |
|
|
|
750,019 |
|
|
|
837,028 |
|
|
|
141,120 |
|
|
|
152,586 |
|
Services |
|
|
234,384 |
|
|
|
185,312 |
|
|
|
13,917 |
|
|
|
12,215 |
|
|
|
2,225 |
|
|
|
656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,840,786 |
|
|
$ |
3,362,544 |
|
|
$ |
1,151,749 |
|
|
$ |
1,309,365 |
|
|
$ |
144,370 |
|
|
$ |
153,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have not disclosed net sales amounts by product or service type for the year ended December
31, 2007, as it is impracticable for us to do so.
The method for determining what information regarding operating segments, products and
services, geographic areas of operation and major clients to report is based upon the management
approach, or the way that management organizes the operating segments within a company, for which
separate financial information is evaluated regularly by
the Chief Operating Decision Maker (CODM) in deciding how to allocate resources. Our CODM
is our Chief Executive Officer.
75
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 year ended December 31, 2009.
A portion of our operating segments selling and administrative expenses arise from shared
services and infrastructure that we have historically provided to them in order to realize
economies of scale and to use resources efficiently. These expenses, collectively identified as
corporate charges, include senior management expenses, internal audit, legal, tax, insurance
services, treasury and other corporate infrastructure expenses. Charges are allocated to our
operating segments, and the allocations have been determined on a basis that we considered to be a
reasonable reflection of the utilization of services provided to or benefits received by the
operating segments.
The tables below present information about our reportable operating segments as of and for the
years ended December 31, 2009, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009 |
|
|
|
North |
|
|
|
|
|
|
|
|
|
|
|
|
America |
|
|
EMEA |
|
|
APAC |
|
|
Consolidated |
|
Net sales |
|
$ |
2,840,786 |
|
|
$ |
1,151,749 |
|
|
$ |
144,370 |
|
|
$ |
4,136,905 |
|
Costs of goods sold |
|
|
2,451,069 |
|
|
|
992,640 |
|
|
|
124,582 |
|
|
|
3,568,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
389,717 |
|
|
|
159,109 |
|
|
|
19,788 |
|
|
|
568,614 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
346,306 |
|
|
|
140,380 |
|
|
|
15,416 |
|
|
|
502,102 |
|
Severance and restructuring expenses |
|
|
10,327 |
|
|
|
2,979 |
|
|
|
302 |
|
|
|
13,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations |
|
$ |
33,084 |
|
|
$ |
15,750 |
|
|
$ |
4,070 |
|
|
$ |
52,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,358,096 |
|
|
$ |
462,095 |
|
|
$ |
58,843 |
|
|
$ |
1,879,034 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 |
|
|
|
North |
|
|
|
|
|
|
|
|
|
|
|
|
America |
|
|
EMEA |
|
|
APAC |
|
|
Consolidated |
|
Net sales |
|
$ |
3,362,544 |
|
|
$ |
1,309,365 |
|
|
$ |
153,580 |
|
|
$ |
4,825,489 |
|
Costs of goods sold |
|
|
2,913,358 |
|
|
|
1,118,692 |
|
|
|
129,856 |
|
|
|
4,161,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
449,186 |
|
|
|
190,673 |
|
|
|
23,724 |
|
|
|
663,583 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
391,629 |
|
|
|
152,617 |
|
|
|
17,741 |
|
|
|
561,987 |
|
Goodwill impairment |
|
|
323,422 |
|
|
|
59,852 |
|
|
|
13,973 |
|
|
|
397,247 |
|
Severance and restructuring expenses |
|
|
4,633 |
|
|
|
3,923 |
|
|
|
39 |
|
|
|
8,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
$ |
(270,498 |
) |
|
$ |
(25,719 |
) |
|
$ |
(8,029 |
) |
|
$ |
(304,246 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,280,771 |
|
|
$ |
447,789 |
|
|
$ |
49,422 |
|
|
$ |
1,777,982 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
76
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 |
|
|
|
North |
|
|
|
|
|
|
|
|
|
|
|
|
America |
|
|
EMEA |
|
|
APAC |
|
|
Consolidated |
|
Net sales |
|
$ |
3,367,998 |
|
|
$ |
1,329,682 |
|
|
$ |
107,794 |
|
|
$ |
4,805,474 |
|
Costs of goods sold |
|
|
2,904,835 |
|
|
|
1,154,916 |
|
|
|
87,097 |
|
|
|
4,146,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
463,163 |
|
|
|
174,766 |
|
|
|
20,697 |
|
|
|
658,626 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
383,390 |
|
|
|
143,611 |
|
|
|
15,321 |
|
|
|
542,322 |
|
Severance and restructuring expenses |
|
|
2,960 |
|
|
|
(429 |
) |
|
|
64 |
|
|
|
2,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations |
|
$ |
76,813 |
|
|
$ |
31,584 |
|
|
$ |
5,312 |
|
|
$ |
113,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,387,773 |
|
|
