UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

FORM10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 20182019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period fromto

Commission File Number:0-25092

LOGO

INSIGHT ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

Delaware

86-0766246

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

6820 South Harl Avenue, Tempe, Arizona 85283

(Address of principal executive offices) (Zip Code)

(480)333-3000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common stock, par value $0.01

NSIT

The NASDAQ Global Select Market

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   ☒  

No   ☐

Indicate by check mark whetherIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File requiredregistrant has submitted electronically every Interactive Data File required to be submitted and posted pursuantsubmitted pursuant to RuleRule 405 of RegulationS-TRegulation S-T (§232.405 of this chapter) during the precedingchapter) during the preceding 12 months (or for such shorter period that(or for such shorter period that the registrant was required registrant was required to submit and post such files)such files).

Yes   ☒  

No   ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)  ☐

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

Yes   ☐  

No   ☒

The number of shares outstanding of the issuer’s common stock as of April 27, 201826, 2019 was 35,436,195.35,762,268.

 

 


 


INSIGHT ENTERPRISES, INC.

QUARTERLY REPORT ON FORM10-Q

Three Months Ended March 31, 20182019

TABLE OF CONTENTS

 

Page

PART I -

Financial Information

Item 1 –

Financial Statements:

Consolidated Balance Sheets (unaudited) - March 31, 20182019 and December 31, 20172018

1

Consolidated Statements of Operations (unaudited) - Three Months Ended March 31, 20182019 and 20172018

2

Consolidated Statements of Comprehensive Income (unaudited) - Three Months Ended March 31, 20182019 and 20172018

3

Consolidated Statements of Stockholders’ Equity (unaudited) – Three Months Ended March 31, 2019 and 2018

4

Consolidated Statements of Cash Flows (unaudited) - Three Months Ended March 31, 20182019 and 20172018

4

5

Notes to Consolidated Financial Statements (unaudited)

5

6

Item 2 –

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

21

Item 3 –

Quantitative and Qualitative Disclosures About Market Risk

38

32

Item 4 –

Controls and Procedures

38

32

PART II – Other Information

PART II -

Other Information

Item 1 –

Legal Proceedings

38

33

Item 1A –

Risk Factors

38

33

Item 2 –

Unregistered Sales of Equity Securities and Use of Proceeds

39

33

Item 3 –

Defaults Upon Senior Securities

39

33

Item 4 –

Mine Safety Disclosures

39

33

Item 5 –

Other Information

39

33

Item 6 –

Exhibits

34

Item 6 – ExhibitsSignatures

40

Signatures

41

35


INSIGHT ENTERPRISES, INC.

FORWARD-LOOKING INFORMATION

Forward-Looking Information

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.  Certain statements in this Quarterly Report on Form10-Q, including statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this report, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements may include: expectations regarding net sales, gross profit, gross margin, operating expenses, earnings from operations,non-operating income and expenses, net earnings andor cash flows, cash usesneeds and needs, the payment of accrued expenses and liabilities, the timing of the inventory shipments;liabilities; the expected effects of seasonality on our business; expectations of further consolidation in the Information Technology (“IT”) industry; our intentions concerning the payment of dividends; our acquisition strategy; projections of capital expenditures; the sufficiency of our capital resources, the availability of financing and our needs and plans relating thereto; the estimated effect of new accounting principles and expected dates of adoption; expected tax changes; the effect of indemnification obligations; projections about the outcome of ongoing tax audits; expectations regarding future employee termination benefits; estimates regarding future asset-retirement activities; adequate provisions for and our positions and strategies with respect to ongoing and threatened litigation; our expectations regarding the use of cash flow from operations for working capital, to pay down debt, repurchase shares of our common stock, make capital expenditures and fund acquisitions; our expectations regarding stock-based compensation and future income tax expense; our compliance with leverage ratio requirements; our exposure tooff-balance sheet arrangements; 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, which are discussed in “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form10-K for the year ended December 31, 2017:2018:

 

actions of our competitors, including manufacturers and publisherspublishers of products we sell;

our reliance on our partners for product availability, competitive products to sell and marketing funds and purchasing incentives, which can change significantly in the amounts made available and the requirements year over year;

changes in the IT industry and/or rapid changes in technology;

risks associated with the integration and operation of acquired businesses;

possible significant fluctuations in our future operating results;

the risks associated with our international operations;

general economic conditions;

increased debt and interest expense and decreased availability of funds under our financing facilities;

the security of our electronic and other confidential information;information;

disruptions in our IT systems and voice and data networks;

failure to comply with the terms and conditions of our commercial and public sector contracts;

legal proceedings and client audits and failure to comply with laws and regulations;

accounts receivable risks, including increased credit loss experience or extended payment terms with our clients;

our reliance on independent shipping companies;

our dependence on certain key personnel;

 

natural disasters or other adverse occurrences;


INSIGHT ENTERPRISES, INC.

 

natural disasters or other adverse occurrences;

exposure to changes in, interpretations of, or enforcement trends related to tax rules and regulations; and

intellectualintellectual property infringement claims and challenges to our registered trademarks and trade names.

Additionally, there may be other risks that are otherwise described from time to time in the reports that we file with the Securities and Exchange Commission.  Any forward-looking statements in this report should be considered in light of various important factors, including the risks and uncertainties listed above, as well as others.  We assume no obligation to update, and, except as may be required by law, do not intend to update, any forward-looking statements.  We do not endorse any projections regarding future performance that may be made by third parties.


PART I—FINANCIALI - FINANCIAL INFORMATION

Item 1. Financial Statements.

INSIGHT ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)

 

  March 31,
2018
 December 31,
2017
 

 

March 31,

2019

 

 

December 31,

2018

 

ASSETS

   

 

 

 

 

 

 

 

 

Current assets:

   

 

 

 

 

 

 

 

 

Cash and cash equivalents

  $100,237  $105,831 

 

$

124,831

 

 

$

142,655

 

Accounts receivable, net of allowance for doubtful accounts of $10,101 and $10,158, respectively

   1,751,321  1,814,560 

Accounts receivable, net of allowance for doubtful accounts

of $10,903 and $10,462, respectively

 

 

1,723,817

 

 

 

1,931,736

 

Inventories

   194,743  194,529 

 

 

187,146

 

 

 

148,503

 

Inventories not available for sale

   645  36,956 

Other current assets

   119,404  152,467 

 

 

117,199

 

 

 

115,683

 

  

 

  

 

 

Total current assets

   2,166,350  2,304,343 

 

 

2,152,993

 

 

 

2,338,577

 

Property and equipment, net of accumulated depreciation and amortization of $325,608 and $335,078, respectively

   75,579  75,252 

Property and equipment, net of accumulated depreciation and

amortization of $273,379 and $331,700, respectively

 

 

74,038

 

 

 

72,954

 

Goodwill

   131,403  131,431 

 

 

166,073

 

 

 

166,841

 

Intangible assets, net of accumulated amortization of $40,949 and $37,357, respectively

   97,158  100,778 

Intangible assets, net of accumulated amortization of

$56,255 and $52,942, respectively

 

 

108,856

 

 

 

112,179

 

Deferred income taxes

   16,019  17,064 

 

 

7,345

 

 

 

7,967

 

Other assets

   85,902  56,783 

 

 

247,162

 

 

 

77,429

 

  

 

  

 

 
  $2,572,411  $2,685,651 
  

 

  

 

 

 

$

2,756,467

 

 

$

2,775,947

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

   

 

 

 

 

 

 

 

 

Current liabilities:

   

 

 

 

 

 

 

 

 

Accounts payable—trade

  $882,782  $899,075 

 

$

897,609

 

 

$

978,104

 

Accounts payable—inventory financing facility

   228,102  319,468 

 

 

260,160

 

 

 

304,130

 

Accrued expenses and other current liabilities

   175,147  175,860 

 

 

183,678

 

 

 

190,733

 

Current portion of long-term debt

   16,358  16,592 

 

 

1,161

 

 

 

1,395

 

Deferred revenue

   70,955  88,979 

 

 

66,646

 

 

 

62,300

 

  

 

  

 

 

Total current liabilities

   1,373,344  1,499,974 

 

 

1,409,254

 

 

 

1,536,662

 

Long-term debt

   245,569  296,576 

 

 

113,227

 

 

 

195,525

 

Deferred income taxes

   672  717 

 

 

604

 

 

 

683

 

Other liabilities

   72,225  44,915 

 

 

207,164

 

 

 

56,088

 

  

 

  

 

 

 

 

1,730,249

 

 

 

1,788,958

 

   1,691,810  1,842,182 
  

 

  

 

 

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; 35,848 shares at March 31, 2018 and 35,829 shares at December 31, 2017 issued and outstanding

   358  358 

Common stock, $0.01 par value, 100,000 shares authorized;

35,762 shares at March 31, 2019 and 35,482 shares at

December 31, 2018 issued and outstanding

 

 

358

 

 

 

355

 

Additionalpaid-in capital

   315,493  317,155 

 

 

321,606

 

 

 

323,622

 

Retained earnings

   584,423  550,220 

 

 

743,992

 

 

 

704,665

 

Accumulated other comprehensive loss – foreign currency translation adjustments

   (19,673 (24,264

 

 

(39,738

)

 

 

(41,653

)

  

 

  

 

 

Total stockholders’ equity

   880,601  843,469 

 

 

1,026,218

 

 

 

986,989

 

  

 

  

 

 

 

$

2,756,467

 

 

$

2,775,947

 

  $2,572,411  $2,685,651 
  

 

  

 

 

See accompanying notes to consolidated financial statements.


INSIGHT ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

   Three Months Ended
March 31,
 
   2018  2017 

Net sales:

   

Products

  $1,582,155  $1,321,969 

Services

   180,748   155,574 
  

 

 

  

 

 

 

Total net sales

   1,762,903   1,477,543 
  

 

 

  

 

 

 

Costs of goods sold:

   

Products

   1,438,734   1,201,057 

Services

   84,164   68,259 
  

 

 

  

 

 

 

Total costs of goods sold

   1,522,898   1,269,316 
  

 

 

  

 

 

 

Gross profit

   240,005   208,227 

Operating expenses:

   

Selling and administrative expenses

   188,180   177,632 

Severance and restructuring expenses

   1,644   4,695 

Acquisition-related expenses

   —     2,947 
  

 

 

  

 

 

 

Earnings from operations

   50,181   22,953 

Non-operating (income) expense:

   

Interest income

   (153  (431

Interest expense

   6,015   3,933 

Net foreign currency exchange (gain) loss

   (245  380 

Other expense, net

   302   315 
  

 

 

  

 

 

 

Earnings before income taxes

   44,262   18,756 

Income tax expense

   11,517   4,908 
  

 

 

  

 

 

 

Net earnings

  $32,745  $13,848 
  

 

 

  

 

 

 

Net earnings per share:

   

Basic

  $0.91  $0.39 
  

 

 

  

 

 

 

Diluted

  $0.90  $0.38 
  

 

 

  

 

 

 

Shares used in per share calculations:

   

Basic

   35,913   35,602 
  

 

 

  

 

 

 

Diluted

   36,263   36,185 
  

 

 

  

 

 

 

See accompanying notes to consolidated financial statements.                

INSIGHT ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Net sales:

 

 

 

 

 

 

 

 

Products

 

$

1,466,672

 

 

$

1,557,792

 

Services

 

 

218,794

 

 

 

184,702

 

Total net sales

 

 

1,685,466

 

 

 

1,742,494

 

Costs of goods sold:

 

 

 

 

 

 

 

 

Products

 

 

1,337,308

 

 

 

1,414,986

 

Services

 

 

99,686

 

 

 

87,245

 

Total costs of goods sold

 

 

1,436,994

 

 

 

1,502,231

 

Gross profit

 

 

248,472

 

 

 

240,263

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling and administrative expenses

 

 

191,063

 

 

 

188,180

 

Severance and restructuring expenses

 

 

370

 

 

 

1,644

 

Earnings from operations

 

 

57,039

 

 

 

50,439

 

Non-operating (income) expense:

 

 

 

 

 

 

 

 

Interest income

 

 

(271

)

 

 

(153

)

Interest expense

 

 

4,823

 

 

 

6,015

 

Net foreign currency exchange loss (gain)

 

 

711

 

 

 

(245

)

Other expense, net

 

 

339

 

 

 

302

 

Earnings before income taxes

 

 

51,437

 

 

 

44,520

 

Income tax expense

 

 

12,110

 

 

 

11,517

 

Net earnings

 

$

39,327

 

 

$

33,003

 

Net earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

1.10

 

 

$

0.92

 

Diluted

 

$

1.09

 

 

$

0.91

 

Shares used in per share calculations:

 

 

 

 

 

 

 

 

Basic

 

 

35,609

 

 

 

35,913

 

Diluted

 

 

36,103

 

 

 

36,263

 

 

   Three Months Ended
March 31,
 
   2018   2017 

Net earnings

  $32,745   $13,848 

Other comprehensive income (loss), net of tax: Foreign currency translation adjustments

   4,591    7,280 
  

 

 

   

 

 

 

Total comprehensive income

  $37,336   $21,128 
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.


