Item 1. Financial Statements.
INSIGHT ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
173,910
|
|
|
$
|
187,978
|
|
Accounts receivable, net of allowance for doubtful accounts of $11,026 and $11,872,
respectively
|
|
|
1,050,866
|
|
|
|
1,315,094
|
|
Inventories
|
|
|
129,452
|
|
|
|
119,820
|
|
Inventories not available for sale
|
|
|
52,453
|
|
|
|
51,756
|
|
Other current assets
|
|
|
85,147
|
|
|
|
77,011
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,491,828
|
|
|
|
1,751,659
|
|
Property and equipment, net of accumulated depreciation and amortization of $298,292 and $291,643,
respectively
|
|
|
85,975
|
|
|
|
88,281
|
|
Goodwill
|
|
|
56,195
|
|
|
|
56,195
|
|
Intangible assets, net of accumulated amortization of $98,516 and $94,406, respectively
|
|
|
23,790
|
|
|
|
26,983
|
|
Deferred income taxes
|
|
|
62,927
|
|
|
|
62,986
|
|
Other assets
|
|
|
28,452
|
|
|
|
27,913
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,749,167
|
|
|
$
|
2,014,017
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payabletrade
|
|
$
|
609,882
|
|
|
$
|
905,464
|
|
Accounts payableinventory financing facility
|
|
|
102,064
|
|
|
|
106,327
|
|
Accrued expenses and other current liabilities
|
|
|
122,315
|
|
|
|
144,633
|
|
Current portion of long-term debt
|
|
|
1,206
|
|
|
|
1,535
|
|
Deferred revenue
|
|
|
53,627
|
|
|
|
50,166
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
889,094
|
|
|
|
1,208,125
|
|
Long-term debt
|
|
|
141,171
|
|
|
|
89,000
|
|
Deferred income taxes
|
|
|
197
|
|
|
|
239
|
|
Other liabilities
|
|
|
31,222
|
|
|
|
30,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,061,684
|
|
|
|
1,328,275
|
|
|
|
|
|
|
|
|
|
|
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; 36,832 shares at March 31, 2016 and
37,106 shares at December 31, 2015 issued and outstanding
|
|
|
368
|
|
|
|
371
|
|
Additional paid-in capital
|
|
|
313,273
|
|
|
|
316,686
|
|
Retained earnings
|
|
|
406,459
|
|
|
|
408,721
|
|
Accumulated other comprehensive loss foreign currency translation adjustments
|
|
|
(32,617
|
)
|
|
|
(40,036
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
687,483
|
|
|
|
685,742
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,749,167
|
|
|
$
|
2,014,017
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
1
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net sales
|
|
$
|
1,168,982
|
|
|
$
|
1,219,679
|
|
Costs of goods sold
|
|
|
1,007,874
|
|
|
|
1,057,866
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
161,108
|
|
|
|
161,813
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
|
|
146,119
|
|
|
|
140,796
|
|
Severance and restructuring expenses
|
|
|
1,356
|
|
|
|
723
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
13,633
|
|
|
|
20,294
|
|
Non-operating (income) expense:
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
(250
|
)
|
|
|
(154
|
)
|
Interest expense
|
|
|
1,848
|
|
|
|
1,738
|
|
Net foreign currency exchange loss
|
|
|
616
|
|
|
|
613
|
|
Other expense, net
|
|
|
268
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
11,151
|
|
|
|
17,766
|
|
Income tax expense
|
|
|
4,263
|
|
|
|
6,815
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
6,888
|
|
|
$
|
10,951
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.19
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.18
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculations:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37,075
|
|
|
|
39,673
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
37,386
|
|
|
|
39,994
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
2
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net earnings
|
|
$
|
6,888
|
|
|
$
|
10,951
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
7,419
|
|
|
|
(16,882
|
)
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$
|
14,307
|
|
|
$
|
(5,931
|
)
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
3
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
6,888
|
|
|
$
|
10,951
|
|
Adjustments to reconcile net earnings to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
10,180
|
|
|
|
9,542
|
|
Provision for losses on accounts receivable
|
|
|
608
|
|
|
|
1,083
|
|
Write-downs of inventories
|
|
|
967
|
|
|
|
826
|
|
Non-cash stock-based compensation
|
|
|
2,799
|
|
|
|
2,323
|
|
Excess tax benefit from employee gains on stock-based compensation
|
|
|
(258
|
)
|
|
|
(345
|
)
|
Deferred income taxes
|
|
|
(1
|
)
|
|
|
31
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease in accounts receivable
|
|
|
265,222
|
|
|
|
239,253
|
|
Increase in inventories
|
|
|
(11,334
|
)
|
|
|
(18,079
|
)
|
Increase in other assets
|
|
|
(8,259
|
)
|
|
|
(11,456
|
)
|
Decrease in accounts payable
|
|
|
(297,714
|
)
|
|
|
(198,530
|
)
|
Increase in deferred revenue
|
|
|
3,370
|
|
|
|
7,384
|
|
Decrease in accrued expenses and other liabilities
|
|
|
(19,655
|
)
|
|
|
(22,165
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(47,187
|
)
|
|
|
20,818
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(2,896
|
)
|
|
|
(3,194
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,896
|
)
|
|
|
(3,194
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings on senior revolving credit facility
|
|
|
214,920
|
|
|
|
158,410
|
|
Repayments on senior revolving credit facility
|
|
|
(214,920
|
)
|
|
|
(138,910
|
)
|
Borrowings on accounts receivable securitization financing facility
|
|
|
516,000
|
|
|
|
409,100
|
|
Repayments on accounts receivable securitization financing facility
|
|
|
(465,000
|
)
|
|
|
(395,100
|
)
|
Repayments under other financing agreements
|
|
|
(632
|
)
|
|
|
|
|
Payments on capital lease obligations
|
|
|
(56
|
)
|
|
|
(55
|
)
|
Net (repayments) borrowings under inventory financing facility
|
|
|
(4,263
|
)
|
|
|
22,505
|
|
Excess tax benefit from employee gains on stock-based compensation
|
|
|
258
|
|
|
|
345
|
|
Payment of payroll taxes on stock-based compensation through shares withheld
|
|
|
(2,098
|
)
|
|
|
(1,826
|
)
|
Repurchases of common stock
|
|
|
(13,461
|
)
|
|
|
(38,559
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
30,748
|
|
|
|
15,910
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange effect on cash and cash equivalent balances
|
|
|
5,267
|
|
|
|
(11,932
|
)
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(14,068
|
)
|
|
|
21,602
|
|
Cash and cash equivalents at beginning of period
|
|
|
187,978
|
|
|
|
164,524
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
173,910
|
|
|
$
|
186,126
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation and Recently Issued Accounting Standards
We are a Fortune 500-ranked global provider of hardware, software, Cloud and service solutions to business, government,
healthcare and educational clients. 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
|
Our offerings in North America and select countries in EMEA include hardware, software and services. Our
offerings in the remainder of our EMEA segment and in APAC are largely software and select software-related services.