$ |
578,820 |
|
|
$ |
52,013 |
|
|
$ |
3,018,606 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Consolidated total assets do not reflect intercompany eliminations and corporate assets
of $275,713,000, $170,479,000 and $1,127,876,000 at December 31, 2009, 2008 and 2007,
respectively. |
The following is a summary of our geographic continuing operations net sales and long-lived
assets, consisting of property and equipment, net (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
Foreign |
|
|
Total |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
2,681,043 |
|
|
$ |
1,455,862 |
|
|
$ |
4,136,905 |
|
Total long-lived assets |
|
$ |
117,186 |
|
|
$ |
32,917 |
|
|
$ |
150,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
3,163,758 |
|
|
$ |
1,661,731 |
|
|
$ |
4,825,489 |
|
Total long-lived assets |
|
$ |
131,171 |
|
|
$ |
26,163 |
|
|
$ |
157,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
3,160,992 |
|
|
$ |
1,644,482 |
|
|
$ |
4,805,474 |
|
Total long-lived assets |
|
$ |
125,044 |
|
|
$ |
34,696 |
|
|
$ |
159,740 |
|
Foreign net sales and property and equipment summarized above for 2009, 2008 and 2007 include
net sales and property and equipment, net of $580,386,000 and $21,075,000; $653,458,000 and $16,425,000 and
$718,286,000 and $22,993,000, respectively, attributed to the United Kingdom. Net sales by
geographic area are presented by attributing net sales to external customers based on the domicile
of the selling location.
We recorded the following pre-tax amounts, by operating segment, for depreciation and
amortization, in the accompanying consolidated financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
North America |
|
$ |
34,125 |
|
|
$ |
33,675 |
|
|
$ |
26,992 |
|
EMEA |
|
|
6,420 |
|
|
|
6,882 |
|
|
|
6,954 |
|
APAC |
|
|
618 |
|
|
|
682 |
|
|
|
717 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
41,163 |
|
|
$ |
41,239 |
|
|
$ |
34,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19) |
|
Discontinued Operations |
PC Wholesale
On March 1, 2007, we completed the sale of PC Wholesale, a division of our North America
operating segment that sells to other resellers. The sale of PC Wholesale was consistent with our
strategic plan as we had concluded that selling IT products to other resellers is not a core
element of our strategy. The transaction generated proceeds of $28,631,000. In the fourth quarter
of 2007, we resolved certain post-closing contingencies and recognized an additional gain on the
sale of PC Wholesale of $350,000, $264,000 net of taxes. This resolution required a cash payment
of $900,000 that was made in 2008.
77
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We have reported the results of operations of PC Wholesale as a discontinued operation in the
consolidated statements of operations for all periods presented. We did not allocate interest,
general corporate overhead expense or non-specific partner funding to the discontinued operation.
The following amounts for the year ended December 31, 2007 represent PC Wholesales results of
operations and have been segregated from continuing operations and reflected as a discontinued
operation (in thousands):
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
|
2007 |
|
Net sales |
|
$ |
30,142 |
|
Costs of goods sold |
|
|
29,092 |
|
|
|
|
|
Gross profit |
|
|
1,050 |
|
Operating expenses: |
|
|
|
|
Selling and administrative expenses |
|
|
768 |
|
|
|
|
|
Earnings from discontinued operation |
|
|
282 |
|
Gain on sale |
|
|
5,587 |
|
|
|
|
|
Earnings from discontinued operation, including gain on sale,
before income tax expense |
|
|
5,869 |
|
Income tax expense |
|
|
2,267 |
|
|
|
|
|
Net earnings from discontinued operation, including gain on sale |
|
$ |
3,602 |
|
|
|
|
|
Direct Alliance
During the year ended December 31, 2009, we recorded earnings from a discontinued operation of
$4,460,000, $2,801,000 net of tax, as a result of the favorable settlement on July 7, 2009 of an
arbitrated claim related to the sale of Direct Alliance, a former subsidiary that was sold on June
30, 2006. The amount recognized was net of payments to holders of 1,997,500 exercised stock
options of the former subsidiary and a broker success fee with respect to the settlement totaling
$540,000. In December 2009, we received a reimbursement of legal fees associated with the
arbitration settlement of $1,414,000. Such amount was recorded as a reduction of selling and
administrative expenses in the accompanying consolidated statement of operations for the year ended
December 31, 2009.