INSIGHT ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWSCOMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

   Three Months Ended March 31, 
   2018  2017 

Cash flows from operating activities:

   

Net earnings

  $32,745  $13,848 

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:

   

Depreciation and amortization of property and equipment

   5,433   6,830 

Amortization of intangible assets

   3,611   4,223 

Provision for losses on accounts receivable

   346   921 

Write-downs of inventories

   629   392 

Write-off of property and equipment

   303   —   

Non-cash stock-based compensation

   3,184   3,412 

Deferred income taxes

   979   (573

Changes in assets and liabilities, net of acquisitions and sale of foreign entity:

   

Decrease in accounts receivable

   188,138   182,710 

Decrease (increase) in inventories

   4,444   (22,257

(Increase) decrease in other assets

   (28,517  1,043 

Decrease in accounts payable

   (97,104  (334,221

Increase in deferred revenue

   16,177   9,808 

Increase (decrease) in accrued expenses and other liabilities

   20,377   (18,238
  

 

 

  

 

 

 

Net cash provided by (used in) operating activities

   150,745   (152,102
  

 

 

  

 

 

 

Cash flows from investing activities:

   

Purchases of property and equipment

   (5,044  (10,052

Acquisitions, net of cash and cash equivalents acquired

   —     (180,859
  

 

 

  

 

 

 

Net cash used in investing activities

   (5,044  (190,911
  

 

 

  

 

 

 

Cash flows from financing activities:

   

Borrowings on senior revolving credit facility

   276,684   169,109 

Repayments on senior revolving credit facility

   (392,184  (169,109

Borrowings on accounts receivable securitization financing facility

   1,024,000   918,500 

Repayments on accounts receivable securitization financing facility

   (955,000  (762,000

Borrowings under Term Loan A

   —     175,000 

Repayments under Term Loan A

   (3,281  —   

Repayments under other financing agreements

   (1,234  (3,419

Payments on capital lease obligations

   (288  (128

Net repayments under inventory financing facility

   (91,366  (4,172

Payment of debt issuance costs

   —     (1,123

Payment of payroll taxes on stock-based compensation through shares withheld

   (2,884  (4,526

Repurchases of common stock

   (7,679  —   
  

 

 

  

 

 

 

Net cash (used in) provided by financing activities

   (153,232  318,132 
  

 

 

  

 

 

 

Foreign currency exchange effect on cash, cash equivalents and restricted cash balances

   1,937   5,820 
  

 

 

  

 

 

 

Decrease in cash, cash equivalents and restricted cash

   (5,594  (19,061

Cash, cash equivalents and restricted cash at beginning of period

   107,445   205,946 
  

 

 

  

 

 

 

Cash, cash equivalents and restricted cash at end of period

  $101,851  $186,885 
  

 

 

  

 

 

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Net earnings

 

$

39,327

 

 

$

33,003

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

1,915

 

 

 

4,591

 

Total comprehensive income

 

$

41,242

 

 

$

37,594

 

See accompanying notes to consolidated financial statements.



INSIGHT ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

 

 

Common Stock

 

 

Treasury Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Retained

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Par Value

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Earnings

 

 

Equity

 

Balances at December 31, 2018

 

 

35,482

 

 

 

355

 

 

 

 

 

 

 

 

 

323,622

 

 

 

(41,653

)

 

 

704,665

 

 

 

986,989

 

Issuance of common stock under employee stock plans, net of shares withheld for payroll taxes

 

 

279

 

 

 

3

 

 

 

 

 

 

 

 

 

(6,131

)

 

 

 

 

 

 

 

 

(6,128

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,115

 

 

 

 

 

 

 

 

 

4,115

 

Foreign currency translation adjustments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,915

 

 

 

 

 

 

1,915

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39,327

 

 

 

39,327

 

Balances at March 31, 2019

 

 

35,761

 

 

$

358

 

 

 

 

 

$

 

 

$

321,606

 

 

$

(39,738

)

 

$

743,992

 

 

$

1,026,218

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2017

 

 

35,829

 

 

 

358

 

 

 

 

 

 

 

 

 

317,155

 

 

 

(24,264

)

 

 

550,220

 

 

 

843,469

 

Cumulative effect of accounting change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,176

 

 

 

7,176

 

Issuance of common stock under employee stock plans, net of shares withheld for payroll taxes

 

 

240

 

 

 

2

 

 

 

 

 

 

 

 

 

(2,887

)

 

 

 

 

 

 

 

 

(2,885

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,184

 

 

 

 

 

 

 

 

 

3,184

 

Repurchase of treasury stock

 

 

 

 

 

 

 

 

(221

)

 

 

(7,679

)

 

 

 

 

 

 

 

 

 

 

 

(7,679

)

Retirement of treasury stock

 

 

(221

)

 

 

(2

)

 

 

221

 

 

 

7,679

 

 

 

(1,959

)

 

 

 

 

 

(5,718

)

 

 

 

Foreign currency translation adjustments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,591

 

 

 

 

 

 

4,591

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,003

 

 

 

33,003

 

Balances at March 31, 2018

 

 

35,848

 

 

$

358

 

 

 

 

 

$

 

 

$

315,493

 

 

$

(19,673

)

 

$

584,681

 

 

$

880,859

 

See accompanying notes to consolidated financial statements.


INSIGHT ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

39,327

 

 

$

33,003

 

Adjustments to reconcile net earnings to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization of property and equipment

 

 

5,044

 

 

 

5,433

 

Amortization of intangible assets

 

 

3,823

 

 

 

3,611

 

Provision for losses on accounts receivable

 

 

1,413

 

 

 

346

 

Write-downs of inventories

 

 

1,408

 

 

 

629

 

Write-off of property and equipment

 

 

 

 

 

303

 

Non-cash stock-based compensation

 

 

4,115

 

 

 

3,184

 

Deferred income taxes

 

 

547

 

 

 

979

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Decrease in accounts receivable

 

 

210,691

 

 

 

184,877

 

(Increase) Decrease in inventories

 

 

(39,658

)

 

 

4,444

 

Increase in other assets

 

 

(107,314

)

 

 

(25,514

)

Decrease in accounts payable

 

 

(82,246

)

 

 

(97,104

)

Increase in deferred revenue

 

 

7,117

 

 

 

16,177

 

Increase in accrued expenses and other liabilities

 

 

77,646

 

 

 

20,377

 

Net cash provided by operating activities

 

 

121,913

 

 

 

150,745

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(5,352

)

 

 

(5,044

)

Acquisitions, net of cash and cash equivalents acquired

 

 

(762

)

 

 

 

Net cash used in investing activities

 

 

(6,114

)

 

 

(5,044

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings on senior revolving credit facility

 

 

49,936

 

 

 

276,684

 

Repayments on senior revolving credit facility

 

 

(49,936

)

 

 

(392,184

)

Borrowings on accounts receivable securitization financing facility

 

 

1,010,500

 

 

 

1,024,000

 

Repayments on accounts receivable securitization financing facility

 

 

(1,092,500

)

 

 

(955,000

)

Repayments under Term Loan A

 

 

 

 

 

(3,281

)

Repayments under other financing agreements

 

 

 

 

 

(1,234

)

Payments on finance lease obligations

 

 

(542

)

 

 

(288

)

Net repayments under inventory financing facility

 

 

(43,970

)

 

 

(91,366

)

Payment of payroll taxes on stock-based compensation

   through shares withheld

 

 

(6,128

)

 

 

(2,884

)

Repurchases of common stock

 

 

 

 

 

(7,679

)

Net cash used in financing activities

 

 

(132,640

)

 

 

(153,232

)

Foreign currency exchange effect on cash, cash equivalents and

   restricted cash balances

 

 

(986

)

 

 

1,937

 

Decrease in cash, cash equivalents and restricted cash

 

 

(17,827

)

 

 

(5,594

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

144,293

 

 

 

107,445

 

Cash, cash equivalents and restricted cash at end of period

 

$

126,466

 

 

$

101,851

 

See accompanying notes to consolidated financial statements.


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.

1.

Basis of Presentation and Recently Issued Accounting Standards

We are a Fortune 500 global IT provider helping businessesempower organizations of all sizes – from small and medium sized firms to worldwide enterprises, governments, schools and health care organizations – define, architect, implement and managewith Insight Intelligent Technology SolutionsTM to maximize the business value of IT in North America; Europe, the Middle East and Africa (“EMEA”); and Asia-Pacific (“APAC”).  We empower ourAs a Fortune 500-ranked global provider of digital innovation, cloud/data center transformation, connected workforce, and supply chain optimization solutions and services, we help clients to manage their IT environments so they can drive meaningful business outcomes todayinnovate and transformoptimize their operations for tomorrow.to run smarter.  Our 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 certain countries in EMEA and APAC include hardware, software and services.  Our offerings in the remainder of our EMEA and APAC segments areconsist of largely software and certain 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, 20182019 and our results of operations for the three months ended March 31, 2019 and 2018 and cash flows for the three months ended March 31, 20182019 and 2017.2018.  The consolidated balance sheet as of December 31, 20172018 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 Form10-K for the year ended December 31, 2017.2018.  Our results of operations include the results of Datalink CorporationCardinal Solutions Group, Inc. (“Datalink”Cardinal”) from its acquisition date of January 6, 2017 and Caase Group B.V. (referred to herein as, “Caase.com”) from its acquisition date of September 26, 2017.August 1, 2018.  

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.

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.

6


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Recently Issued Accounting Standards

Other than the adoption ofEffective January 1, 2019, we adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standard Update (“ASU”)No. 2014-09,2016-02—Leases (Topic 842) “Revenue from Contracts with Customers,” effective, as of January 1, 2018,2019, using the effective date transition method. This approach provides a method for recording existing leases at adoption without restating comparative periods. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification.  In addition, we made an accounting policy election not to separate non-lease components from lease components for all existing classes of underlying assets with the exception of land and buildings.  We also made an accounting policy election to not record right of use (“ROU”) assets and lease liabilities for leases with an initial term of twelve months or less on our consolidated balance sheet.

Adoption of the new standard resulted in the recording of additional net operating lease ROU assets and lease liabilities of $65,922,000 and $70,512,000, respectively, as discussed in Note 2, thereof January 1, 2019. The difference between the additional lease assets and lease liabilities reflected existing accrued and prepaid rent balances that were reclassified to the operating lease ROU asset at January 1, 2019. The standard did not materially impact our consolidated net earnings and had no impact on cash flows.  

There have been no other material changes in 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 onForm 10-K for the year ended December 31, 20172018 that affect or may affect our current financial statements.

2.

Leases

We adopted ASUlease office space, distribution centers, land, vehicles and equipment. Lease agreements with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.   

Certain lease agreements include one or more options to renew, with renewal terms that can extend the lease term from one to No. 2016-18,five years “Restricted Cash,” ASUor more. No. 2016-15, “ClassificationThe exercise of lease renewal options is at our sole discretion. Some agreements also include options to purchase the leased property. The estimated life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.  

Certain Cash Receiptsof our lease agreements include rental payments adjusted periodically for inflation.  Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Significant Accounting Policy

We determine if a contract or arrangement is, or contains a lease at inception.  Balances related to operating leases are included in other assets, other current liabilities, and Cash Payments,” and ASUNo. 2016-01, “Financial Instruments Overview: Recognition and Measurement of Financial Assets and Financial Liabilities,” effective January 1, 2018. The adoption of these new standards did not have a material effect onother liabilities in our consolidated financial statements.

As a resultbalance sheet.  Balances related to financing leases are included in property and equipment, current portion of the adoption of ASUNo. 2016-18, we began including amounts generally described as restricted cash or restricted cash equivalents with cashlong-term debt, and cash equivalents when reconciling thebeginning-of-period andend-of-period total amounts shownlong-term debt in the statement of cash flowsour consolidated balance sheet.  ROU assets represent our right to use an underlying asset for the three months ended March 31, 2018. Amounts shown inlease term and lease liabilities represent our obligation to make lease payments arising from the statement of cash flows for the three months ended March 31, 2017 were reclassified to conform to the current period presentation. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the balance sheets that sum to the total of the same such amounts shown in the statements of cash flows for the three months ended March 31, 2018 and 2017 (in thousands):lease.  

 

   March 31,
2018
   December 31,
2017
 

Cash and cash equivalents

  $100,237   $105,831 

Restricted cash included in other current assets

   10    46 

Restricted cash included in othernon-current assets

   1,604    1,568 
  

 

 

   

 

 

 

Total cash, cash equivalents and restricted cash shown in the statement of cash flows

  $101,851   $107,445 
  

 

 

   

 

 

 

   March 31,
2017
   December 31,
2016
 

Cash and cash equivalents

  $183,709   $202,882 

Restricted cash included in other current assets

   78    51 

Restricted cash included in othernon-current assets

   3,098    3,013 
  

 

 

   

 

 

 

Total cash, cash equivalents and restricted cash shown in the statement of cash flows

  $186,885   $205,946 
  

 

 

   

 

 

 

Amounts includedOperating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.  As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in restricted cash represent those required to be set aside by a contractual agreement with a lessor related to certain leased office space in foreign jurisdictions. Restricted cash shown indetermining the statementpresent value of cash flows forlease payments.  We use the three months ended March 31, 2017 also includes funds deposited with a financial institution in Australia to provide a guarantee on our behalf as security for any funds we might draw under our revolving loan facility in China. The deposited funds were restricted in that we could not withdraw them as long as the related loan facility was in place. These amounts were reported in othernon-current assets.implicit rate

7


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

when readily determinable.  The operating lease ROU asset includes any prepaid lease payments and additional direct costs and excludes lease incentives.  Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.  