In the opinion of
management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly our financial position as of March 31, 2016, and our results of operations and cash flows for the three months ended
March 31, 2016 and 2015. The consolidated balance sheet as of December 31, 2015 was derived from the audited consolidated balance sheet at such date. The accompanying unaudited consolidated financial statements and notes have been prepared
in accordance with the rules and regulations promulgated by the Securities and Exchange Commission and consequently do not include all of the disclosures normally required by United States generally accepted accounting principles (GAAP).
The results of operations for interim periods are not necessarily indicative of results for the full year, due in part to the seasonal
nature of our business. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the related notes thereto, in our Annual Report on Form 10-K for the year ended
December 31, 2015. Our results of operations include the results of BlueMetal Architects, Inc. (BlueMetal) from its acquisition date of October 1, 2015.
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.
The preparation of consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Additionally, these
estimates and assumptions affect the reported amounts of net sales and expenses during the 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, valuation of inventories, 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.
Recently Issued Accounting Standards
In
February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-02, Leases (Topic 842), which supersedes the lease recognition requirements in Accounting Standards
Codification Topic 840, Leases. The core principal of the guidance is that an entity should recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative
disclosures. The standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within such fiscal years. Early adoption is permitted. The guidance is to be applied using a modified retrospective
transition method with the option to elect a number of practical expedients. We are in the process of determining the effect that the adoption of ASU 2016-02 will have on our consolidated financial statements and disclosures and have not yet
selected our planned transition approach or the timing of adoption.
5
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
In March 2016, FASB issued ASU No. 2016-09, Improvements to Employee
Share-Based Payment Accounting (Topic 718). This ASU simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the
statement of cash flows. This ASU requires that excess tax benefits and deficiencies be recognized as income tax benefit or expense in the income statement, and, therefore, we anticipate increased income tax expense volatility after adoption of this
ASU. The guidance is effective in 2017 with early adoption permitted. We are currently evaluating the effect of this guidance on our financial statements and the timing of adoption.
There have been no other material changes or additions to the recently issued accounting standards as previously reported in Note 1 to our
Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2015 that affect or may affect our financial statements.
2. Net Earnings Per Share (EPS)
Basic EPS is computed by dividing net earnings available to common stockholders by the weighted average number of common
shares outstanding during each period. Diluted EPS is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method.
Dilutive potential common shares include outstanding restricted stock units (RSUs). A reconciliation of the denominators of the basic and diluted EPS calculations follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
6,888
|
|
|
$
|
10,951
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares used to compute basic EPS
|
|
|
37,075
|
|
|
|
39,673
|
|
Dilutive potential common shares due to dilutive RSUs, net of tax effect
|
|
|
311
|
|
|
|
321
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to compute diluted EPS
|
|
|
37,386
|
|
|
|
39,994
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.19
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.18
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2016, 138,000 of our RSUs were not included in the diluted EPS
calculations because their inclusion would have been anti-dilutive. There were no anti-dilutive RSUs for the three months ended March 31, 2015. These share-based awards could be dilutive in the future.
6
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
3. Debt, Capital Leases and Other Financing Obligations
Debt
Our long-term
debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Senior revolving credit facility
|
|
$
|
|
|
|
$
|
|
|
Accounts receivable securitization financing facility
|
|
|
140,000
|
|
|
|
89,000
|
|
Capital leases and other financing obligations
|
|
|
2,377
|
|
|
|
1,535
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
142,377
|
|
|
|
90,535
|
|
Less: current portion of capital leases and other financing obligations
|
|
|
(1,206
|
)
|
|
|
(1,535
|
)
|
Less: current portion of revolving credit facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
141,171
|
|
|
$
|
89,000
|
|
|
|
|
|
|
|
|
|
|
Our senior revolving credit facility (revolving facility) has an aggregate U.S. dollar equivalent
maximum borrowing capacity amount of $350,000,000 and matures on April 26, 2017.
Our accounts receivable securitization financing
facility (the ABS facility) has a maximum borrowing capacity of $200,000,000 and matures on June 30, 2017. While the ABS facility has a stated maximum amount, the actual availability under the ABS facility is limited by the quantity
and quality of the underlying accounts receivable. As of March 31, 2016, qualified receivables were sufficient to permit access to the full $200,000,000 facility amount, of which $140,000,000 was outstanding.
Our consolidated debt balance that can be outstanding at the end of any fiscal quarter under our revolving 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 our trailing twelve month net earnings (loss) plus (i) interest expense,
excluding non-cash imputed interest on our inventory financing facility, (ii) income tax expense (benefit), (iii) depreciation and amortization, (iv) non-cash stock-based compensation and (v) extraordinary or non-recurring
non-cash losses or expenses (adjusted earnings). The maximum leverage ratio permitted under the facilities is 2.75 times our trailing twelve-month adjusted earnings. A significant drop in our 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 our consolidated maximum facility amount. Based on our maximum leverage ratio as of March 31, 2016, our aggregate debt balance that could
have been outstanding under our revolving facility and our ABS facility was reduced from the maximum borrowing capacity of $550,000,000 to $455,123,000, of which $140,000,000 was outstanding at March 31, 2016.
Capital Lease
In March 2016, we entered
into a new capitalized lease with a 36-month term for certain IT equipment. The obligation under the capitalized lease is included in long-term debt in our consolidated balance sheet as of March 31, 2016. 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, has been excluded from our consolidated statement of cash flows for the three months ended March 31, 2016.
7
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
4. Severance and Restructuring Activities
During the three months ended March 31, 2016, we recorded severance expense associated with the realignment of certain
roles and responsibilities, primarily cost reduction initiatives across our U.S. business.
The following table details the activity
related to these resource actions for the three months ended March 31, 2016 and the outstanding obligations as of March 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
EMEA
|
|
|
APAC
|
|
|
Consolidated
|
|
Balances at December 31, 2015
|
|
$
|
505
|
|
|
$
|
2,983
|
|
|
$
|
|
|
|
$
|
3,488
|
|
Severance costs, net of adjustments
|
|
|
1,217
|
|
|
|
24
|
|
|
|
115
|
|
|
|
1,356
|
|
Cash payments
|
|
|
(253
|
)
|
|
|
(1,278
|
)
|
|
|
(66
|
)
|
|
|
(1,597
|
)
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at March 31, 2016
|
|
$
|
1,469
|
|
|
$
|
1,784
|
|
|
$
|
49
|
|
|
$
|
3,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments were recorded as a reduction to severance and restructuring expense in North America and EMEA of
$4,000 and $63,000, respectively, in the three months ended March 31, 2016, due to changes in estimates.