In connection with the sale of Direct Alliance, we entered into a lease agreement with Direct
Alliance pursuant to which Direct Alliance leases from us the facilities it used prior to the sale.
The parent company that bought Direct Alliance is the guarantor under the lease. Lease income
related to these buildings was $1,633,000, $1,594,000 and $1,257,000 for the years ended December
31, 2009, 2008 and 2007, respectively, and is classified as net sales. Depreciation expense
related to the buildings was $748,000, $687,000 and $731,000 for the years ended December 31, 2009,
2008 and 2007, respectively, and is classified as costs of goods sold.
A tax benefit of $548,000 was recorded in 2007 related to a reduction in state taxes in
connection with the sale of Direct Alliance.
78
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(20) Selected Quarterly Financial Information (unaudited)
The following tables set forth selected unaudited consolidated quarterly financial information
for the years ended December 31, 2009 and 2008 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
|
Dec. 31, |
|
|
Sept. 30, |
|
|
June 30, |
|
|
Mar. 31, |
|
|
Dec. 31, |
|
|
Sept. 30, |
|
|
June 30, |
|
|
Mar. 31, |
|
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
Net sales |
|
$ |
1,178,648 |
|
|
$ |
969,935 |
|
|
$ |
1,037,162 |
|
|
$ |
951,160 |
|
|
$ |
1,160,350 |
|
|
$ |
1,165,056 |
|
|
$ |
1,396,585 |
|
|
$ |
1,103,498 |
|
Costs of goods sold |
|
|
1,023,136 |
|
|
|
836,449 |
|
|
|
889,318 |
|
|
|
819,388 |
|
|
|
1,003,421 |
|
|
|
1,010,966 |
|
|
|
1,195,643 |
|
|
|
951,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
155,512 |
|
|
|
133,486 |
|
|
|
147,844 |
|
|
|
131,772 |
|
|
|
156,929 |
|
|
|
154,090 |
|
|
|
200,942 |
|
|
|
151,622 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
127,271 |
|
|
|
117,623 |
|
|
|
123,865 |
|
|
|
133,343 |
|
|
|
134,511 |
|
|
|
139,137 |
|
|
|
152,878 |
|
|
|
135,461 |
|
Goodwill impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,471 |
|
|
|
|
|
|
|
313,776 |
|
|
|
|
|
Severance and restructuring expenses |
|
|
1,137 |
|
|
|
3,994 |
|
|
|
2,130 |
|
|
|
6,347 |
|
|
|
3,187 |
|
|
|
|
|
|
|
3,508 |
|
|
|
1,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
|
27,104 |
|
|
|
11,869 |
|
|
|
21,849 |
|
|
|
(7,918 |
) |
|
|
(64,240 |
) |
|
|
14,953 |
|
|
|
(269,220 |
) |
|
|
14,261 |
|
Non-operating (income) expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
(91 |
) |
|
|
(45 |
) |
|
|
(188 |
) |
|
|
(100 |
) |
|
|
(646 |
) |
|
|
(440 |
) |
|
|
(700 |
) |
|
|
(601 |
) |
Interest expense |
|
|
4,369 |
|
|
|
2,333 |
|
|
|
1,988 |
|
|
|
2,100 |
|
|
|
3,839 |
|
|
|
3,062 |
|
|
|
3,912 |
|
|
|
2,666 |
|
Net foreign currency exchange (gain) loss |
|
|
(208 |
) |
|
|
93 |
|
|
|
(162 |
) |
|
|
(51 |
) |
|
|
6,204 |
|
|
|
3,307 |
|
|
|
1,055 |
|
|
|
(937 |
) |
Other expense, net |
|
|
425 |
|
|
|
217 |
|
|
|
202 |
|
|
|
279 |
|
|
|
320 |
|
|
|
297 |
|
|
|
171 |
|
|
|
319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations
before income taxes |
|
|
22,609 |
|
|
|
9,271 |
|
|
|
20,009 |
|
|
|
(10,146 |
) |
|
|
(73,957 |
) |
|
|
8,727 |
|
|
|
(273,658 |
) |
|
|
12,814 |
|
Income tax expense (benefit) |
|
|
5,204 |
|
|
|
1,999 |
|
|
|
7,116 |
|
|
|
(3,349 |
) |
|
|
5,465 |
|
|
|