 

2. New Accounting Standard – Sales Recognition

We adopted ASUNo. 2014-09, “Revenue from Contracts with Customers,” which created FASB Topic 606 (“Topic 606”) with a dateThe following table provides information about the financial statement classification of initial applicationour lease balances reported within the consolidated balances sheets as of March 31, 2019 and January 1, 2018. Topic 606 also includes Subtopic340-40, “Other Assets and Deferred Costs – Contracts with Customers,” which requires2019 (in thousands):

Leases

Classification

 

March 31,

2019

 

 

January 1,

2019

 

Assets

 

 

 

 

 

 

 

 

 

Operating lease assets

Other assets

 

$

63,336

 

 

$

65,922

 

Finance lease assets

Property and equipment(a)

 

 

1,522

 

 

 

1,693

 

Total lease assets

 

 

$

64,858

 

 

$

67,615

 

Liabilities

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

   Operating lease liabilities

Accrued expenses and other current liabilities

 

$

15,711

 

 

$

15,788

 

   Finance lease liabilities

Current portion of long-term debt

 

 

1,161

 

 

 

1,399

 

Non-current

 

 

 

 

 

 

 

 

 

   Operating lease liabilities

Other liabilities

 

 

52,692

 

 

 

54,724

 

   Finance lease liabilities

Long-term debt

 

 

1,227

 

 

 

1,521

 

Total lease liabilities

 

 

$

70,791

 

 

$

73,432

 

 

 

 

 

 

 

 

 

 

 

(a)

Recorded net of accumulated amortization of $171,000 as of March 31, 2019 and there is no accumulated amortization as of January 1, 2019.

The following table provides information about the deferralfinancial statement classification of incremental costsour lease expenses reported within the consolidated statement of obtaining a contract with a customer. As a result, we changed our accounting policy for sales recognition and incremental costs of obtaining a contract with a customer as detailed below.

We applied Topic 606 using the modified retrospective transition method. Upon initially applying the new standard, the net cumulative effect from prior periods of applying the guidance in Topic 606 was recognized as a cumulative effect adjustment to the opening balance of retained earnings in our consolidated balance sheet as of January 1, 2018. Additionally, we have elected the option to only account for contracts that remained open as of the January 1, 2018 transition date in accordance with Topic 606. Revenue recognition for contracts for which substantially all of the revenue was recognized in accordance with the revenue guidance in effect before January 1, 2018 has not been changed. The comparative information as of December 31, 2017 andoperations for the yearsthree months ended DecemberMarch 31, 2017 and 2016 have not been adjusted and continue to be reported under the previously applicable accounting standards. The details of the significant changes and quantitative impact of the changes are set forth below.

2019 (in thousands):

In sales transactions for certain security software products that are sold with integral third-party delivered software maintenance, we changed our accounting to record both the software license and the accompanying software maintenance on a net basis, as the agent in the arrangement, given the predominant nature of the goods and services provided to the customer. Under previous guidance, we bifurcated the sale of the software license from the sale of the maintenance contract, recorded the sale of the software product on a gross sales recognition basis and recorded the sale of the software maintenance on a net sales recognition basis. This change has no effect on reported gross profit dollars associated with these transactions.

Lease cost

Classification

 

Three months ended

March 31,

2019

 

Operating lease cost (a) (b)

Selling and administrative expenses

 

$

4,918

 

Finance lease cost

 

 

 

 

 

   Amortization of leased

     assets

Selling and administrative expenses

 

 

171

 

   Interest on lease liabilities

Interest expense, net

 

 

27

 

Total lease cost

 

 

$

5,116

 

 

 

 

 

 

 

(a)

Includes immaterial amounts recorded to cost of goods sold.

(b)

Excludes short-term and variable lease costs, which are immaterial.

 

The accounting for inventories not available for sale, otherwise known as bill and hold arrangements, changed such that a portion of revenue under the contracts is recognized earlier than we were recognizing under previous accounting standards. Bill and hold arrangements are inventory balances owned by our clients that we are warehousing and will be deploying to the clients’ locations in a future period.

8

The accounting for renewals of certain software term licenses changed to delay revenue recognition until the beginning of the renewal period. Under previous guidance, we recognized revenue as the renewal order was completed.

The accounting for certain contracts with our clients that include payment terms that exceed one year changed such that we recognize revenue at the point in time when control of the product is transferred to the client or over the period of time that the service is provided to the client. To the extent that a significant financing component exists in these arrangements, we will record interest income associated with the financing component of the arrangement over the payment terms of the arrangement. Under previous guidance, we deferred revenue recognition under these contracts until payments became due as a result of the extended payment terms.

The timing of revenue recognition for certain services contracts also changed to align with an appropriate input or output method. For example, the timing of revenue recognition for certain services contracts with stated milestone terms changed to an earlier point in time when control transfers to the customer. Under previous guidance, we recognized revenue based on the milestones stated in the contract with our customer.


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

The accounting for sales commissions on contracts with performance periods that exceed one year changed such that we record such sales commissions as an asset and amortize them to expense over the related contract performance period. Under previous guidance, sales commissions were expensed in the period the transaction was generated.

The total cumulative effect adjustment from prior periods that we recognized in our consolidated balance sheet as of January 1, 2018 as an adjustment to retained earnings was $7,176,000.

The following tables summarize the effects of adopting Topic 606 on the Company’s consolidated financial statementsFuture minimum lease payments under non-cancelable leases as of March 31, 20182019 are as follows (in thousands):

 

 

Operating leases

 

 

Finance leases

 

 

Total

 

Remainder of 2019

 

$

14,118

 

 

$

930

 

 

$

15,048

 

2020

 

 

14,758

 

 

 

1,150

 

 

 

15,908

 

2021

 

 

12,225

 

 

 

432

 

 

 

12,657

 

2022

 

 

9,466

 

 

 

 

 

 

9,466

 

2023

 

 

6,460

 

 

 

 

 

 

6,460

 

After 2023

 

 

20,913

 

 

 

 

 

 

20,913

 

Total lease payments

 

 

77,940

 

 

 

2,512

 

 

 

80,452

 

Less:  Interest

 

 

(9,537

)

 

 

(124

)

 

 

(9,661

)

Present value of lease liabilities

 

$

68,403

 

 

$

2,388

 

 

$

70,791

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease payments include $13.4 million related to options to extend lease terms that are reasonably certain of being exercised.

The following table provides information about the remaining lease terms and discount rates applied as of March 31, 2019:

March 31, 2019

Weighted average remaining lease term (years)

   Operating leases

6.58

   Finance leases

2.19

Weighted average discount rate (%)

   Operating leases

3.86

   Finance leases

4.84

The following table provides other information related to leases for the three months then ended March 31, 2019 (in thousands):

BALANCE SHEET AT MARCH 31, 2018

 

 

Three months ended

March 31, 2019

 

Cash paid for amounts included in the measurement of lease

   liabilities:

 

 

 

 

   Operating cash flows from operating leases

 

$

4,457

 

Leased assets obtained in exchange for new finance lease liabilities

 

 

 

Leased assets obtained in exchange for new operating lease liabilities

 

 

1,768

 

Operating Leases pre-Topic 842 adoption:

 

   As Reported   Adjustments   Pre-Topic
606
Adoption
 

Cash and cash equivalents

  $100,237   $—     $100,237 

Accounts receivable, net

   1,751,321    (80,928   1,670,393 

Inventories

   194,743    —      194,743 

Inventories not available for sale

   645    65,470    66,115 

Other current assets

   119,404    34,790    154,194 
  

 

 

   

 

 

   

 

 

 

Total current assets

   2,166,350    19,332    2,185,682 

Property and equipment, net

   75,579    —      75,579 

Goodwill

   131,403    —      131,403 

Intangible assets, net

   97,158    —      97,158 

Deferred income taxes

   16,019    —      16,019 

Other assets

   85,902    (28,709   57,193 
  

 

 

   

 

 

   

 

 

 
  $2,572,411   $(9,377  $2,563,034 
  

 

 

   

 

 

   

 

 

 

Accounts payable – trade

  $882,782   $(27,199  $855,583 

Accounts payable – inventory financing facility

   228,102    —      228,102 

Accrued expenses and other current liabilities

   175,147   ��(13,000   162,147 

Current portion of long-term debt

   16,358    —      16,358 

Deferred revenue

   70,955    65,146    136,101 
  

 

 

   

 

 

   

 

 

 

Total current liabilities

   1,373,344    24,947    1,398,291 

Long-term debt

   245,569    —      245,569 

Deferred income taxes

   672    —      672 

Other liabilities

   72,225    (26,269   45,956 
  

 

 

   

 

 

   

 

 

 
   1,691,810    (1,322   1,690,488 
  

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

      

Preferred stock

   —      —      —   

Common stock

   358    —      358 

Additionalpaid-in capital

   315,493    —      315,493 

Retained earnings

   584,423    (7,991   576,432 

Accumulated other comprehensive loss – foreign currency translation adjustments

   (19,673   (64   (19,737
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

   880,601    (8,055   872,546 
  

 

 

   

 

 

   

 

 

 
  $2,572,411   $(9,377  $2,563,034 
  

 

 

   

 

 

   

 

 

 

We have 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 $20,114,000, $19,126,000 and $14,444,000 in 2018, 2017 and 2016, respectively, and is included in selling and administrative expenses in the accompanying consolidated statements of operations.

9


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2018 are as follows (in thousands):

 

STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2018

   As Reported   Adjustments   Pre-Topic
606
Adoption
 

Net sales:

      

Products

  $1,582,155   $(9,497  $1,572,658 

Services

   180,748    (1,996   178,752 
  

 

 

   

 

 

   

 

 

 

Total net sales

   1,762,903    (11,493   1,751,410 
  

 

 

   

 

 

   

 

 

 

Costs of goods sold:

      

Products

   1,438,734    (11,069   1,427,665 

Services

   84,164    516    84,680 
  

 

 

   

 

 

   

 

 

 

Total costs of goods sold

   1,522,898    (10,553   1,512,345 
  

 

 

   

 

 

   

 

 

 

Gross profit

   240,005    (940   239,065 

Operating expenses:

      

Selling and administrative expenses

   188,180    78    188,258 

Severance and restructuring expenses

   1,644    —      1,644 
  

 

 

   

 

 

   

 

 

 

Earnings from operations

   50,181    (1,018   49,163 

Non-operating expense, net

   5,919    —      5,919 
  

 

 

   

 

 

   

 

 

 

Earnings before income taxes

   44,262    (1,018   43,244 

Income tax expense

   11,517    (203   11,314 
  

 

 

   

 

 

   

 

 

 

Net earnings

  $32,745   $(815  $31,930 
  

 

 

   

 

 

   

 

 

 

Net earnings per share:

      

Basic

  $0.91   $(0.02  $0.89 
  

 

 

   

 

 

   

 

 

 

Diluted

  $0.90   $(0.02  $0.88 
  

 

 

   

 

 

   

 

 

 

Shares used in per share calculations:

      

Basic

   35,913    —      35,913 
  

 

 

   

 

 

   

 

 

 

Diluted

   36,263    —      36,263 
  

 

 

   

 

 

   

 

 

 

STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2018

The adoption of Topic 606 had no effect on net cash provided by operating activities, net cash used in investing activities or net cash used in financing activities for the three months ended March 31, 2018. The adjustment to net earnings noted above in reconciling our reported results of operations for the quarter under Topic 606 topre-Topic 606 adoption was fully offset by adjustments to the reported changes in asset and liability balances, resulting in no effect on operating cash flows.

Significant Accounting Policy

Revenue is measured based on the consideration specified in a contract with a client, and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control of a product or service to a client.

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a client, are excluded from revenue. This is consistent with our accounting treatment prior to the adoption of Topic 606, whereby we reported sales net of any sales-based taxes assessed by governmental authorities that are imposed on and concurrent with sales transactions.

INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Years Ending December 31,

 

 

 

 

2019

 

$

21,499

 

2020

 

 

15,580

 

2021

 

 

12,121

 

2022

 

 

9,150

 

2023

 

 

6,296

 

Thereafter

 

 

7,238

 

Total minimum lease payments

 

$

71,884

 

 

We record the freight we bill to our clients as net sales and the related freight costs we pay as costs of goods sold. This is consistent with our accounting treatment prior to the adoption of Topic 606.