The remaining outstanding
obligations are expected to be paid during the next 12 months and, therefore, are included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets.
5. Stock-Based Compensation
We recorded the following pre-tax amounts in selling and administrative expenses for stock-based compensation, by operating
segment, in the accompanying consolidated financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
North America
|
|
$
|
2,097
|
|
|
$
|
1,731
|
|
EMEA
|
|
|
591
|
|
|
|
502
|
|
APAC
|
|
|
111
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
2,799
|
|
|
$
|
2,323
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016, total compensation cost related to nonvested RSUs not yet recognized is
$22,961,000, which is expected to be recognized over the next 1.46 years on a weighted-average basis.
8
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes our RSU activity during the three months ended March 31,
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Weighted Average
Grant Date Fair Value
|
|
|
Fair Value
|
|
Nonvested at January 1, 2016
|
|
|
951,784
|
|
|
$
|
24.35
|
|
|
|
|
|
Granted
(a)
|
|
|
421,356
|
|
|
|
25.82
|
|
|
|
|
|
Vested, including shares withheld to cover taxes
|
|
|
(311,325
|
)
|
|
|
23.48
|
|
|
$
|
8,017,180
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(5,218
|
)
|
|
|
24.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2016
(a)
|
|
|
1,056,597
|
|
|
|
25.19
|
|
|
$
|
30,260,938
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest
|
|
|
930,483
|
|
|
|
|
|
|
$
|
26,649,033
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes 125,410 RSUs subject to remaining performance conditions. The number of RSUs subject to performance conditions are based on the Company achieving 100% of its 2016 targeted financial results. The number of RSUs
ultimately awarded under the performance-based RSUs varies based on actual achieved financial results for 2016.
|
(b)
|
The aggregate 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.
|
(c)
|
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 $28.64 as of
March 31, 2016, which would have been received by holders of RSUs had all such holders sold their underlying shares on that date.
|
6. Income Taxes
Our effective tax rate for the three months ended March 31, 2016 and 2015 was 38.2% and 38.4%, respectively. For
the three months ended March 31, 2016 and 2015, our effective tax rate was higher than the United States federal statutory rate of 35.0% due primarily to state income taxes, net of federal benefit. Additionally, the effect of lower taxes on
earnings in foreign jurisdictions was offset partially by losses in certain foreign jurisdictions, resulting in an increase in the valuation allowance for deferred tax assets related to these foreign operating losses.
As of March 31, 2016 and December 31, 2015, we had approximately $3,490,000 and $3,335,000, respectively, of unrecognized tax
benefits. Of these amounts, approximately $330,000 and $296,000, respectively, related to accrued interest.
Several of our subsidiaries
are currently under audit for tax years 2006 through 2014. Although the timing of the resolutions and/or closures of audits is highly uncertain, it is reasonably possible that the examination phase of these audits may be concluded within the next 12
months, which could significantly increase or decrease the balance of our gross unrecognized tax benefits. However, based on the status of the various examinations in multiple jurisdictions, an estimate of the range of reasonably possible outcomes
cannot be made at this time, but the estimated effect on our income tax expense and net earnings is not expected to be significant.
7. Share Repurchase Programs
In February 2016, our Board of Directors authorized the repurchase of up to $50,000,000 of our common stock. During the
three months ended March 31, 2016, we purchased 504,504 shares of our common stock on the open market at a total cost of approximately $13,461,000 (an average price of $26.68 per share). As of March 31, 2016, approximately $36,539,000
remains available for repurchases of our common stock. There is no stated expiration date of this repurchase program. Any share repurchases may be made on the open market, through block trades, through 10b5-1 plans or otherwise. The amount of shares
purchased and the timing of the purchases will be based on working capital requirements, general business conditions and other factors. We intend to retire the repurchased shares. All shares repurchased during the three months ended March 31,
2016 were retired.
9
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
During the comparative three months ended March 31, 2015, under previously authorized
share repurchase programs, we purchased 1,468,218 shares of our common stock at a total cost of approximately $38,559,000 (an average price of $26.26 per share). All shares repurchased were retired.
8. Commitments and Contingencies
Contractual
In the
ordinary course of business, we issue performance bonds to secure our performance under certain contracts or state tax requirements. As of March 31, 2016, we had approximately $2,108,000 of performance bonds outstanding. These bonds are issued
on our behalf by a surety company on an unsecured basis; however, if the surety company is ever required to pay out under the bonds, we have contractually agreed to reimburse 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 outstanding nonvested RSUs would accelerate following a change in control. If severance
payments under the current employment agreements or plan payments were to become payable, the severance payments would generally range from three to twenty-four months of salary.
Indemnifications
From time to time, in
the ordinary course of business, we enter into contractual arrangements under which we agree to indemnify either our clients or third-party service providers from certain losses incurred relating to services performed on our behalf or for losses
arising from defined events, which may include litigation or claims relating to past performance. These arrangements include, but are not limited to, the indemnification of our clients for certain claims arising out of our performance under our
sales contracts, the indemnification of our landlords for certain claims arising from our use of leased facilities and the indemnification of the lenders that provide our credit facilities for certain claims arising from their extension of credit to
us. Such indemnification obligations may not be subject to maximum loss clauses.
Management believes that payments, if any, related to
these indemnifications are not probable at March 31, 2016. Accordingly, we have not accrued any liabilities related to such indemnifications in our consolidated financial statements.
We have entered into separate indemnification agreements with certain of 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 incurred by such individual in connection with any action arising out of such
individuals status or service as our executive officer or director (subject to exceptions such as where the individual failed to act in good faith or in a manner the individual reasonably believed to be in, or not opposed to, the best
interests of the Company) and to advance expenses incurred by such individual with respect to which such individual may be entitled to indemnification by us. There are no pending legal proceedings that involve the indemnification of any of the
Companys directors or officers.
Contingencies Related to Third-Party Review
From time to time, we are subject to potential claims and assessments from third parties. We are also subject to various governmental, client
and partner 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.
10
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Legal Proceedings
From time to time, we are party to various legal proceedings arising in the ordinary course of business, including preference payment claims
asserted in client bankruptcy proceedings, indemnification claims, claims of alleged infringement of patents, trademarks, copyrights and other intellectual property rights, claims of alleged non-compliance with contract provisions and claims related
to alleged violations of laws and regulations. We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable or there is a reasonable possibility that a loss, or an additional loss, may
have been incurred and determine if accruals are appropriate. If accruals are not appropriate, we further evaluate each legal proceeding to assess whether an estimate of possible loss or range of possible loss can be made for disclosure. Although
litigation is inherently unpredictable, we believe that we have adequate provisions for any probable and estimable losses. It is possible, nevertheless, that our consolidated financial position, results of operations or liquidity could be
materially and adversely affected in any particular period by the resolution of a legal proceeding. Legal expenses related to defense, negotiations, settlements, rulings and advice of outside legal counsel are expensed as incurred.