2,130 |
|
|
|
(98,583 |
) |
|
|
4,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from continuing operations |
|
|
17,405 |
|
|
|
7,272 |
|
|
|
12,893 |
|
|
|
(6,797 |
) |
|
|
(79,422 |
) |
|
|
6,597 |
|
|
|
(175,075 |
) |
|
|
8,173 |
|
Net earnings from a discontinued operation |
|
|
|
|
|
|
|
|
|
|
2,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
17,405 |
|
|
$ |
7,272 |
|
|
$ |
15,694 |
|
|
$ |
(6,797 |
) |
|
$ |
(79,422 |
) |
|
$ |
6,597 |
|
|
$ |
(175,075 |
) |
|
$ |
8,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from continuing operations |
|
$ |
0.38 |
|
|
$ |
0.16 |
|
|
$ |
0.28 |
|
|
$ |
(0.15 |
) |
|
$ |
(1.74 |
) |
|
$ |
0.14 |
|
|
$ |
(3.76 |
) |
|
$ |
0.17 |
|
Net earnings from a discontinued operation |
|
|
|
|
|
|
|
|
|
|
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share |
|
$ |
0.38 |
|
|
$ |
0.16 |
|
|
$ |
0.34 |
|
|
$ |
(0.15 |
) |
|
$ |
(1.74 |
) |
|
$ |
0.14 |
|
|
$ |
(3.76 |
) |
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from continuing operations |
|
$ |
0.37 |
|
|
$ |
0.16 |
|
|
$ |
0.28 |
|
|
$ |
(0.15 |
) |
|
$ |
(1.74 |
) |
|
$ |
0.14 |
|
|
$ |
(3.76 |
) |
|
$ |
0.17 |
|
Net earnings from a discontinued operation |
|
|
|
|
|
|
|
|
|
|
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share |
|
$ |
0.37 |
|
|
$ |
0.16 |
|
|
$ |
0.34 |
|
|
$ |
(0.15 |
) |
|
$ |
(1.74 |
) |
|
$ |
0.14 |
|
|
$ |
(3.76 |
) |
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21) Subsequent Events
We evaluated subsequent events for their effect on the accompanying consolidated financial
statements and notes thereto through the date of the filing of our annual report on Form 10-K for
the year ended December 31, 2009 on February 24, 2010. No events requiring adjustment to
or disclosure in these consolidated financial statements and related notes were identified.
79
INSIGHT ENTERPRISES, INC.
|
|
|
Item 9. |
|
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None.
|
|
|
Item 9A. |
|
Controls and Procedures |
(a) Managements Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting (as such term is defined under Rules 13a-15(f) and 15d-15(f) of the Securities
Exchange Act of 1934, as amended (the Exchange Act)). Our management, including our Chief
Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our
internal control over financial reporting as of December 31, 2009. In making this assessment, our
management used the criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management has
concluded that the Company maintained effective internal control over financial reporting as of
December 31, 2009, based on the criteria established in COSOs Internal Control Integrated
Framework.
KPMG LLP, the independent registered public accounting firm that audited the Consolidated
Financial Statements in Part II, Item 8 of this report, has issued an attestation report on the
Companys internal control over financial reporting as of December 31, 2009.
(b) Changes in Internal Control Over Financial Reporting
Subsequent to December 31, 2008, we took several steps to remediate the material weakness
identified as of December 31, 2008 in our internal control over financial reporting related to the
proper disposition, reconciliation, monitoring and consequent accounting of aged trade credits.