Nature of Goods and Services

We sell hardware and software products on both a stand-alone basis without any services and as solutions bundled with services.

When we provide a combination of hardware and software products with the provision of services, we separately identify our performance obligations under our contract with the client as the distinct goods (hardware and/or software products) or services that will be provided. The total transaction price for an arrangement with multiple performance obligations is allocated at contract inception to each distinct performance obligation in proportion to its stand-alone selling price. The stand-alone selling price is the price at which we would sell a promised good or service separately to a client. Observable stand-alone prices are used when they are available. If not available, we estimate the price based on observable inputs, including direct labor hours and allocable costs.

Hardware Offerings

We recognize hardware product revenue at the point in time when a client takes control of the hardware, which typically occurs when title and risk of loss have passed to the client at its destination. Our selling terms and conditions were modified during the fourth quarter of 2017 to specify F.O.B. destination contractual terms such that control is transferred from the Company at the point in time when the product is received by the client. Prior to the adoption of Topic 606, because we either (i) had a general practice of covering client losses while products were in transit despite title and risk of loss contractually transferring at the point of shipment or (ii) had specifically stated F.O.B. destination contractual terms with the client, delivery was not deemed to have occurred until the point in time when the product was received by the client. The transaction price for hardware sales is adjusted for estimated product returns that we expect to occur under our return policy based upon historical return rates.

We leverage drop-shipment arrangements with many of our partners and suppliers to deliver products to our clients without having to physically hold the inventory at our warehouses, thereby increasing efficiency and reducing costs. We recognize revenue for drop-shipment arrangements on a gross basis as the principalAmounts in the transaction when the product is received by the client because we control the product prior to transfer to the client. We also assume primary responsibility for fulfillmenttable above exclude approximately $1.6 million in the arrangement, we assume inventory risk if the product is returned by the client, we set the price of the product charged to the client and we work closely with our clients to determine their hardware and software specifications. This is consistent with our accounting treatment prior to the adoption of Topic 606.

Bill and Hold Transactions

We offer a service to our customers whereby clients may purchase product that we procure on their behalf and, at our clients’ direction, store the product2019 in our warehouse for a designated period of time, with the intention of deploying the product to the clients’ designated locations at a later date. These warehousing services are designed to help our clients with inventory management challenges associated with technology roll-outs, product that is moving to end of life, and/or clients needing integrated stock available for immediate deployment. In some circumstances, we may also perform lab integration services on a portion of the product prior to shipment to our clients for anon-cancellable rental income.

INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

separate fee. The client is invoiced and title transfers to the client upon receipt of the product at our warehouse. These product contracts arenon-cancelable with customary credit terms beginning the date the product is received in our warehouse and the warranty periods begin on the date of invoice. Revenue is recognized for the sale of the product to the client upon receipt of the product at our warehouse.

The warehousing services and lab integration fees are considered separate performance obligations. Under previous accounting guidance, prior to the adoption of Topic 606, it was determined that these product sales transactions did not meet the revenue recognition criteria under GAAP. Therefore, we did not record product net sales, and the inventories were classified as inventories not available for sale on our consolidated balance sheet, until the product was delivered to the clients’ designated location. If clients remitted payment before we delivered the product to them, we recorded the payments received as deferred revenue on our consolidated balance sheet until such time as the product was delivered.

Software Offerings

We recognize revenue from software sales at the point in time when the client acquires the right to use or copy software under license and control transfers to the client. Revenue is recognized upon the commencement of the term of the software license agreement or when the renewal term begins, as applicable. This is a change from our accounting treatment prior to the adoption of Topic 606, whereby revenue from renewals of software licenses was recognized when the parties agreed to the renewal or extension, provided that all other revenue recognition criteria had been met.

Although the revenue recognition treatment for term software license renewals has changed as described above, a substantial portion of the software licenses we sell are perpetual software licenses and do not require renewal or extension after their initial purchase by the client. Such perpetual licenses are periodically subject totrue-up, whereby additional perpetual licenses are sold under the client’spre-existing master agreement. Suchtrue-ups are generally sold in arrears, and clients are invoiced for the additional licenses they had already been utilizing. Since the client controlled these additional perpetual licenses prior to thetrue-up, software revenue related to the underlying additional licenses is recognized when we agree to thetrue-up with our client and the partner. This is consistent with our accounting treatment prior to the adoption of Topic 606.

Software Maintenance

Software maintenance agreements provide our clients with the right to obtain any software upgrades, bug fixes and help desk and other support services directly from the software publisher at no additional charge during the term of the software maintenance agreements. We act as the software publisher’s agent in selling these software maintenance agreements and do not assume any performance obligation to the client under the agreements. As a result, we are the agent in these transactions and these sales are recorded on a net sales recognition basis. Under net sales recognition, the cost of the software maintenance agreement 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. Because we are acting as the software publisher’s agent, revenue is recognized when the parties agree to the initial purchase, renewal or extension as our agency services are then complete. This is consistent with our accounting treatment prior to the adoption of Topic 606. As discussed in Note 10, we report all fees earned from activities reported net within our services net sales category in our statements of operations.

INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Cloud /Software-as-a-Service Offerings

Cloud orsoftware-as-a-service subscription products provide our clients with access to software products hosted in the public cloud without the client taking possession of the software. We act as the software publisher’s agent in selling thesesoftware-as-a service subscription products and do not host the software products on our servers. We do not take control of the software products or assume any performance obligation to the clients related to the provisioning of the offerings in the cloud. As a result, these sales are recorded on a net sales recognition basis. This is consistent with our accounting treatment prior to the adoption of Topic 606. As discussed in Note 10, we report all fees earned from activities reported net within our services net sales category in our statements of operations.

Services Sales

We design, procure, deploy, implement and manage solutions that combine hardware, software and services to help businesses run smarter. Such services are provided by us or third-partysub-contract vendors as part of bundled arrangements, or are provided separately on a stand-alone basis as technical, consulting or managed services engagements. If the services are provided as part of a bundled arrangement with hardware and software, the hardware, software and services are generally distinct performance obligations. In general, we recognize revenue from services engagements as we perform the underlying services and satisfy our performance obligations.

We recognize revenue for sales of services by measuring progress toward complete satisfaction of the related service performance obligation. Billings for such services that are made in advance of the related revenue recognized are recorded as a contract liability.

Specific revenue recognition practices for certain of our services offerings are described in further detail below.

Time and Materials Services Contracts.We recognize revenue for professional services engagements that are on a time and materials basis based upon hours incurred for the performance completed to date for which we have the right to consideration, even if such amounts have not yet been invoiced as of period end. This is consistent with our accounting treatment prior to the adoption of Topic 606, whereby we recognized revenue for professional services engagements that are on a time and materials basis based upon hours incurred as the services were performed and amounts were earned.

Fixed Fee Services Contracts.We recognize revenue on fixed fee professional services contracts using a proportional performance method of revenue recognition based on the ratio of direct labor and other allocated costs incurred to total estimated direct labor and other allocated costs. This is consistent with our accounting treatment prior to the adoption of Topic 606.

OneCall Support Services Contracts.When we sell certain hardware and/or software products to our clients, we also enter into service contracts with them. These contracts are support service agreements for the hardware and/or software products that were purchased. Under certain support services contracts, although we purchase third-party support contracts for maintenance on the specific hardware or software products we have sold, our internal support desk assists the client first by performing an initial technical triage to determine the source of the problem and whether we can direct the client on how to fix the problem. We refer to these services as “OneCall.” We act as the principal in the transaction because we perform the OneCall services over the term of the support service contract and we set the price of the service charged to the client. As a result, we recognize revenue from OneCall extended service contracts on a gross sales recognition basis ratably over the contract term of the stand ready obligation, generally one to three years.

INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

On our balance sheet, a significant portion of our contract liabilities balance relates to OneCall support services agreements for which clients have paid or have been invoiced but for which we have not yet recognized the applicable services revenue. We also defer incremental direct costs to fulfill our service contracts that we prepay to third parties for direct support of our fulfillment of the service contract to our clients under our contract terms and amortize them into operations over the term of the contracts.

The recognition of revenue and related costs for our stand ready obligation under our OneCall service contracts on a straight-line basis over the term of the contract is consistent with our accounting treatment prior to the adoption of Topic 606.

Vendor Direct Support Services Contracts.When we do not provide OneCall services to the client on hardware and/or software products that were purchased, the client purchases a vendor direct support services contract through us. Under these contracts, our clients call the manufacturer/publisher or its designated service organization directly for both the initial technical triage and anyfollow-up assistance. We act as the manufacturer/publisher’s agent in selling these support service contracts and do not assume any performance obligation to the client under the arrangements. As a result, these sales are recorded on a net sales recognition basis similar to software maintenance agreements, as discussed above. Because we are acting as the manufacturer/publisher’s agent, revenue is recognized when the parties agree to the purchase of the support services contract as our agency services are then complete. This is consistent with our accounting treatment prior to the adoption of Topic 606.

Third-party Provided Services.A majority of our third-partysub-contractor services contracts are entered into in conjunction with other services contracts under which the services are performed by Insight teammates. We have concluded that we control all services under the contract and can direct the third-partysub-contractor to provide the requested services. As such, we act as the principal in the transaction and record the services under a gross sales recognition basis, with the selling price being recorded in sales and our cost to the third-party service provider being recorded in costs of goods sold. For certain third-party service contracts in which we are not responsible for fulfillment of the services, we have concluded that we are an agent in the transaction and record revenue on a net sales recognition basis. This is consistent with our accounting treatment prior to the adoption of Topic 606.

INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Disaggregation of Revenue

3.

Sales Recognition

In the following table, revenue is disaggregated by our reportable operating segments, which are primarily defined bytheirby their related geographies, as well as by major product offering, by major client group and by recognition on either a gross basis as a principal in the arrangement, or on a net basis as an agent, for the three months ended March 31, 2019 and 2018 (in thousands):

 

 

Three Months Ended March 31, 2019

 

  Three Months Ended March 31, 2018 

 

North America

 

 

EMEA

 

 

APAC

 

 

Consolidated

 

  North
America
   EMEA   APAC   Consolidated 

Major Product Offering

        

Major Offerings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hardware

  $873,341   $187,010   $7,160   $1,067,511 

 

$

748,337

 

 

$

171,525

 

 

$

6,518

 

 

$

926,380

 

Software

   290,476    184,918    39,250    514,644 

 

 

322,079

 

 

 

183,148

 

 

 

35,065

 

 

 

540,292

 

Services

   143,581    28,487    8,680    180,748 

 

 

172,025

 

 

 

35,502

 

 

 

11,267

 

 

 

218,794

 

  

 

   

 

   

 

   

 

 
  $1,307,398   $400,415   $55,090   $1,762,903 
  

 

   

 

   

 

   

 

 

 

$

1,242,441

 

 

$

390,175

 

 

$

52,850

 

 

$

1,685,466

 

Major Client Groups

        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large Enterprise / Corporate

  $979,894   $265,921   $13,034   $1,258,849 

 

$

976,841

 

 

$

260,607

 

 

$

13,307

 

 

$

1,250,755

 

Public Sector

   111,604    116,614    29,931    258,149 

 

 

97,117

 

 

 

109,066

 

 

 

26,154

 

 

 

232,337

 

Small andMedium-Sized Businesses

   215,900    17,880    12,125    245,905 

 

 

168,483

 

 

 

20,502

 

 

 

13,389

 

 

 

202,374

 

  

 

   

 

   

 

   

 

 

 

$

1,242,441

 

 

$

390,175

 

 

$

52,850

 

 

$

1,685,466

 

  $1,307,398   $400,415   $55,090   $1,762,903 
  

 

   

 

   

 

   

 

 

Revenue Recognition based on acting as Principal or Agent in the Transaction

        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross revenue recognition (Principal)

  $1,259,489   $383,077   $52,920   $1,695,486 

 

$

1,182,078

 

 

$

367,165

 

 

$

47,866

 

 

$

1,597,109

 

Net revenue recognition (Agent)

   47,909    17,338    2,170    67,417 

 

 

60,363

 

 

 

23,010

 

 

 

4,984

 

 

 

88,357

 

  

 

   

 

   

 

   

 

 

 

$

1,242,441

 

 

$

390,175

 

 

$

52,850

 

 

$

1,685,466

 

  $1,307,398   $400,415   $55,090   $1,762,903 
  

 

   

 

   

 

   

 

 

10


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

 

 

Three Months Ended March 31, 2018

 

 

 

North America

 

 

EMEA

 

 

APAC

 

 

Consolidated

 

Major Offerings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hardware

 

$

873,341

 

 

$

187,010

 

 

$

7,160

 

 

$

1,067,511

 

Software

 

 

261,060

 

 

 

190,202

 

 

 

39,019

 

 

 

490,281

 

Services

 

 

143,979

 

 

 

29,922

 

 

 

10,801

 

 

 

184,702

 

 

 

$

1,278,380

 

 

$

407,134

 

 

$

56,980

 

 

$

1,742,494

 

Major Client Groups

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large Enterprise / Corporate

 

$

952,810

 

 