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 business, financial condition or results of operations.
9. Segment Information
We operate in three reportable geographic operating segments: North America; EMEA; and APAC. Our offerings in North America
and select countries in EMEA include IT hardware, software and services. Our offerings in the remainder of our EMEA segment and in APAC are largely software and select software-related services. Net sales by product or service type for North
America, EMEA and APAC were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
EMEA
|
|
|
APAC
|
|
|
|
Three Months Ended
March 31,
|
|
|
Three Months Ended
March 31,
|
|
|
Three Months Ended
March 31,
|
|
Sales Mix
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Hardware
|
|
$
|
518,021
|
|
|
$
|
505,252
|
|
|
$
|
120,047
|
|
|
$
|
145,984
|
|
|
$
|
3,663
|
|
|
$
|
1,926
|
|
Software
|
|
|
243,368
|
|
|
|
258,492
|
|
|
|
174,048
|
|
|
|
198,460
|
|
|
|
33,531
|
|
|
|
38,822
|
|
Services
|
|
|
65,499
|
|
|
|
58,965
|
|
|
|
9,265
|
|
|
|
10,398
|
|
|
|
1,540
|
|
|
|
1,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
826,888
|
|
|
$
|
822,709
|
|
|
$
|
303,360
|
|
|
$
|
354,842
|
|
|
$
|
38,734
|
|
|
$
|
42,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All significant intercompany transactions are eliminated upon consolidation, and there are no differences
between the accounting policies used to measure profit and loss for our segments or on a consolidated basis. Net sales are defined as net sales to external clients. None of our clients exceeded ten percent of consolidated net sales for the three
months ended March 31, 2016 or 2015.
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.
11
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following tables present our results of operations by reportable operating segment for
the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
|
North America
|
|
|
EMEA
|
|
|
APAC
|
|
|
Consolidated
|
|
Net sales
|
|
$
|
826,888
|
|
|
$
|
303,360
|
|
|
$
|
38,734
|
|
|
$
|
1,168,982
|
|
Costs of goods sold
|
|
|
715,145
|
|
|
|
259,934
|
|
|
|
32,795
|
|
|
|
1,007,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
111,743
|
|
|
|
43,426
|
|
|
|
5,939
|
|
|
|
161,108
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
|
|
100,041
|
|
|
|
40,679
|
|
|
|
5,399
|
|
|
|
146,119
|
|
Severance and restructuring expenses
|
|
|
1,217
|
|
|
|
24
|
|
|
|
115
|
|
|
|
1,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
$
|
10,485
|
|
|
$
|
2,723
|
|
|
$
|
425
|
|
|
$
|
13,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
|
|
|
North America
|
|
|
EMEA
|
|
|
APAC
|
|
|
Consolidated
|
|
Net sales
|
|
$
|
822,709
|
|
|
$
|
354,842
|
|
|
$
|
42,128
|
|
|
$
|
1,219,679
|
|
Costs of goods sold
|
|
|
711,193
|
|
|
|
310,031
|
|
|
|
36,642
|
|
|
|
1,057,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
111,516
|
|
|
|
44,811
|
|
|
|
5,486
|
|
|
|
161,813
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
|
|
92,402
|
|
|
|
42,757
|
|
|
|
5,637
|
|
|
|
140,796
|
|
Severance and restructuring expenses
|
|
|
405
|
|
|
|
318
|
|
|
|
|
|
|
|
723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations
|
|
$
|
18,709
|
|
|
$
|
1,736
|
|
|
$
|
(151
|
)
|
|
$
|
20,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of our total assets by reportable operating segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
North America
|
|
$
|
1,808,435
|
|
|
$
|
1,999,485
|
|
EMEA
|
|
|
453,292
|
|
|
|
543,146
|
|
APAC
|
|
|
104,367
|
|
|
|
114,973
|
|
Corporate assets and intercompany eliminations, net
|
|
|
(616,927
|
)
|
|
|
(643,587
|
)
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,749,167
|
|
|
$
|
2,014,017
|
|
|
|
|
|
|
|
|
|
|
We recorded the following pre-tax amounts, by reportable operating segment, for depreciation and amortization
in the accompanying consolidated financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
North America
|
|
$
|
8,062
|
|
|
$
|
7,641
|
|
EMEA
|
|
|
1,902
|
|
|
|
1,685
|
|
APAC
|
|
|
216
|
|
|
|
216
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,180
|
|
|
$
|
9,542
|
|
|
|
|
|
|
|
|
|
|
12
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following
discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this Quarterly Report on Form 10-Q.
Quarterly Overview
We
are a Fortune 500-ranked global provider of hardware, software, Cloud and service solutions to business, government, healthcare and educational clients in North America; Europe, the Middle East, Africa (EMEA); and Asia-Pacific
(APAC). Our offerings in North America and select countries in EMEA include hardware, software and services. Our offerings in the remainder of our EMEA segment and in APAC are largely software and select software-related services.
Consolidated net sales of $1.17 billion in the three months ended March 31, 2016 decreased 4% compared to the three months ended
March 31, 2015. Excluding the effects of changes in currency exchange rates, consolidated net sales decreased 3% in the first quarter of 2016 compared to the first quarter of 2015, as modest growth in North America was offset by an 11% decline
in net sales reported by our EMEA operating segment, and a 3% decrease in net sales in APAC, due largely to a higher percentage of revenues recognized on a net sales basis. Consolidated gross profit was relatively flat year over year at $161.1
million in U.S. dollar terms, up 1% excluding the effects of foreign currency movements. Gross margin improved approximately 50 basis points year over year to 13.8%, driven primarily by higher product margin in the software category in all of our
operating segments reflecting a higher volume of sales of software maintenance and subscription products that are recorded on a net sales recognition basis, which results in net sales equal to the gross profit on the transaction and improves
reported margins. Selling and administrative expenses for the first quarter increased 4% year over year in U.S. dollar terms (up 6% excluding the effects of foreign currency movements). The year over year increase in selling and administrative
expenses was driven by investments in sales, technical and services headcount, primarily in our North America operating segment. Our consolidated results of operations for the first quarter of 2016 also include severance expense, net of adjustments,
totaling $1.4 million, $854,000 net of tax, compared to $723,000, $556,000, net of tax, recorded during the first quarter of 2015. All of this resulted in a 33% year to year decline in consolidated earnings from operations from $20.3 million in the
first quarter of 2015 to $13.6 million in the first quarter of 2016. On a consolidated basis, we reported net earnings of $6.9 million and diluted earnings per share of $0.18 for the first quarter of 2016. This compares to net earnings of $11.0
million and diluted earnings per share of $0.27 for the first quarter of 2015.