Inadequate understanding of the Companys unclaimed property obligations and unsupported
assumptions regarding trade credits resulted in the following control deficiencies which, when
considered in the aggregate, resulted in a material weakness in our internal control over financial
reporting as of December 31, 2008:
|
|
|
Inadequate policies and procedures to timely determine the proper disposition of all
overpayments and duplicate payments received from clients; |
|
|
|
Inadequate policies and procedures to timely reconcile and determine the proper
disposition of all credit memos issued to clients in exchange for returned products,
billing errors and other customer service reasons; |
|
|
|
Inadequate policies and procedures to timely determine the proper disposition of all
goods received/accepted by the Company for which no invoice has been received; |
|
|
|
Inadequate policies and procedures to timely reconcile and determine the proper
disposition of all open purchase orders; and |
|
|
|
Ineffective monitoring of the effectiveness of our policies and procedures relating to
aged trade credits. |
The Company has completed its investigation into the trade credits issue, and subsequent to
December 31, 2008, has taken steps to remediate the aforementioned material weakness. We have
implemented internal control improvements in several areas. Some additional planned improvements
will require systems enhancements that will take some time to implement. In the interim, the
Company has implemented improved manual controls to ensure that the aged trade credits are
accounted for in compliance with all legal and accounting requirements.
Subsequent to December 31, 2008, improvements have been made in the following areas:
|
|
|
Discontinued the practice of taking certain aged trade credits into the statement of
operations as a reduction to costs of goods sold unless we are legally released from our
obligation or we determine that the credit is an error, such that no credit or other
obligation in fact exists; |
|
|
|
Implemented and documented policies and procedures to research and properly dispose of
customer credits and outstanding purchase orders, including an escalation procedure if a
credit remains unresolved for an extended period; |
|
|
|
Identified and implemented system enhancements to strengthen control procedures, reduce
the volume of manual processes and increase the automated tools available to accounting
personnel, including (i) automating the issuance of credit memos to clients, (ii)
automating the matching of credit memos against related/applicable debits, (iii) increasing
communication and workflow between the operations group and the collections
department related to returned goods and (iv) streamlining and conforming policies and
procedures across all business units; |
80
INSIGHT ENTERPRISES, INC.
|
|
|
Developed a training program to ensure appropriate personnel understand the systems
enhancements and the new policies, procedures and controls related to aged trade credits; |
|
|
|
Implemented a robust and comprehensive unclaimed property reporting methodology to
timely and accurately comply with all applicable state laws; and |
|
|
|
Enhanced our monitoring controls to more promptly identify and adequately respond to
changes in the Companys operations and business processes resulting from systems
improvements and/or upgrades, acquisitions or business mix. |
The following changes in internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) implemented during the quarter ended December
31, 2009 have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting:
|
|
|
Completed implementing policies and procedures to research and properly dispose of
customer credits and outstanding purchase orders and comply with unclaimed property laws,
including an escalation procedure if a credit remains unresolved for an extended period; |
|
|
|
Completed implementing system enhancements, including (i) automating the issuance of
credit memos to clients, (ii) automating the matching of credit memos against
related/applicable debits when the amounts are equal and (iii) streamlining and conforming
policies and procedures across all business units; and |
|
|
|
Completed the rollout of training programs to ensure appropriate personnel understand
the systems enhancements and the new policies, procedures and controls related to aged
trade credits. |
We have completed all of the actions necessary to remediate the material weakness in internal
control over financial reporting and have tested the controls for effectiveness.
(c) Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended) that are designed to ensure that information required
to be disclosed in our reports to the SEC is recorded, processed, summarized and reported within
the time periods specified in the SECs rules and forms, and that such information is accumulated
and communicated to our management, including our principal executive officer and our principal
financial and accounting officer, as appropriate, to allow timely decisions regarding required
disclosure.
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
December 31, 2009 our disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the SECs
rules and forms and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure.
(d) Inherent Limitations of Disclosure Controls and Internal Control Over Financial Reporting
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Projections of any evaluation of effectiveness to future periods are
subject to risks that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
|
|
|
Item 9B. |
|
Other Information |
None.
81
INSIGHT ENTERPRISES, INC.