$

272,640

 

 

$

12,966

 

 

$

1,238,416

 

Public Sector

 

 

110,504

 

 

 

116,614

 

 

 

31,376

 

 

 

258,494

 

Small and Medium-Sized Businesses

 

 

215,066

 

 

 

17,880

 

 

 

12,638

 

 

 

245,584

 

 

 

$

1,278,380

 

 

$

407,134

 

 

$

56,980

 

 

$

1,742,494

 

Revenue Recognition based on acting as

   Principal or Agent in the Transaction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross revenue recognition (Principal)

 

$

1,230,412

 

 

$

388,337

 

 

$

51,825

 

 

$

1,670,574

 

Net revenue recognition (Agent)

 

 

47,968

 

 

 

18,797

 

 

 

5,155

 

 

 

71,920

 

 

 

$

1,278,380

 

 

$

407,134

 

 

$

56,980

 

 

$

1,742,494

 

Contract Balances

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers as of March 31, 20182019 and January 1,December 31, 2018 (in thousands):

 

 

March 31,

 

 

December 31,

 

  March 31,
2018
   January 1,
2018
 

 

2019

 

 

2018

 

Current receivables, which are included in “Accounts receivable, net”

  $1,794,794   $1,849,803 

 

$

1,723,817

 

 

$

1,931,736

 

Non-current receivables, which are included in “Other assets”

   41,748    29,675 

 

 

142,792

 

 

 

38,157

 

Contract assets, which are included in “Other current assets”

   1,040    595 

 

 

1,207

 

 

 

892

 

Contract liabilities, which are included in “Deferred revenue” and “Other liabilities”

   89,533    86,743 

 

 

88,801

 

 

 

82,117

 

Significant changes in the contract assets and the contract liabilities balances during the three months ended March 31, 20182019 are as follows (in thousands):

 

   Increase (Decrease) 
   Contract
Assets
   Contract
Liabilities
 

Balances at January 1, 2018

  $595   $86,743 

Reclassification of the beginning contract liabilities to revenue, as the result of performance obligations satisfied

   —      (19,473

Cash received in advance and not recognized as revenue

   —      22,263 

Reclassification of the beginning contract assets to receivables, as the result of rights to consideration becoming unconditional

   (395   —   

Contract assets recognized, net of reclassification to receivables

   840    —   
  

 

 

   

 

 

 

Balances at March 31, 2018

  $1,040   $89,533 
  

 

 

   

 

 

 

 

 

Increase (Decrease)

 

 

 

Contract

 

 

Contract

 

 

 

Assets

 

 

Liabilities

 

Balances at December 31, 2018

 

$

892

 

 

$

82,117

 

Reclassification of the beginning contract liabilities

   to revenue, as the result of performance obligations satisfied

 

 

 

 

 

(17,651

)

Cash received in advance and not recognized as revenue

 

 

 

 

 

24,335

 

Reclassification of the beginning contract assets to receivables, as

   the result of rights to consideration becoming unconditional

 

 

(117

)

 

 

 

Contract assets recognized, net of reclassification to receivables

 

 

432

 

 

 

 

Balances at March 31, 2019

 

$

1,207

 

 

$

88,801

 

Transaction price allocated to the remaining performance obligations

11


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The following table includes estimated net sales related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 20182019 that are expected to be recognized in the future (in thousands):

 

 

Products

 

 

Services

 

 

Total

 

  Products   Services   Total 

Remaining nine months of 2018

  $370   $78,500   $78,870 

2019

   193    47,727    47,920 

Remaining nine months of 2019

 

$

9

 

 

$

74,784

 

 

$

74,793

 

2020

   84    20,998    21,082 

 

 

6

 

 

 

33,293

 

 

 

33,299

 

2021

   6    6,867    6,873 

 

 

 

 

 

 

13,936

 

 

 

13,936

 

2022

   —      3,110    3,110 

 

 

 

 

 

 

5,191

 

 

 

5,191

 

2023

   —      910    910 

2024 and thereafter

   —      24    24 
  

 

   

 

   

 

 

2023 and thereafter

 

 

 

 

 

 

2,667

 

 

 

2,667

 

Total remaining performance obligations

  $653   $158,136   $158,789 

 

$

15

 

 

$

129,871

 

 

$

129,886

 

  

 

   

 

   

 

 

Topic 606 allows for certain practical expedients

With the exception of remaining performance obligations associated with our OneCall Support Services contracts which we have elected to apply. As a result, we do not disclose information about remainingare included in the table above regardless of original duration, remaining performance obligations that have original expected durations of one year or less are not included in the table above.  Amounts not included in the table above have an average original expected duration of eightnine months.  Additionally, for our time and material services contracts, whereby we have the right to consideration from a client in an amount that corresponds directly with the value to the client of our performance completed to date, we recognized revenue in the amount to which we have a right to invoice as of March 31, 20182019 and do not disclose information about related remaining performance obligations in the table above.  Our time and material contracts have an average expected duration of 1114 months.

INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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, therefore we do not include performance obligations under open cancelable purchase orders, which do not qualify for revenue recognition, in accordance with Topic 606 as of March 31, 2018, in the table above.

4.

Assets recognized for costs of obtaining a contract with a customer

We believe that the only significant incremental costs incurred to obtain contracts with our clients within the scope of Topic 606 are sales commissions. The majority of our contracts are completed within aone-year performance period, and for contracts with a specified term of one year or less, we have exercised a practical expedient, which allows us to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that we otherwise would have recognized is one year or less. Under Topic 606, we record sales commissions on contracts with performance periods that exceed one year as an asset and amortize the asset to expense over the related contract performance period. As of March 31, 2018, the related asset balance was $2,467,000, which we expect to recognize as expense over the next 36 months. Under previous accounting standards, we recognized sales commissions as earned and recorded such amounts within selling and administrative expenses in our statements of operations.

3. 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,
 

 

Three Months Ended

March 31,

 

  2018   2017 

 

2019

 

 

2018

 

Numerator:

    

 

 

 

 

 

 

 

 

Net earnings

  $32,745   $13,848 

 

$

39,327

 

 

$

33,003

 

  

 

   

 

 

Denominator:

    

 

 

 

 

 

 

 

 

Weighted average shares used to compute basic EPS

   35,913    35,602 

 

 

35,609

 

 

 

35,913

 

Dilutive potential common shares due to dilutive

RSUs, net of tax effect

   350    583 

 

 

494

 

 

 

350

 

  

 

   

 

 

Weighted average shares used to compute diluted EPS

   36,263    36,185 

 

 

36,103

 

 

 

36,263

 

  

 

   

 

 

Net earnings per share:

    

 

 

 

 

 

 

 

 

Basic

  $0.91   $0.39 

 

$

1.10

 

 

$

0.92

 

  

 

   

 

 

Diluted

  $0.90   $0.38 

 

$

1.09

 

 

$

0.91

 

  

 

   

 

 

12


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

For the three months ended March 31, 2019 and 2018, 164,000 and 2017, 20,000, and 96,000, respectively, of our RSUs were not included in the diluted EPS calculations because their inclusion would have been anti-dilutive.  These share-based awards could be dilutive in the future.

5.

Debt, Inventory Financing Facility, Finance Leases and Other Financing Obligations

INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

4. Debt Inventory Financing Facility, Capital Leases and Other Financing Obligations

Debt

Our long-term debt consists of the following (in thousands):

 

  March 31,
2018
   December 31,
2017
 

 

March 31,

2019

 

 

December 31,

2018

 

Senior revolving credit facility

  $2,000   $117,500 

 

$

 

 

$

 

Term Loan A (less unamortized debt issuance costs of $811 and $873, respectively)

   162,158    165,377 

Accounts receivable securitization financing facility

   94,000    25,000 

 

 

112,000

 

 

 

194,000

 

Capital leases and other financing obligations

   3,769    5,291 
  

 

   

 

 

Finance leases and other financing obligations

 

 

2,388

 

 

 

2,920

 

Total

   261,927    313,168 

 

 

114,388

 

 

 

196,920

 

Less: current portion of long-term debt

   (16,358   (16,592

 

 

(1,161

)

 

 

(1,395

)

  

 

   

 

 

Long-term debt

  $245,569   $296,576 

 

$

113,227

 

 

$

195,525

 

  

 

   

 

 

Our senior revolving credit facility (“revolving facility”) has an aggregate U.S. dollar equivalent maximum borrowing amount of $350,000,000, including a maximum borrowing capacity that may be used for borrowing in certain foreign currencies of $50,000,000, and matures on June 23, 2021. In January 2017, we amended our revolving facility to expand the facility by $175,000,000 in the form of an incremental Term Loan A (“TLA”). The TLA requires amortization payments of 5%, 7.5%, 10%, 12.5% and 15% of the original principal balance in years one through five, respectively, to be paid quarterly through March 31, 2021, with the remaining balance of $107,187,500 due at maturity on June 23, 2021.

Our accounts receivable securitization financing facility (the “ABS facility”) has a maximum aggregate borrowing availability of $250,000,000, and matures on June 23, 2019.2021.  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, 2018,2019, qualified receivables were sufficient to permit access to the full $250,000,000 facility amount, of which $94,000,000$112,000,000 was outstanding.

Our consolidated debt balance that can be outstanding at the end of any fiscal quarter under our revolving facility our TLA 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, excludingnon-cash imputed interest on our inventory financing facility, (ii) income tax expense (benefit), (iii) depreciation and amortization,(iv) non-cash stock-based compensation, (v) extraordinary ornon-recurringnon-cash non-recurring non-cash losses or expenses and (vi) certain cash restructuring and acquisition-related charges and synergies, not to exceed a specified cap (“adjusted earnings”).  The maximum leverage ratio permitted under the facilities is currently 3.253.0 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, 2018,2019, our aggregate debt balance that could have been outstanding under our revolving facility our TLA and our ABS facility was the full amount of the maximum borrowing capacity of $762,969,000, of which $2,000,000 was outstanding under our revolving facility, $162,969,000 was outstanding under our TLA and $94,000,000 was outstanding under our ABS facility at March 31, 2018.$600,000,000.

INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Inventory Financing Facility

Our inventory financing facility was amended on March 23, 2018 to increase the aggregate availability for vendor purchases under the facility from $325,000,000 tohas a maximum borrowing capacity of $400,000,000, of which $228,102,000$260,160,000 was outstanding at March 31, 2018.2019.  The inventory financing facility matures on June 23, 2021. In conjunction with the increase in the aggregate availability under the facility, we no longer have the option to request additional increases in the aggregate amount available under the inventory financing facility without amending the facility.  If balances are not paid within stated vendor terms, they will accrue interest at prime plus 1.25%.  Amounts outstanding under this facility are classified separately as accounts payable—payable – inventory financing facility in the accompanying consolidated balance sheets.

Capital13


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Finance Lease and Other Financing Obligations

Our capitalfinance lease obligations totaled $2,775,000$2,388,000 and $2,802,000$2,920,000 as of March 31, 20182019 and December 31, 2017,2018, respectively.     

In conjunction with our acquisition of Datalink effective January 6, 2017, we acquired certain obligations associated with Datalink’s financing of the equipment that it leased to its clients. These financing obligations totaled $994,000 and $2,489,000 as of March 31, 2018 and December 31, 2017, respectively.

The current and long-term portions of our capital lease and other financing obligationsfinance leases are included in the current and long-term portions of long-term debt in the table above and in our consolidated balance sheets as of March 31, 20182019 and December 31, 2017.2018.  Further, see Note 2 for additional information.    

6.

Restricted Cash

5. SeveranceAmounts included in restricted cash represent those required to be set aside by a contractual agreement with a lessor related to certain leased office space in foreign jurisdictions.  The following table provides a reconciliation of cash, cash equivalents and Restructuring Activities

Duringrestricted cash reported within the three months ended March 31, 2018, we recorded severance expensebalance sheets that sum to the total of the same such amounts shown in eachthe statements of our operating segments. The charges in all three operating segmentscash flows for the three months ended March 31, 2018 primarily related to severance actions taken to realign certain roles2019 and responsibilities.

The following table details the activity related to these resource actions for the three months ended March 31, 2018 and the outstanding obligations as of March 31, 2018 (in thousands):

 

   North America   EMEA   APAC   Consolidated 

Balances at December 31, 2017

  $1,631   $2,994   $15   $4,640 

Severance costs, net of adjustments

   443    1,074    127    1,644 

Cash payments

   (791   (2,506   (142   (3,439

Foreign currency translation adjustments

   (20   81    —      61 
  

 

 

   

 

 

   

 

 

   

 

 

 

Balances at March 31, 2018

  $1,263   $1,643   $—     $2,906 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Cash and cash equivalents

 

$

124,831

 

 

$

142,655

 

Restricted cash included in other current assets

 

 

8

 

 

 

8

 

Restricted cash included in other non-current assets

 

 

1,627

 

 

 

1,630

 

Total cash, cash equivalents and restricted cash shown in

   the statement of cash flows

 

$

126,466

 

 

$

144,293

 

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.

INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

 

March 31,

2018

 

 

December 31,

2017

 

Cash and cash equivalents

 

$

100,237

 

 

$

105,831

 

Restricted cash included in other current assets

 

 

10

 

 

 

46

 

Restricted cash included in other non-current assets

 

 

1,604

 

 

 

1,568

 

Total cash, cash equivalents and restricted cash shown in

   the statement of cash flows

 

$

101,851

 

 

$

107,445

 

 

6. 7.Stock-Based Compensation

We recorded the followingpre-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,
 

 

Three Months Ended

March 31,

 

  2018   2017 

 

2019

 

 

2018

 

North America

  $2,390   $2,538 

 

$

3,123

 

 

$

2,390

 

EMEA

   690    745 

 

 

870

 

 

 

690

 

APAC

   104    129 

 

 

122

 

 

 

104

 

  

 

   

 

 

Total Consolidated

  $3,184   $3,412 

 

$

4,115

 

 

$

3,184

 

  

 

   

 

 

As of March 31, 2018,2019, total compensation cost related to nonvested RSUs not yet recognized is $28,174,000,$36,742,000, which is expected to be recognized over the next 1.411.84 years on a weighted-average basis.

14


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The following table summarizes our RSU activity during the three months ended March 31, 2018:2019:

 

   Number   Weighted Average
Grant Date Fair Value
   Fair Value 

Nonvested at January 1, 2018

   892,113   $32.86   

Granted(a)

   377,045    35.30   

Vested, including shares withheld to

cover taxes

   (321,924   29.65   $11,355,845(b) 
      

 

 

 

Forfeited

   (14,185   33.14   
  

 

 

     

Nonvested at March 31, 2018(a)

   933,049    34.95   $32,591,402(c) 
  

 

 

     

 

 

 

 

 

Number

 

 

Weighted

Average

Grant Date

Fair Value

 

 

Fair Value

 

 

Nonvested at January 1, 2019

 

 

1,020,930

 

 

$

36.10

 

 

 

 

 

 

Granted(a)

 

 

326,868

 

 

 

57.52

 

 

 

 

 

 

Vested, including shares withheld to cover taxes

 

 

(387,406

)

 

 

33.90

 

 

$

13,133,063

��

(b)

Forfeited

 

 

(7,888

)

 

 

40.94

 

 

 

 

 

 

Nonvested at March 31, 2019(a)

 

 

952,504

 

 

 

44.30

 

 

$

52,444,870

 

(c)

 

(a)

Includes 116,96788,509 RSUs subject to remaining performance conditions.  The number of RSUs subject to performance conditions are based on the Company achieving 97% of its 20182019 targeted financial results.  The number of RSUs ultimately awarded under the performance-based RSUs varies based on actual achieved financial results for 2018.2019.  

(b)

(b)

The aggregate fair value of vested RSUs represents the totalpre-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)

(c)

The aggregate fair value of the nonvested RSUs and the RSUs expected to vest represents the totalpre-tax fair value, based on our closing stock price of $34.93$55.06 as of March 29, 20182019 (the last trading day of the quarter), which would have been received by holders of RSUs had all such holders sold their underlying shares on that date.

8.

7. Income Taxes

Our effective tax rate for the three months ended March 31, 2019 and 2018 was 23.5% and 2017 was 26.0% and 26.2%25.9%, respectively.  For the three months ended March 31, 2019, our effective tax rate was higher than the United States federal statutory rate of 21.0% due primarily to state income taxes, net of federal benefit, and higher taxes on earnings in foreign jurisdictions partially offset by tax benefits on the settlement of employee share-based awards and the recognition of tax benefits related to research and development activities.  For the three months ended March 31, 2018, our effective tax rate was higher than the United States federal statutory rate of 21.0% due primarily to state income taxes net of federal benefit. For the three months ended March 31, 2017, our effective tax rate was lower than the United States federal statutory rate of 35.0% due primarily to the recognition of $1,996,000 of tax benefits on the settlement of employee share-based awards in accordance with a new accounting standard, which was adopted effective January 1, 2017, and the recognition of certain tax benefits related to the release of reserves for specific uncertain tax positions during the quarter. 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. These decreases in our effective tax rate were partially offset by state income taxes, net of federal benefit, and the effect ofnon-deductible acquisition-related expenses incurred during the first quarter of 2017.

INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

In December 2017, U.S. federal tax reform was enacted as part of the U.S. Tax Cuts and Jobs Act. Although we recorded a tax charge in 2017 in connection with the enactment of the U.S. Tax Cuts and Jobs Act, we have not completed our accounting related to all of its provisions. U.S. income taxes attributable to the remeasurement of U.S. deferred income taxes, the mandatory deemed repatriation provision and the state tax effects of these items are provisional amounts. For the quarter ended March 31, 2018, we have not made any changes to these provisional estimates, and we are continuing to analyze and model the impacts of the U.S. federal tax reform and will record said impacts as they become more certain.

As of March 31, 20182019 and December 31, 2017,2018, we had approximately $4,300,000$7,423,000 and $4,273,000,$6,849,000, respectively, of unrecognized tax benefits.  Of these amounts, approximately $268,000$373,000 and $287,000,$313,000, respectively, related to accrued interest.  In the future, if recognized, the liability associated with uncertain tax positions would affect our effective tax rate.  We do not believe there will be any changes over the next 12 months that would have a material effect on our effective tax rate.

Several of our subsidiaries are currently under audit for tax years 2012 through 2015.2017.  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.

8. Share Repurchase Program15


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

9.

Share Repurchase Program

On February 13, 2018, our Board of Directors authorized the repurchase of up to $50,000,000 of our common stock.  Our share repurchases will be made on the open market, subject to Rule10b-18 or in privately negotiated transactions, through block trades, through10b5-1 plans or otherwise, at management’s discretion.  The amount of shares purchased and the timing of the purchases will be based on market conditions, working capital requirements, general business conditions and other factors.  We intend to retire the repurchased shares.  We

During the three months ended March 31, 2019, we did not repurchase any shares of our common stock.  During the comparative three months ended March 31, 2018, we repurchased 221,256 shares of our common stock on the open market at a total cost of approximately $7,679,000 (an average price of $34.71 per share) during the three months ended March 31, 2018..  All shares repurchased were retired.      During the comparative three months ended March 31, 2017, we did not repurchase any shares of our common stock.

10.

Commitments and Contingencies

9. 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, 2018,2019, we had approximately $1,962,000$3,939,000 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.

Management believes that payments, if any, related to these performance bonds are not probable at March 31, 2018.2019.  Accordingly, we have not accrued any liabilities related to such performance bonds in our consolidated financial statements.

INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Employment Contracts and Severance Plans

We have employment contracts with, and severance 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, 2018.2019.  Accordingly, we have not accrued any liabilities related to such indemnifications in our consolidated financial statements.

16


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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 individual’s status or service as our executive officer or director (subject to exceptions such as where the individual failed to act in good faith or in a manner the individual reasonably believed to be in, or not opposed to, the best interests of the Company) and to advance expenses incurred by such individual with respect to which such individual may be entitled to indemnification by us.  There are no pending legal proceedings that involve the indemnification of any of the Company’s directors or officers.

Contingencies Related to Third-Party Review

From time to time, we are subject to potential claims and assessments from third parties.  We are also subject to various governmental, client and 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.

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 allegednon-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

INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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 would reasonably be expected to have a material adverse effect on its business, financial condition or results of operations.

10.

17


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

11.Segment Information

We operate in three reportable geographic operating segments: North America; EMEA; and APAC.  Our offerings in North America and certain countries in EMEA and APAC include IT hardware, software and services.  Our offerings in the remainder of our EMEA and APAC segments are largely software and certain software-related services.

During the year ended December 31, 2017, subsequent to our acquisition of Datalink, our consolidated net sales from the provision of services approximated 10%. As such, beginning with our results of operations for the year ended December 31, 2017, we began reporting net sales from the provision of services and the related costs of goods sold separately from net sales of products and the related costs of goods sold on the face of our consolidated statement of operations. We continued this presentation in the three months ended March 31, 2018, and expect to continue this presentation in future periods. For comparability purposes, net sales and costs of goods sold for the three months ended March 31, 2017 have been expanded to conform to the current year presentation. These changes in presentation had no effect on previously reported total net sales, total costs of goods sold or gross profit amounts.

In conjunction with these changes in presentation, because fees earned from activities reported net are considered services revenues, we reclassified certain revenue streams for which we act as the agent in the transaction to net sales from services. Previously, we included these net revenue streams within our software and, to a lesser extent, hardware sales mix categories based on the type of product being sold (e.g., fees earned for the sale of software maintenance and certain software licenses were included in software sales and fees earned for the sale of certain third-party provided training and warranty services were included in hardware sales when we historically disclosed and analyzed our sales mix). For comparability purposes, our sales mix among our hardware, software and services categories for the three months ended March 31, 2017 has been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported total net sales amounts. The following table summarizes net sales by offering for North America, EMEA and APAC including the effect of the reclassifications on the previously reported net sales by sales mix amounts for the three months ended March 31, 20172019 and 2018 (in thousands):

INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

   North America
Three Months Ended
March 31,
   EMEA
Three Months Ended
March 31,
   APAC
Three Months Ended
March 31,
 

Sales Mix

  2018   2017   2018   2017   2018   2017 
       (As
Reclassified)
       (As
Reclassified)
       (As
Reclassified)
 

Hardware

  $873,341   $710,864   $187,010   $138,877   $7,160   $4,080 

Software

   290,476    273,983    184,918    169,318    39,250    24,847 

Services

   143,581    126,105    28,487    22,160    8,680    7,309 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $1,307,398   $1,110,952   $400,415   $330,355   $55,090   $36,236 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

In North America, EMEA and APAC, fees earned from activities reported on a net basis totaling $21,981,000, $10,876,000 and $2,172,000, respectively, that were previously reported as part of our software or hardware product categories in the three months ended March 31, 2017, were reclassified to services to conform to the current year presentation. On a consolidated basis, these reclassified amounts included a total of only $71,000 of fees previously included within the hardware sales mix category for the three months ended March 31, 2017.

 

 

North America

 

 

EMEA

 

 

APAC

 

 

 

Three Months Ended

March 31,

 

 

Three Months Ended

March 31,

 

 

Three Months Ended

March 31,

 

Sales Mix

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hardware

 

$

748,337

 

 

$

873,341

 

 

$

171,525

 

 

$

187,010

 

 

$

6,518

 

 

$

7,160

 

Software

 

 

322,079

 

 

 

261,060

 

 

 

183,148

 

 

 

190,202

 

 

 

35,065

 

 

 

39,019

 

Services

 

 

172,025

 

 

 

143,979

 

 

 

35,502

 

 

 

29,922

 

 

 

11,267

 

 

 

10,801

 

 

 

$

1,242,441

 

 

$

1,278,380

 

 

$

390,175

 

 

$

407,134

 

 

$

52,850

 

 

$

56,980

 

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, 20182019 or 2017.2018.

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 following tables present our results of operations by reportable operating segment for the periods indicated (in thousands):

 

  Three Months Ended March 31, 2018 

 

Three Months Ended March 31, 2019

 

  North America   EMEA   APAC   Consolidated 

 

North America

 

 

EMEA

 

 

APAC

 

 

Consolidated

 

Net sales:

        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

  $1,163,817   $371,928   $46,410   $1,582,155 

 

$

1,070,416

 

 

$

354,673

 

 

$

41,583

 

 

$

1,466,672

 

Services

   143,581    28,487    8,680    180,748 

 

 

172,025

 

 

 

35,502

 

 

 

11,267

 

 

 

218,794

 

  

 

   

 

   

 

   

 

 

Total net sales

   1,307,398    400,415    55,090    1,762,903 

 

 

1,242,441

 

 

 

390,175

 

 

 

52,850

 

 

 

1,685,466

 

  

 

   

 

   

 

   

 

 

Costs of goods sold:

        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

   1,057,989    337,907    42,838    1,438,734 

 

 

974,701

 

 

 

324,038

 

 

 

38,569

 

 

 

1,337,308

 

Services

   74,038    6,716    3,410    84,164 

 

 

85,133

 

 

 

9,154

 

 

 

5,399

 

 

 

99,686

 

  

 

   

 

   

 

   

 

 

Total costs of goods sold

   1,132,027    344,623    46,248    1,522,898 

 

 

1,059,834

 

 

 

333,192

 

 

 

43,968

 

 

 

1,436,994

 

  

 

   

 

   

 

   

 

 

Gross profit

   175,371    55,792    8,842    240,005 

 

 

182,607

 

 

 

56,983

 

 

 

8,882

 

 

 

248,472

 

Operating expenses:

        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses

   132,640    48,283    7,257    188,180 

 

 

136,950

 

 

 

47,145

 

 

 

6,968

 

 

 

191,063

 

Severance and restructuring expenses

   443    1,074    127    1,644 

 

 

331

 

 

 

(85

)

 

 

124

 

 

 

370

 

  

 

   

 

   

 

   

 

 