In recent quarters, we have experienced lower gross
margins than we desire in our North America business due to the mix of products and clients being more weighted towards lower-margin devices with large enterprise and public sector clients. When combined with headcount investments made over the last
two years, our earnings results are not meeting our expectations. As a result, we have recently implemented several cost reduction initiatives across our North America business that will allow us to better align our cost structure with current gross
profit performance. Annualized savings from these actions are expected to be approximately $20 million, beginning in May 2016.
Throughout
the Quarterly Overview and Results of Operations sections 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 on a consolidated basis and in North America, EMEA and APAC excluding the effects of foreign currency movements. In computing these change amounts and percentages, we compare the current period amount as translated into
U.S. dollars under the applicable accounting standards to the prior period amount in local currency translated into U.S. dollars utilizing the weighted average translation rate for the current period.
13
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Net of tax amounts referenced above were computed using the statutory tax rate for the taxing
jurisdictions in the operating segment in which the related expenses were recorded, adjusted for the effects of valuation allowances on net operating losses in certain jurisdictions.
Details about segment results of operations can be found in Note 9 to the Consolidated Financial Statements in Part I, Item 1 of this
report.
Our discussion and analysis of financial condition and results of operations is intended to assist in the understanding of our
consolidated financial statements, including the changes in certain key items in those consolidated financial statements from period to period and the primary factors that contributed to those changes, as well as how certain critical accounting
estimates affect our consolidated financial statements.
Critical Accounting Estimates
Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles
(GAAP). For a summary of significant accounting policies, see Note 1 to the Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2015. The preparation of these
consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses. We base our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results, however, may differ from
estimates we have made. Members of our senior management have discussed the critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors.
There have been no changes to the items disclosed as critical accounting estimates in Managements Discussion and Analysis of
Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015.
Results of Operations
The following table sets forth for the periods presented certain financial data as a percentage of net sales for the three months ended
March 31, 2016 and 2015:
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Three Months Ended
March 31,
|
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|
|
2016
|
|
|
2015
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Costs of goods sold
|
|
|
86.2
|
|
|
|
86.7
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
13.8
|
|
|
|
13.3
|
|
Selling and administrative expenses
|
|
|
12.5
|
|
|
|
11.5
|
|
Severance and restructuring expenses
|
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0.1
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|
0.1
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|
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|
|
|
|
|
|
Earnings from operations
|
|
|
1.2
|
|
|
|
1.7
|
|
Non-operating expense, net
|
|
|
0.2
|
|
|
|
0.2
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|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
1.0
|
|
|
|
1.5
|
|
Income tax expense
|
|
|
0.4
|
|
|
|
0.6
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|
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|
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Net earnings
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0.6
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%
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|
0.9
|
%
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|
We experience some seasonal trends in our sales of IT hardware, software and services. Software sales are
typically seasonally higher in our second and fourth quarters, particularly the second quarter. Business clients, particularly larger enterprise businesses in the United States, tend to spend more in our fourth quarter and less in the first quarter.
Sales to the federal government in the United States are often stronger in our third quarter, while sales in the state and local government and education markets are stronger in our second quarter. 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.
14
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Net Sales
.
Net sales for the three months ended March 31, 2016
decreased 4% compared to the three months ended March 31, 2015 to $1.17 billion. Excluding the effects of changes in currency exchange rates, consolidated net sales decreased 3% in the first quarter of 2016 compared to the first quarter of
2015. Our net sales by operating segment were as follows (dollars in thousands):
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Three Months Ended
March 31,
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%
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|
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|
2016
|
|
|
2015
|
|
|
Change
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|
North America
|
|
$
|
826,888
|
|
|
$
|
822,709
|
|
|
|
1
|
%
|
EMEA
|
|
|
303,360
|
|
|
|
354,842
|
|
|
|
(15
|
%)
|
APAC
|
|
|
38,734
|
|
|
|
42,128
|
|
|
|
(8
|
%)
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|
|
|
|
|
|
|
|
|
|
|
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|
Consolidated
|
|
$
|
1,168,982
|
|
|
$
|
1,219,679
|
|
|
|
(4
|
%)
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|
|
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|
Net sales in North America increased 1%, or $4.2 million, for the three months ended March 31, 2016
compared to the three months ended March 31, 2015. Net sales of hardware and services increased 3% and 11%, respectively, year over year, while net sales of software declined 6% year to year. Net sales in the hardware category were up due
primarily to higher sales of client devices, partly offset by lower sales of data center products. Services sales improved with additional consulting services engagements, primarily driven by the acquisition of BlueMetal in the fourth quarter of
2015. Software net sales declined during the first quarter of 2016 due to a higher volume of sales of software maintenance and subscription products that are recorded on a net sales recognition basis, with the costs of the goods sold being recorded
as a reduction to sales, resulting in net sales equal to the gross profit on the transaction.
Net sales in EMEA decreased 15%, or $51.5
million, for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. Excluding the effects of foreign currency movements, net sales decreased 11% compared to the first quarter of last year. Net sales of
hardware, software and services decreased 18%, 12% and 11%, respectively, compared to the first quarter of 2015, all in U.S. dollars. Excluding the effects of foreign currency movements, hardware, software and services net sales decreased 13%, 9%
and 8%, respectively, compared to the first quarter of last year. The decrease in hardware net sales was due primarily to lower volume in the United Kingdom resulting from softer demand from large enterprise and public sector clients and large deals
transacted in the prior year period that did not repeat in the first quarter of 2016. The most notable year to year decreases were in the servers and storage hardware categories. The decrease in software net sales were driven by a higher volume of
sales of software maintenance and Cloud subscription products that are recorded on a net sales recognition basis. The decrease in services net sales was due primarily to decreased sales of license consultancy services and partner delivered
third-party services to new and existing clients across the region.
Net sales in APAC decreased 8%, or $3.4 million, for the three months
ended March 31, 2016 compared to the three months ended March 31, 2015. Excluding the effects of foreign currency movements, net sales were down 3% compared to the first quarter of last year. The decrease was driven by a higher volume of
sales of software maintenance and Cloud subscription products that are recorded on a net sales recognition basis during the three months ended March 31, 2016 compared to the three months ended March 31, 2015.