PART III
|
|
|
Item 10. |
|
Directors, Executive Officers and Corporate Governance |
The information required by this item and included under the captions Information
Concerning Directors and Executive Officers, Meetings of the Board and Its Committees,
Section 16(a) Beneficial Ownership Reporting Compliance and Code of Ethics and can be found in
our definitive Proxy Statement relating to our 2010 Annual Meeting of Stockholders (our Proxy
Statement) and is incorporated herein by reference.
|
|
|
Item 11. |
|
Executive Compensation |
The information required by this item and included under the captions Meetings of the
Board and Its Committees, Compensation Discussion and Analysis, Compensation Committee Report,
Compensation Committee Interlocks and Insider Participation, Summary Compensation Table,
Grants of Plan Based Awards, Outstanding Equity Awards at Fiscal Year-End, Option Exercises
and Stock Vested, Director Compensation and Employment Agreements, Severance and Change in
Control Plans, can be found in our Proxy Statement and is incorporated herein by reference.
|
|
|
Item 12. |
|
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters |
The information required by this item and included under the captions Securities
Authorized for Issuance Under Equity Compensation Plans and Security Ownership of Certain
Beneficial Owners and Management can be found in our Proxy Statement and is incorporated herein by
reference.
|
|
|
Item 13. |
|
Certain Relationships and Related Transactions, and Director Independence |
The information required by this item and included under the caption Meetings of the
Board and Its Committees, and Transactions With Related Persons, Promoters and Certain Control
Persons can be found in our Proxy Statement and is incorporated herein by reference.
|
|
|
Item 14. |
|
Principal Accountant Fees and Services |
The information required by this item and included under the captions Audit Committee
Report and Relationship with Independent Registered Public Accounting Firm can be found in our
Proxy Statement and is incorporated herein by reference.
PART IV
|
|
|
Item 15. |
|
Exhibits and Financial Statement Schedules |
(a) Financial Statements and Schedules
The Consolidated Financial Statements of Insight Enterprises, Inc. and subsidiaries and the
related Reports of Independent Registered Public Accounting Firm are filed herein as set forth
under Part II, Item 8 of this report.
Financial statement schedules have been omitted since they are either not required, not
applicable, or the information is otherwise included in the Consolidated Financial Statements or
notes thereto.
(b) Exhibits
The exhibits list in the Index to Exhibits immediately following the signature page is
incorporated herein by reference as the list of exhibits required as part of this report.
82
INSIGHT ENTERPRISES, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
|
|
|
INSIGHT ENTERPRISES, INC.
|
|
|
By: |
/s/ Kenneth T. Lamneck
|
|
|
|
Kenneth T. Lamneck |
|
|
|
Chief Executive Officer |
|
Dated: February 24, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Kenneth T. Lamneck
Kenneth T. Lamneck
|
|
President, Chief Executive Officer and
Director
|
|
February 24, 2010 |
|
|
|
|
|
/s/ Glynis A. Bryan
|
|
Chief Financial Officer
|
|
February 24, 2010 |
|
|
(principal financial officer and
principal accounting officer) |
|
|
|
|
|
|
|
/s/ Timothy A. Crown*
|
|
Chairman of the Board
|
|
February 24, 2010 |
|
|
|
|
|
|
|
|
|
|
/s/ Bennett Dorrance*
|
|
Director
|
|
February 24, 2010 |
|
|
|
|
|
|
|
|
|
|
/s/ Michael M. Fisher*
|
|
Director
|
|
February 24, 2010 |
|
|
|
|
|
|
|
|
|
|
/s/ Larry A. Gunning*
|
|
Director
|
|
February 24, 2010 |
|
|
|
|
|
|
|
|
|
|
/s/ Anthony F. Ibargüen*
|
|
Director
|
|
February 24, 2010 |
|
|
|
|
|
|
|
|
|
|
/s/ Robertson C. Jones*
|
|
Director
|
|
February 24, 2010 |
|
|
|
|
|
|
|
|
|
|
/s/ Kathleen S. Pushor*
|
|
Director
|
|
February 24, 2010 |
|
|
|
|
|
|
|
|
|
|
/s/ David J. Robino*
|
|
Director
|
|
February 24, 2010 |
|
|
|
|
|
|
|
|
|
|
/s/ Robert F. Woods*
|
|
Director
|
|
February 24, 2010 |
|
|
|
|
|
|
|
|
|
|
* |
By: |
/s/ Steven R. Andrews
|
|
|
|
Steven R. Andrews, Attorney in Fact |
|
83
INSIGHT ENTERPRISES, INC.
EXHIBITS TO FORM 10-K
YEAR ENDED DECEMBER 31, 2009
Commission File No. 0-25092
(Unless otherwise noted, exhibits are filed herewith.)