Earnings from operations

  $42,288   $6,435   $1,458   $50,181 

 

$

45,326

 

 

$

9,923

 

 

$

1,790

 

 

$

57,039

 

  

 

   

 

   

 

   

 

 

18


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

  Three Months Ended March 31, 2017 

 

Three Months Ended March 31, 2018

 

  North America   EMEA   APAC   Consolidated 

 

North America

 

 

EMEA

 

 

APAC

 

 

Consolidated

 

Net sales:

        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

  $984,847   $308,195   $28,927   $1,321,969 

 

$

1,134,401

 

 

$

377,212

 

 

$

46,179

 

 

$

1,557,792

 

Services

   126,105    22,160    7,309    155,574 

 

 

143,979

 

 

 

29,922

 

 

 

10,801

 

 

 

184,702

 

  

 

   

 

   

 

   

 

 

Total net sales

   1,110,952    330,355    36,236    1,477,543 

 

 

1,278,380

 

 

 

407,134

 

 

 

56,980

 

 

 

1,742,494

 

  

 

   

 

   

 

   

 

 

Costs of goods sold:

        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

   891,587    282,509    26,961    1,201,057 

 

 

1,028,970

 

 

 

343,019

 

 

 

42,997

 

 

 

1,414,986

 

Services

   61,064    5,300    1,895    68,259 

 

 

74,039

 

 

 

8,065

 

 

 

5,141

 

 

 

87,245

 

  

 

   

 

   

 

   

 

 

Total costs of goods sold

   952,651    287,809    28,856    1,269,316 

 

 

1,103,009

 

 

 

351,084

 

 

 

48,138

 

 

 

1,502,231

 

  

 

   

 

   

 

   

 

 

Gross profit

   158,301    42,546    7,380    208,227 

 

 

175,371

 

 

 

56,050

 

 

 

8,842

 

 

 

240,263

 

Operating expenses:

        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses

   131,010    40,143    6,479    177,632 

 

 

132,640

 

 

 

48,283

 

 

 

7,257

 

 

 

188,180

 

Severance and restructuring expenses

   1,104    3,530    61    4,695 

 

 

443

 

 

 

1,074

 

 

 

127

 

 

 

1,644

 

Acquisition-related expenses

   2,947    —      —      2,947 
  

 

   

 

   

 

   

 

 

Earnings (loss) from operations

  $23,240   $(1,127  $840   $22,953 
  

 

   

 

   

 

   

 

 

Earnings from operations

 

$

42,288

 

 

$

6,693

 

 

$

1,458

 

 

$

50,439

 

The following is a summary of our total assets by reportable operating segment (in thousands):

 

  March 31,
2018
   December 31,
2017
 

 

March 31,

2019

 

 

December 31,

2018

 

North America

  $2,349,002   $2,337,573 

 

$

2,640,942

 

 

$

2,660,886

 

EMEA

   576,292    530,242 

 

 

614,556

 

 

 

611,338

 

APAC

   112,778    101,169 

 

 

114,156

 

 

 

98,959

 

Corporate assets and intercompany eliminations, net

   (465,661   (283,333

 

 

(613,187

)

 

 

(595,236

)

  

 

   

 

 

Total assets

  $2,572,411   $2,685,651 

 

$

2,756,467

 

 

$

2,775,947

 

  

 

   

 

 

We recorded the followingpre-tax amounts, by reportable operating segment, for depreciation and amortization in the accompanying consolidated financial statements (in thousands):

 

  Three Months Ended
March 31,
 

 

Three Months Ended

March 31,

 

  2018   2017 

 

2019

 

 

2018

 

Depreciation and amortization of property and equipment:

    

 

 

 

 

 

 

 

 

North America

  $4,298   $5,553 

 

$

3,957

 

 

$

4,298

 

EMEA

   1,003    1,150 

 

 

955

 

 

 

1,003

 

APAC

   132    127 

 

 

132

 

 

 

132

 

  

 

   

 

 

 

 

5,044

 

 

 

5,433

 

   5,433    6,830 
  

 

   

 

 

Amortization of intangible assets:

    

 

 

 

 

 

 

 

 

North America

   3,360    4,012 

 

 

3,636

 

 

 

3,360

 

EMEA

   74    12 

 

 

69

 

 

 

74

 

APAC

   177    199 

 

 

118

 

 

 

177

 

  

 

   

 

 

 

 

3,823

 

 

 

3,611

 

   3,611    4,223 
  

 

   

 

 

Total

  $9,044   $11,053 

 

$

8,867

 

 

$

9,044

 

  

 

   

 

 

19


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

12.

Acquisition

Effective August 1, 2018, we acquired 100 percent of the issued and outstanding shares of Cardinal, a digital solutions provider based in Cincinnati, Ohio, with offices across the Midwest and Southeast United States, for a cash purchase price, net of cash acquired, of approximately $78,400,000, including final working capital and tax gross up adjustments.  Cardinal provides technology solutions to digitally transform organizations through their expertise in mobile applications development, Internet of Things and cloud enabled business intelligence.  We believe that this acquisition strengthens our services capabilities and will bring value to our clients within our digital innovation services solution offering.

The fair value of net assets acquired was approximately $42,360,000, including $27,540,000 of identifiable intangible assets, consisting primarily of customer relationships that will be amortized using the straight line method over the estimated economic life of ten years.  The preliminary purchase price was allocated using the information currently available.  We finalized the fair value assumptions for identifiable intangible assets acquired in the fourth quarter of 2018.  Goodwill acquired approximated $36,040,000 which was recorded in our North America operating segment.  The goodwill is tax deductible.  The working capital adjustment in the amount of $762,000 was finalized in the fourth quarter of 2018 and paid in January 2019.  Additionally, we finalized the purchase price allocation when the tax gross up adjustment of $2,600,000 was agreed upon in April 2019.  This resulted in a reduction of the previously recorded purchase price of $400,000.

We consolidated the results of operations for Cardinal within our North America operating segment beginning on August 1, 2018, the effective date of the acquisition.  Our historical results would not have been materially affected by the acquisition of Cardinal and, accordingly, we have not presented pro forma information as if the acquisition had been completed at the beginning of each period presented in our statement of operations.


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this Quarterly Report on Form10-Q.  We refer to our customers as “clients,” our suppliers as “partners” and our employees as “teammates.”

Quarterly Overview

Today, every business is a technology business.  We are a Fortune 500 global IT provider helping businessesempower organizations of all sizes – from small and medium sized firms to worldwide enterprises, governments, schools and health care organizations – define, architect, implement and managewith Intelligent Technology SolutionsTM and services to maximize the business value of IT in North America; Europe, the Middle East and Africa (“EMEA”); and Asia-Pacific (“APAC”).  We empower ourAs a Fortune 500-ranked global provider of digital innovation, cloud/data center transformation, connected workforce, and supply chain optimization solutions, we help clients to manage their IT environments so they can drive meaningful business outcomes todayinnovate and transformoptimize their operations for tomorrow.to run smarter. Our offerings in North America and certain countries in EMEA and APAC include hardware, software and services.  Our offerings in the remainder of our EMEA and APAC segments are largely software and certain software-related services.

Consolidated net sales of $1.76 billion in

On a consolidated basis, for the three months ended March 31, 2018 increased 19%2019:

Net sales of $1.69 billion decreased 3% compared to the three months ended March 31, 2017, reflecting strong top line financial results across each of2018.  This change reflects a decrease in hardware net sales to large enterprise clients offset by growth in our geographic operating segments.software and services net sales.  Excluding the effects of fluctuating foreign currency exchange rates, consolidatedrate net sales increased 16% in the first quarter of 2018decreased 1% compared to the first quarter of 2017.2018.

Consolidated grossGross profit of $240.0$248.5 million in the three months ended March 31, 2018 increased 15%3% compared to the three months ended March 31, 2017. Excluding the effects of fluctuating foreign currency exchange rates, consolidated gross profit increased 12% in the three months ended March 31, 2018, compared to the three months ended March 31, 2017. Gross margin declined approximately 50 basis points year to year to 13.6%, reflecting a lower mix of fees from enterprise agreements and fewer professional services engagements, partly offset by the positive effect of changes to certain partner programs. As a result of the changes, certain incentives, which would normally be earned over the full year, were accelerated and were fully earned in the first quarter of 2018. We estimate that the benefit in the three months ended March 31, 2018 was approximately $5.0 million.

Consolidated selling and administrative expenses for the first quarter of 2018 increased $10.5 million, orup 6% year over year (up 3% excluding the effects of fluctuating foreign currency exchange rates). Our consolidated resultsrates.

Gross margin improved approximately 90 basis points to 14.7% of operations fornet sales in the first quarter of 2018 also include severance expense,three months ended March 31, 2019.  This increase reflects a change in sales mix towards higher margin net of adjustments, totaling $1.6 millionsales categories, including Insight delivered services and cloud solutions compared to $4.7 million during the first quarter of 2017. The first quarter of 2017 also included $2.9 millionsame period in transaction expenses related to the Datalink acquisition, which impacted theprior year.

Earnings from operations increased 13% year over year comparison. No such acquisition-related expenses were recorded during the first quarter of 2018.

Double digit growth in net sales and gross profit, including the positive effect of the change in certain partner incentives noted above, combined with effective cost control, led to a 119% year over year improvement in consolidated earnings from operations from $23.0$57.0 million in the first quarter of 20172019 compared to $50.2$50.4 million in the first quarter of 2018, with each of our operating segments contributing positively to our results.2018.  Excluding the effects of fluctuating foreign currency exchange rates, consolidated earnings from operations also increased 119%14% year over year. On a consolidated basis, we reported

Net earnings and diluted earnings per share were $39.3 million and $1.09, respectively, for the first quarter of 2019.  This compares to net earnings of $32.7$33.0 million and diluted earnings per share of $0.90$0.91 for the first quarter of 2018. This compares to net earnings of $13.8 million and diluted earnings per share of $0.38 for the first quarter of 2017.

21


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Throughout the “Quarterly Overview” and “Results of Operations” sections of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we refer to changes in net sales, gross profit, selling and administrative expenses and earnings from operations on a consolidated basis and in North America, EMEA and APAC excluding the effects of fluctuating foreign currency exchange rates.  In computing the changes in 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.

Details about segment results of operations can be found in Note 1011 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 Form10-K for the year ended December 31, 2017.2018.  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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report onForm 10-K for the year ended December 31, 2017, other than the adoption of ASUNo. 2014-09, “Revenue from Contracts with Customers,” effective January 1, 2018, as discussed in Note 2 to the Consolidated Financial Statements in Part I, Item 1 of this report.2018.  

22


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Results of Operations

The following table sets forth certain financial data as a percentage of net sales for the three months ended March 31, 20182019 and 2017:2018:

 

  Three Months Ended
March 31,
 

 

Three Months Ended

March 31,

 

  2018 2017 

 

2019

 

 

2018

 

Net sales

   100.0 100.0

 

 

100.0

%

 

 

100.0

%

Costs of goods sold

   86.4  85.9 

 

 

85.3

 

 

 

86.2

 

  

 

  

 

 

Gross profit

   13.6  14.1 

 

 

14.7

 

 

 

13.8

 

Selling and administrative expenses

   10.7  12.0 

 

 

11.3

 

 

 

10.8

 

Severance and restructuring and acquisition-related expenses

   0.1  0.5 
  

 

  

 

 

Severance and restructuring expenses

 

 

 

 

 

0.1

 

Earnings from operations

   2.8  1.6 

 

 

3.4

 

 

 

2.9

 

Non-operating expense, net

   0.3  0.3 

 

 

0.3

 

 

 

0.3

 

  

 

  

 

 

Earnings before income taxes

   2.5  1.3 

 

 

3.1

 

 

 

2.6

 

Income tax expense

   0.6  0.3 

 

 

0.8

 

 

 

0.7

 

  

 

  

 

 

Net earnings

   1.9 1.0

 

 

2.3

%

 

 

1.9

%

  

 

  

 

 

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 our 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 net sales and profitability are expected to be higher in the second and fourth quarters of the year.

During the year ended December 31, 2017, our consolidated net sales from the provision of services was approximately 10% of net sales. Accordingly, in our Annual Report on Form10-K for the year ended December 31, 2017, we began reporting net sales from the provision of services and the related costs of goods sold separately from net sales of products and the related costs of goods sold on the face of our consolidated statements of operations. We continued this reporting on the face of our consolidated statement of operations for the three months ended March 31, 2018 included in the Consolidated Financial Statements in Part I, Item 1 of this report. For comparability purposes, the presentation of net sales and costs of goods sold for the three months ended March 31, 2017 has been revised to conform to the current period presentation. These changes in presentation had no effect on previously reported total net sales, total costs of goods sold or gross profit amounts.