15
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The percentage of net sales by category for North America, EMEA and APAC were as follows for
the three months ended March 31, 2016 and 2015:
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|
North America
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|
EMEA
|
|
|
APAC
|
|
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|
Three Months Ended
March 31,
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Three Months Ended
March 31,
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|
Three Months Ended
March 31,
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|
Sales Mix
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|
2016
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|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Hardware
|
|
|
63
|
%
|
|
|
61
|
%
|
|
|
40
|
%
|
|
|
41
|
%
|
|
|
9
|
%
|
|
|
5
|
%
|
Software
|
|
|
29
|
%
|
|
|
32
|
%
|
|
|
57
|
%
|
|
|
56
|
%
|
|
|
87
|
%
|
|
|
92
|
%
|
Services
|
|
|
8
|
%
|
|
|
7
|
%
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
4
|
%
|
|
|
3
|
%
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
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|
|
100
|
%
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|
Gross Profit
.
Gross profit for the three months ended March 31, 2016 was relatively
flat compared to the three months ended March 31, 2015, with gross margin increasing approximately 50 basis points to 13.8% for the three months ended March 31, 2016 compared to 13.3% for the three months ended March 31, 2015.
Excluding the effects of changes in currency exchange rates, consolidated gross profit increased 1% year over year in the first quarter of 2016 compared to the first quarter of 2015. Our gross profit and gross profit as a percentage of net sales by
operating segment were as follows (dollars in thousands):
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|
Three Months Ended March 31,
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|
|
2016
|
|
|
% of
Net Sales
|
|
|
2015
|
|
|
% of
Net Sales
|
|
North America
|
|
$
|
111,743
|
|
|
|
13.5
|
%
|
|
$
|
111,516
|
|
|
|
13.6
|
%
|
EMEA
|
|
|
43,426
|
|
|
|
14.3
|
%
|
|
|
44,811
|
|
|
|
12.6
|
%
|
APAC
|
|
|
5,939
|
|
|
|
15.3
|
%
|
|
|
5,486
|
|
|
|
13.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Consolidated
|
|
$
|
161,108
|
|
|
|
13.8
|
%
|
|
$
|
161,813
|
|
|
|
13.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Americas gross profit for the three months ended March 31, 2016 was flat compared to the
three months ended March 31, 2015. As a percentage of net sales, gross margin decreased approximately 10 basis points to 13.5% for the first quarter of 2016 from 13.6% in the first quarter of 2015. A net decrease in product margin, which
includes partner funding and freight, of 11 basis points was due primarily to hardware sales margin compression and lower partner funding resulting from the business mix transacted during the quarter ended March 31, 2016 compared to the quarter
ended March 31, 2015. The first quarter of 2016 included more sales of client devices to large enterprise clients, which generate lower margins than more complex hardware offerings. Partially offsetting this decrease in product margin was an 8
basis point improvement in gross margin generated from services. Although an increase in higher margin consulting services sales generated a 24 basis point improvement in gross margin year over year, the increase was partially offset by a decline in
sales of warranty services of 16 basis points year to year.
EMEAs gross profit decreased 3% in U.S. dollars for the three months
ended March 31, 2016 compared to the three months ended March 31, 2015, due primarily to the unfavorable effects of changes in foreign currency exchange rates year over year. Excluding the effects of foreign currency movements, gross
profit increased 1% compared to the first quarter of last year. Gross margin increased approximately 170 basis points to 14.3% for the first quarter of 2016 from 12.6% in the first quarter of 2015. The year over year increase in gross margin was
primarily attributable to a net increase in product margin, which includes partner funding and freight, of 212 basis points due primarily to the positive effects on software margin that results from the higher volume of sales that are recorded on a
net sales recognition basis within the net sales line item, as noted above, as well as fewer higher revenue, lower margin transactions during the three months ended March 31, 2016 compared to the three months ended March 31, 2015. Within
the significant increase in product margin, partner funding earned was relatively flat year over year, but led to an increase in gross profit as a percentage of net sales due to the overall revenue decline. The net increase in product margin was
offset by a 47 basis point decrease in gross margin due to the decline in the mix of higher margin services net sales during the quarter ended March 31, 2016 compared to the quarter ended March 31, 2015.
16
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
APACs gross profit increased 8% for the three months ended March 31, 2016 compared
to the three months ended March 31, 2015, with gross margin increasing to 15.3% for the three months ended March 31, 2016 compared to 13.0% for the three months ended March 31, 2015. Excluding the effects of foreign currency
movements, gross profit increased 14% compared to the first quarter of last year. The improvement in gross margin in the first quarter of 2016 compared to the first quarter of 2015 was due primarily to higher margins on software sales transactions
partially offset by lower fees from enterprise software agreements during the three months ended March 31, 2016 compared to the three months ended March 31, 2015.
Operating Expenses.
Selling and Administrative Expenses.
Selling and administrative expenses increased $5.3 million, or 4%, for the three months
ended March 31, 2016 compared to the three months ended March 31, 2015. Excluding the effects of changes in currency exchange rates, consolidated selling and administrative expenses increased 6% year over year in the first quarter of 2016
compared to the first quarter of 2015. Our selling and administrative expenses as a percent of net sales by operating segment were as follows (dollars in thousands):
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|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
% of
Net Sales
|
|
|
2015
|
|
|
% of
Net Sales
|
|
North America
|
|
$
|
100,041
|
|
|
|
12.1
|
%
|
|
$
|
92,402
|
|
|
|
11.2
|
%
|
EMEA
|
|
|
40,679
|
|
|
|
13.4
|
%
|
|
|
42,757
|
|
|
|
12.0
|
%
|
APAC
|
|
|
5,399
|
|
|
|
13.9
|
%
|
|
|
5,637
|
|
|
|
13.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
146,119
|
|
|
|
12.5
|
%
|
|
$
|
140,796
|
|
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Americas selling and administrative expenses increased 8%, or $7.6 million, for the three months
ended March 31, 2016 compared to the three months ended March 31, 2015 and increased approximately 90 basis points year over year as a percentage of net sales to 12.1%. Salaries and wages and contract labor increased $3.7 million and
teammate benefits expense, including healthcare expenses, increased $3.9 million year over year due to investments in sales and services personnel and the addition of BlueMetal teammate costs to the business. We recently implemented several cost
reduction initiatives across our North America business to better align its cost structure with current gross profit performance. Annualized savings from these actions are expected to be approximately $20 million, beginning in May 2016.