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
No. |
|
Description |
|
3.1 |
|
|
|
|
Composite Certificate of Incorporation of
Registrant (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 the Registrant
(incorporated by reference to Exhibit 3.1 of our
current report on Form 8-K filed on January 14,
2008). |
|
3.3 |
|
|
|
|
Form of Certificate of Designation of Series A
Preferred Stock (incorporated by reference to
Exhibit 5 of our Registration Statement on Form 8-A
(no. 00-25092) filed on March 17, 1999). |
|
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) |
|
|
|
Form of Indemnification Agreement (incorporated
by reference to Exhibit 10.1 of our annual report on
Form 10-K for the year ended December 31, 2006). |
|
10.2 |
(2) |
|
|
|
1998 Employee Restricted Stock Plan (incorporated
by reference to Exhibit 99.3 of our Form S-8 (No.
333-69113) filed on December 17, 1998). |
|
10.3 |
(2) |
|
|
|
1998 Officer Restricted Stock Plan (incorporated
by reference to Exhibit 99.2 of our Form S-8 (No.
333-69113) filed on December 17, 1998). |
|
10.4 |
(2) |
|
|
|
1999 Broad Based Employee Stock Option Plan
(incorporated by reference to Exhibit 10.14 of our
annual report on Form 10-K for the year ended
December 31, 1999). |
|
10.5 |
(2) |
|
|
|
1998 Long-Term Incentive Plan (incorporated by
reference to Exhibit 99.1 of our Registration
Statement on Form S-8 (No. 333-110915) declared effective December 4, 2004). |
|
10.6 |
(2) |
|
|
|
2007 Omnibus Plan (incorporated by reference to
Annex A of our Proxy Statement filed on October 9,
2007). |
|
10.7 |
(2) |
|
|
|
First Amendment to 2007 Omnibus Plan (incorporated
by reference to Exhibit 10.4 of our quarterly report
on Form 10-Q for the quarter ended September 30,
2008). |
|
10.8 |
(2) |
|
|
|
Executive Service Agreement between Insight
Direct UK Limited and Stuart Fenton dated September
12, 2002 (incorporated by reference to Exhibit 10.31
of our annual report on Form 10-K for the year ended
December 31, 2002). |
|
10.9 |
(2) |
|
|
|
Amendment to Executive Service Agreement between
Insight Direct (UK) and Stuart Fenton dated as of
March 1, 2005 and effective July 1, 2004
(incorporated by reference to Exhibit 10.25 of our
annual report on Form 10-K for the year ended
December 31, 2004). |
|
10.10 |
(2) |
|
|
|
Release and Severance Agreement between Insight
Enterprises, Inc. and Catherine Eckstein
(incorporated by reference to Exhibit 10.3 of our
quarterly report on Form 10-Q for the quarter ended
June 30, 2008). |
|
10.11 |
(2) |
|
|
|
Executive Management Separation Plan effective
as of January 1, 2008 (incorporated by reference to
Exhibit 10.5 for our quarterly report on Form 10-Q for
the quarter ended September 30, 2008). |
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10.12 |
(2) |
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Amended and Restated Employment Agreement
between Insight Enterprises, Inc. and Richard A.
Fennessy dated as of January 1, 2009 (incorporated
by reference to Exhibit 10.1 of our current report
on Form 8-K filed on January 7, 2009). |
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10.13 |
(2) |
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Separation and General Release Agreement by and
between Insight Enterprises, Inc. and Richard A.
Fennessy dated as of September 7, 2009 (incorporated
by reference to Exhibit 10.1 of our current report
on Form 8-K filed on September 8, 2009). |
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10.14 |
(2) |
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Amended and Restated Employment Agreement
between Insight Direct USA, Inc. and Mark T.
McGrath dated as of January 1, 2009 (incorporated by
reference to Exhibit 10.2 of our current report on
Form 8-K filed on January 7, 2009). |
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10.15 |
(2) |
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Release and Severance Agreement by and
between Insight Direct USA, Inc. and Mark T. McGrath dated as of March 1, 2009. |
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10.16 |
(2) |
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Amended and Restated Employment Agreement
between Insight Enterprises, Inc. and Glynis A.
Bryan dated as of January 1, 2009 (incorporated by
reference to Exhibit 10.3 of our current report on
Form 8-K filed January 7, 2009). |
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10.17 |
(2) |
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Amended and Restated Employment Agreement
between Insight Enterprises, Inc. and Steven R.
Andrews dated as of January 1, 2009 (incorporated by
reference to Exhibit 10.4 of our current report on
Form 8-K filed on January 7, 2009). |
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10.18 |
(2) |
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