EMEAs selling and administrative expenses decreased 5%, or $2.1 million, for the three months ended March 31, 2016 compared to the
three months ended March 31, 2015 but increased approximately 140 basis points year over year as a percentage of net sales to 13.4%. Excluding the effects of foreign currency movements, selling and administrative expenses decreased 1% compared
to the first quarter of last year. The decrease in expenses was primarily driven by a $1.1 million decrease in variable compensation as a result of the decline in net sales and gross profit year to year as well as a decline in facilities expenses of
$532,000 year to year, as we reduced our leased square footage in France and Germany following the resource actions taken in prior periods. The notable increase in selling and administrative expenses as a percentage of net sales year over year was
the result of relatively stable fixed costs during the quarter coupled with the decline in our top line revenue for the first quarter of 2016 compared to the first quarter of 2015.
APACs selling and administrative expenses decreased 4%, or $238,000, for the three months ended March 31, 2016 compared to the
three months ended March 31, 2015, increasing approximately 50 basis points year over year as a percentage of net sales to 13.9%. Excluding the effects of foreign currency movements, selling and administrative expenses increased 2% compared to
the first quarter of last year. The year over year increase (excluding the effects of foreign currency movements) was primarily driven by an increase in bad debt expense related to three specifically identified clients in Australia and Singapore.
17
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Severance and Restructuring Expenses.
During the three months ended
March 31, 2016, North America, EMEA and APAC recorded severance expense, net of adjustments, of approximately $1.2 million, $24,000, and $115,000, respectively. The North America charges related to a headcount reduction as part of the cost
reduction initiatives noted previously. Current period charges were offset by adjustments for changes in estimates of previous accruals as cash payments were made. Comparatively, during the three months ended March 31, 2015, North America and
EMEA recorded severance expense, net of adjustments, of approximately $405,000 and $318,000, respectively, while APAC did not record any severance expense in the prior year period.
Non-Operating (Income) Expense.
Interest Income.
Interest income for the three months ended March 31, 2016 and 2015 was generated from interest earned on
cash and cash equivalent bank balances. The increase in interest income for the three months ended March 31, 2016 compared to the three months ended March 31, 2015 was primarily due to higher interest rates earned on such balances and to
higher average interest-bearing cash and cash equivalent balances, particularly in EMEA, during the three months ended March 31, 2016.
Interest Expense.
Interest expense primarily relates to borrowings under our financing facilities and imputed interest under our
inventory financing facility. Interest expense for the three months ended March 31, 2016 increased 6%, or $110,000, compared to the three months ended March 31, 2015. This increase was due primarily to higher average daily balances on
our debt facilities in the first quarter of 2016, offset by lower imputed interest under our inventory financing facility. Imputed interest was $608,000 for the three months ended March 31, 2016, compared to $826,000 for the three months ended
March 31, 2015. This decrease was due to lower outstanding balances under our inventory financing facility during the 2016 period. For a description of our various financing facilities, see Note 3 to our Consolidated Financial Statements in
Part I, Item 1 of this report.
Net Foreign Currency Exchange Gains/Losses
.
These gains/losses result from
foreign currency transactions, including foreign currency derivative contracts and intercompany balances that are not considered long-term in nature. The change in net foreign currency exchange gains/losses is due primarily to the underlying changes
in the applicable exchange rates, partially mitigated by our use of foreign exchange forward contracts to offset the effects of fluctuations in foreign currencies on certain of our non-functional currency assets and liabilities.
Other Expense, Net
.
Other expense, net, consists primarily of bank fees associated with our cash management activities.
Income Tax Expense.
Our effective tax rate for the three months ended March 31, 2016 was 38.2% compared to 38.4% for
the three months ended March 31, 2015. The decrease in our effective tax rate for the three months ended March 31, 2016 compared to the three months ended March 31, 2015 was due primarily to improved operating results in certain
foreign jurisdictions in 2016, resulting in a decrease in income tax expense as a result of the decrease in the valuation allowance for deferred tax assets related to foreign operating losses in those jurisdictions.
18
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources
The following table sets forth certain consolidated cash flow information for the three months ended March 31, 2016 and 2015 (in
thousands):
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|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(47,187
|
)
|
|
$
|
20,818
|
|
Net cash used in investing activities
|
|
|
(2,896
|
)
|
|
|
(3,194
|
)
|
Net cash provided by financing activities
|
|
|
30,748
|
|
|
|
15,910
|
|
Foreign currency exchange effect on cash and cash equivalent balances
|
|
|
5,267
|
|
|
|
(11,932
|
)
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(14,068
|
)
|
|
|
21,602
|
|
Cash and cash equivalents at beginning of period
|
|
|
187,978
|
|
|
|
164,524
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
173,910
|
|
|
$
|
186,126
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Flow
Our primary uses of cash during the three months ended March 31, 2016 were to fund working capital requirements, to repurchase shares of
our common stock and for capital expenditures. Operating activities used $47.2 million in cash during the three months ended March 31, 2016, compared to $20.8 million of cash provided by operating activities during the three months ended
March 31, 2015. The 2016 results are affected by a single significant receivable collected from a client in the fourth quarter of 2015 for which the related payment to the supplier was due and paid in January 2016, as discussed in more detail
below. During the three months ended March 31, 2016, we repurchased $13.5 million of our common stock in open market transactions. We had combined net borrowings on our long-term debt facilities of $51.0 million and net repayments under our
inventory financing facility of $4.3 million during the three months ended March 31, 2016. Capital expenditures were $2.9 million in the three months ended March 31, 2016, a 9% decrease from the prior year period, reflecting lower IT and
facility-related investments year to year. Cash and cash equivalent balances in the three months ended March 31, 2016 were positively affected by $5.3 million as a result of foreign currency exchange rates, compared to a negative effect of
$11.9 million in the prior year period.
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 as well as other strategic investments over the next 12 months. We currently do not intend nor foresee a need to
repatriate any foreign undistributed earnings. We expect existing domestic cash and cash flows from operations to continue to be sufficient to fund our domestic operating cash activities and cash commitments for investing and financing activities,
such as capital expenditures and debt repayments, for at least the next 12 months. See further discussion of undistributed foreign earnings below.
Net cash (used in) provided by operating activities.
Cash flows from operations for the three months ended March 31, 2016
and 2015 reflect our net earnings, adjusted for non-cash items such as depreciation, amortization, stock-based compensation expense and write-offs and write-downs of assets, as well as changes in asset and liability balances. In both periods, the
decreases in accounts receivable and accounts payable can be primarily attributed to the seasonal decrease in net sales from the fourth quarter to the first quarter, which results in lower accounts receivable and accounts payable balances as of
March 31, compared to December 31. However, the 2016 results are also affected by the single significant receivable collected from a client in the fourth quarter of 2015 for which the payment to the supplier was due and paid in January
2016, noted previously. For both periods, the increase in inventories is primarily attributable to an increase in inventory levels at March 31, to support specific client engagements. The decrease in accrued expenses and other liabilities in
both periods is primarily attributable to decreases in accrued VAT and sales taxes as of March 31, compared to December 31, due to the relative timing of related payments and to the reclassification of certain long-term liabilities to
accounts payable as of March 31, compared to December 31, as amounts became payable to partners under their contractual terms.
19
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Our consolidated cash flow operating metrics were as follows:
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|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Days sales outstanding in ending accounts receivable (DSOs)
(a)
|
|
|
82
|
|
|
|
77
|
|
Days inventory outstanding (DIOs)
(b)
|
|
|
11
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|
|
|
11
|
|
Days purchases outstanding in ending accounts payable (DPOs)
(c)
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|
|
(64
|
)
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|
|
(63
|
)
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|
|
|
|
|
|
|
|
|
Cash conversion cycle (days)
(d)
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|
|
29
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Calculated as the balance of accounts receivable, net at the end of the quarter divided by daily net sales. Daily net sales is calculated as net sales for the quarter divided by 91 days in 2016 and 90 days in 2015.
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(b)
|
Calculated as average inventories (excluding inventories not available for sale) divided by daily costs of goods sold. Average inventories is calculated as the sum of the balances of inventories at the beginning of the
quarter plus inventories at the end of the quarter divided by two. Daily costs of goods sold is calculated as costs of goods sold for the quarter divided by 91 days in 2016 and 90 days in 2015.
|
(c)
|
Calculated as the sum of the balances of accounts payable trade and accounts payable inventory financing facility at the end of the quarter divided by daily costs of goods sold. Daily costs of goods sold
is calculated as costs of goods sold for the quarter divided by 91 days in 2016 and 90 days in 2015.
|
(d)
|
Calculated as DSOs plus DIOs, less DPOs.
|
Our cash conversion cycle was 29 days in the first
quarter of 2016, up four days from the first quarter of 2015. The increase resulted from the net effect of a five day increase in DSOs and a one day increase in DPOs period to period due to the relative timing of client receipts and supplier
payments during the respective quarters.
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 we grant to our clients in order to take advantage of supplier discounts. We intend to use cash generated in the remainder of 2016 in excess of working
capital needs to repurchase shares of our common stock and support our capital expenditures for the year and to pay down our debt balances. We also may use cash to fund potential acquisitions to add select capabilities.
Net cash used in investing activities
. Capital expenditures were $2.9 million and $3.2 million for the three months ended
March 31, 2016 and 2015, respectively. We expect capital expenditures for the full year 2016 to be between $10.0 million and $15.0 million, primarily for technology and facility related upgrade projects.
Net cash provided by financing activities
. During the three months ended March 31, 2016 and 2015, we repurchased $13.5
million and $38.6 million, respectively, of our common stock in open market transactions. These repurchases were part of programs previously approved by our Board of Directors in October 2014, February 2015 and February 2016. All shares
repurchased were immediately retired. During the three months ended March 31, 2016, we had net combined borrowings on our long-term debt under our revolving facility and our ABS facility that increased our outstanding debt balance by $51.0
million, and we had net repayments of $4.3 million under our inventory financing facility during the period. During the three months ended March 31, 2015, we had net combined borrowings on our long-term debt under our revolving facility and our
ABS facility that increased our outstanding debt balance by $33.5 million, and we had net borrowings of $22.5 million under our inventory financing facility during the period.
20
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Financing Facilities
Our consolidated debt balance that can be outstanding at the end of any fiscal quarter under our revolving 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, excluding non-cash imputed interest on our inventory financing facility, (ii) income tax expense (benefit), (iii) depreciation and amortization, (iv) non-cash stock-based compensation and
(v) extraordinary or non-recurring non-cash losses or expenses (adjusted earnings). The maximum leverage ratio permitted under the agreements is 2.75 times our trailing twelve-month adjusted earnings. We anticipate that we will be
in compliance with our maximum leverage ratio requirements over the next four quarters. However, a significant drop in the Companys 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 facility amount. Based on the maximum permitted leverage ratio as of March 31, 2016, the Companys debt balance that could have been outstanding under our
revolving facility and our ABS facility was reduced from the maximum borrowing capacity of $550.0 million to $455.1 million, of which $140.0 million was outstanding at March 31, 2016. Our debt balance as of March 31, 2016 was $142.4
million, including our capital lease obligations for certain IT equipment and other financing agreements with financial intermediaries to facilitate the purchase of products from certain vendors. As of March 31, 2016, the current portion of our
long-term debt relates solely to our capital leases and other financing obligations.
Our revolving facility and our ABS facility contain
various covenants customary for transactions of this type, including limitations on the payment of dividends and the requirement that we comply with maximum leverage, minimum fixed charge and minimum asset coverage ratio requirements and meet
monthly, quarterly and annual reporting requirements. If we fail to comply with these covenants, the lenders would be able to demand payment within a specified time period. At March 31, 2016, we were in compliance with all such covenants.
Further, the terms of the ABS facility identify various circumstances that would result in an amortization event under the facility. At March 31, 2016, no such amortization event had occurred.
Undistributed Foreign Earnings
Cash and
cash equivalents held by foreign subsidiaries are generally subject to U.S. income taxation upon repatriation to the United States. We do not provide for U.S. income taxes on the undistributed earnings of those of our foreign subsidiaries where
earnings are reinvested and, in the opinion of management, will continue to be reinvested indefinitely outside of the United States. As of March 31, 2016, we had approximately $147.5 million in cash and cash equivalents in certain of our
foreign subsidiaries where we consider undistributed earnings of these foreign subsidiaries to be indefinitely reinvested. As of March 31, 2016, the majority of our foreign cash resides in the Netherlands, Canada and Australia. Certain of these
cash balances will be remitted to the United States by paying down intercompany payables generated in the ordinary course of business. This repayment would not change our policy to indefinitely reinvest earnings of our foreign subsidiaries. We
intend to use undistributed earnings for general business purposes in the foreign jurisdictions as well as to fund our capital expenditures and potential acquisitions.
Off-Balance Sheet Arrangements
We have
entered into off-balance sheet arrangements, which include indemnifications. The indemnifications are discussed in Note 8 to the Consolidated Financial Statements in Part I, Item 1 of this report and such discussion is incorporated by reference
herein. 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 business, financial condition or results of operations.
21
INSIGHT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Recently Issued Accounting Standards
The information contained in Note 1 to the Consolidated Financial Statements in Part I, Item 1 of this report concerning a description of
recently issued accounting standards which affect or may affect our financial statements, including our expected dates of adoption and the estimated effects on our results of operations and financial condition, is incorporated by reference herein.
Contractual Obligations
There have
been no material changes in our reported contractual obligations, as described under Contractual Obligations in Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital
Resources in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015.
22
INSIGHT ENTERPRISES, INC.