In conjunction with this change in presentation, because fees earned from activities reported net are considered services revenues, we reclassified certain revenue streams for which we act as the agent in the transaction to net sales from services. Previously, we included these net revenue streams within our software and, to a lesser extent, hardware sales mix categories based on the type of product being sold (e.g., fees earned for the sale of software maintenance and certain software licenses were included in software sales and fees earned for the sale of certain third-party provided training and warranty services were included in hardware sales when we historically disclosed and analyzed our sales mix). For comparability purposes, the sales mix among our hardware, software and services categories for the three months ended March 31, 2017 have been reclassified to conform to the current period presentation. Such reclassifications had no effect on previously reported net sales amounts.

INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

Our gross profit across the business is, and will continue to be, impacted by partner incentives, which can change significantly in the amounts made available and the related product or services sales being incentivized by the partner.  TheseIncentives from our largest partners are significant and changes in the incentives could impact our results of operations to the extent we are unable to remediate and otherwise respondadapt our sales strategies to them.optimize performance under the revised programs.   

Net Sales.  Net sales for the three months ended March 31, 2018 increased 19%decreased 3% year to year to $1.69 billion compared to the three months ended March 31, 2017 to $1.76 billion. Excluding the effects of fluctuating foreign currency exchange rates, consolidated net sales increased 16% in the first quarter of 2018 compared to the first quarter of 2017.2018.  Our net sales by operating segment were as follows for the three months ended March 31, 20182019 and 20172018 (dollars in thousands):

 

  Three Months Ended
March 31,
   % 

 

Three Months Ended

March 31,

 

 

%

 

  2018   2017   Change 

 

2019

 

 

2018

 

 

Change

 

North America

  $1,307,398   $1,110,952    18

 

$

1,242,441

 

 

$

1,278,380

 

 

 

(3

%)

EMEA

   400,415    330,355    21

 

 

390,175

 

 

 

407,134

 

 

 

(4

%)

APAC

   55,090    36,236    52

 

 

52,850

 

 

 

56,980

 

 

 

(7

%)

  

 

   

 

   

Consolidated

  $1,762,903   $1,477,543    19

 

$

1,685,466

 

 

$

1,742,494

 

 

 

(3

%)

  

 

   

 

   

Net sales in North America increased 18%decreased 3%, or $196.4$35.9 million, for the three months ended March 31, 20182019 compared to the three months ended March 31, 2017.2018, primarily driven by declines in hardware net sales to large enterprise clients.  Net sales of hardware, software and services increased 23%in EMEA decreased 4%, 6% and 14%, respectively, year over year. By client group, our top line results included double digit growth with large, small and medium businesses and public sector clients duringor $17.0 million, in the first quarter of 2018. The growth in hardware net sales reflects a continuation of the device refresh cycle noted in previous quarters as well as higher volume of sales in the data center categories of networking, servers and storage. Services net sales improved year over year due to higher netted sales of software maintenance and cloud offerings. Our net sales by offering category for North America for the three months ended March 31, 2018 and the three months ended March 31, 2017 (as reclassified), were as follows (dollars in thousands):

   North America     
   2018   2017   % Change 

Sales Mix

      (As Reclassified)     

Hardware

  $873,341   $710,864    23

Software

   290,476    273,983    6

Services

   143,581    126,105    14
  

 

 

   

 

 

   

 

 

 
  $1,307,398   $1,110,952    18
  

 

 

   

 

 

   

 

 

 

In North America, fees earned from activities reported on a net basis of $69,000 and $21.9 million that were previously reported as part of our hardware and software product categories, respectively, in the three months ended March 31, 2017, were reclassified to services to conform to the current period presentation.

Net sales in EMEA increased 21%, or $70.1 million, for the three months ended March 31, 20182019 compared to the three months ended March 31, 2017.first quarter of 2018.  Excluding the effects of fluctuating foreign currency exchange rates net sales in EMEA increased 2%, year over year. Net sales in APAC decreased 7%, or $4.1 million, in the first quarter of 2019 compared to the first quarter of last year. Net sales2018. Excluding the effects of hardware, software and services increased 35%, 9% and 29%, respectively, compared to the first quarter of 2017. The increase in hardwarefluctuating foreign currency exchange rates net sales was due primarily to a higher volume of sales of client devices and networking solutions to large enterprise and public sector clients. The increase in services net sales was due primarily to a higher volume of sales of software maintenance and cloud subscription products as well as the addition of Dutch cloud service provider, Caase.com, to our business effective September 26, 2017. Our net sales by offering category for EMEA for the three months ended March 31, 2018 and the three months ended March 31, 2017 (as reclassified)APAC increased 1%, were as follows (dollars in thousands):    year over year.

23


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

   EMEA     
   2018   2017   % Change 

Sales Mix

      (As Reclassified)     

Hardware

  $187,010   $138,877    35

Software

   184,918    169,318    9

Services

   28,487    22,160    29
  

 

 

   

 

 

   

 

 

 
  $400,415   $330,355    21
  

 

 

   

 

 

   

 

 

 

In EMEA, fees earned from activities reported on aOur net basis of $10.9 million that were previously reported as part of our software productsales by offering category in the three months ended March 31, 2017 were reclassified to services to conform to the current period presentation.

Net sales in APAC increased 52%, or $18.9 million,for North America for the three months ended March 31, 2018 compared to2019 and the three months ended March 31, 2017. Excluding the effects of fluctuating foreign currency exchange rates,2018 were as follows (dollars in thousands):

 

 

Three Months Ended

March 31,

 

 

%

 

Sales Mix

 

2019

 

 

2018

 

 

Change

 

 

 

 

 

Hardware

 

$

748,337

 

 

$

873,341

 

 

 

(14

%)

Software

 

 

322,079

 

 

 

261,060

 

 

 

23

%

Services

 

 

172,025

 

 

 

143,979

 

 

 

19

%

 

 

$

1,242,441

 

 

$

1,278,380

 

 

 

(3

%)

  In North America, net sales increased 47% comparedof software and services were up 23% and 19%, respectively, year over year, while net sales of hardware declined 14% year to the first quarter of last year.  The net changes year to year were the result of the following:

The decrease in hardware net sales was due primarily to lower sales of client devices, storage and networking solutions to large enterprise clients.

The increase in the software category was drivenprimarily the result of a significant transaction during the current quarter with a large enterprise client with no comparable transaction in the same quarter in prior year.

The increase in services net sales was due to higher sales of cloud solutions and an increase in Insight delivered services, attributable to our acquisition of Cardinal.

Our net sales by growthoffering category for EMEA for the three months ended March 31, 2019 and the three months ended March 31, 2018 were as follows (dollars in all offering categories, particularly a 58% increasethousands):  

 

 

Three Months Ended

March 31,

 

 

%

 

Sales Mix

 

2019

 

 

2018

 

 

Change

 

 

 

 

 

Hardware

 

$

171,525

 

 

$

187,010

 

 

 

(8

%)

Software

 

 

183,148

 

 

 

190,202

 

 

 

(4

%)

Services

 

 

35,502

 

 

 

29,922

 

 

 

19

%

 

 

$

390,175

 

 

$

407,134

 

 

 

(4

%)

In EMEA, net sales of hardware and software declined 8% and 4%, respectively, year to year, while net sales of services increased 19% year over year.  The net changes year to year were the result of the following:

The decrease in hardware net sales was due primarily to lower volume sales of networking solutions to public sector clients.

The decrease in software net sales year over year driven by growth with public sector clients. was due to continued client migration of software applications to cloud solutions which are recorded net in services net sales.

The increase in services net sales was due primarily to a higher volume of software maintenance and cloud solutions, and a higher volume of Insight delivered services.

24


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

Our net sales by offering category for APAC for the three months ended March 31, 20182019 and the three months ended March 31, 2017 (as reclassified),2018 were as follows (dollars in thousands):

 

  APAC     
  2018   2017   % Change 

 

Three Months Ended

March 31,

 

 

%

 

Sales Mix

      (As Reclassified)     

 

2019

 

 

2018

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

Hardware

  $7,160   $4,080    75

 

$

6,518

 

 

$

7,160

 

 

 

(9

%)

Software

   39,250    24,847    58

 

 

35,065

 

 

 

39,019

 

 

 

(10

%)

Services

   8,680    7,309    19

 

 

11,267

 

 

 

10,801

 

 

 

4

%

  

 

   

 

   

 

 

 

$

52,850

 

 

$

56,980

 

 

 

(7

%)

  $55,090   $36,236    52
  

 

   

 

   

 

 

In APAC, fees earned from activities reported on a net basissales of $2,000 and $2.2 million that were previously reported as part of our hardware and software product categories,declined 9% and 10%, respectively, year to year, partially offset by an increase in services net sales of 4%, year over year.  The net changes year to year were the three months ended March 31, 2017, were reclassifiedresult of the following:

The decrease in hardware and software net sales was due primarily to lower volume with enterprise and public sector clients.

The increase in services net sales was due to conform to the current period presentation.higher sales of cloud solutions and an increase in Insight delivered services.  

The percentage of net sales by category for North America, EMEA and APAC were as follows for the three months ended March 31, 20182019 and the three months ended March 31, 2017 (as reclassified):2018:

 

   North America  EMEA  APAC 
   Three Months
Ended

March 31,
  Three Months
Ended

March 31,
  Three Months
Ended

March 31,
 

Sales Mix

  2018  2017  2018  2017  2018  2017 

Hardware

   67  64  47  42  13  11

Software

   22  25  46  51  71  69

Services

   11  11  7  7  16  20
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   100  100  100  100  100  100
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

 

North America

 

 

EMEA

 

 

APAC

 

 

 

Three Months Ended

March 31,

 

 

Three Months Ended

March 31,

 

 

Three Months Ended

March 31,

 

Sales Mix

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Hardware

 

 

60

%

 

 

68

%

 

 

44

%

 

 

46

%

 

 

12

%

 

 

13

%

Software

 

 

26

%

 

 

21

%

 

 

47

%

 

 

47

%

 

 

67

%

 

 

68

%

Services

 

 

14

%

 

 

11

%

 

 

9

%

 

 

7

%

 

 

21

%

 

 

19

%

 

 

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

 

Gross Profit.  Gross profit forincreased 3%, or $8.2 million, in the three months ended March 31, 2018 increased 15%, or $31.8 million,2019, compared to the three months ended March 31, 2017,2018, with gross margin decreasingincreasing approximately 5090 basis points to 13.6%14.7% for the three months ended March 31, 2019 compared to 13.8% for the three months ended March 31, 2018 compared to 14.1% for the three months ended March 31, 2017. Excluding the effects of fluctuating foreign currency exchange rates, consolidated gross profit increased 12% year over year in the first quarter of 2018 compared to the first quarter of 2017.2018.  Our gross profit and gross profit as a percentage of net sales by operating segment were as follows for the three months ended March 31, 20182019 and 20172018 (dollars in thousands):

 

  Three Months Ended March 31, 

 

Three Months Ended March 31,

 

  2018   % of
Net
Sales
 2017   % of
Net
Sales
 

 

2019

 

 

% of

Net Sales

 

 

2018

 

 

% of

Net Sales

 

North America

  $175,371    13.4 $158,301    14.2

 

$

182,607

 

 

 

14.7

%

 

$

175,371

 

 

 

13.7

%

EMEA

   55,792    13.9 42,546    12.9

 

 

56,983

 

 

 

14.6

%

 

 

56,050

 

 

 

13.8

%

APAC

   8,842    16.1 7,380    20.4

 

 

8,882

 

 

 

16.8

%

 

 

8,842

 

 

 

15.5

%

  

 

    

 

   

Consolidated

  $240,005    13.6 $208,227    14.1

 

$

248,472

 

 

 

14.7

%

 

$

240,263

 

 

 

13.8

%

  

 

    

 

   

North America’s gross profit for the three months ended March 31, 20182019 increased 11%$7.2 million, or 4%, compared to the three months ended March 31, 2017. As a percentage of net sales, gross margin decreased approximately 80 basis points to 13.4% for the first quarter of 2018 from 14.2% in the first quarter of 2017. The year to year decline in gross margin was primarily attributable to a 38 basis point decline in margin generated by services net sales, including reduced sales from technical services projects, which was offset partially by an increase in margin resulting from a higher volume of software maintenance and cloud subscription products that are recorded on a net basis, during the first quarter of 2018. Additionally, a net decrease in product margin, which includes partner funding and freight, of 28 basis points and a decrease in margin from lower fees from enterprise software agreements of 17 basis points contributed to the lower gross margin during the quarter ended March 31, 2018 compared to the quarter ended March 31, 2017. The net decrease in product margin was due primarily to higher hardware sales to large enterprise clients, which generally transact at lower margins, during the quarter ended March 31, 2018 compared to the quarter ended March 31, 2017.

EMEA’s gross profit increased 31% for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. Excluding the effects of fluctuating foreign currency exchange rates, gross profit increased 16% compared to the first quarter of last year.  As a percentage of net sales, gross margin increased approximately 100 basis points to 13.9% 14.7% for the first quarter of 2018 from 12.9% in the first quarter of 2017. The year over year improvement in gross margin was primarily attributable to a net increase in product margin, which includes partner funding and freight, of 73 basis points and an increase in higher margin services net sales, which contributed 56 basis points of the margin expansion during the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The improvement in product margin primarily resulted from an increase in partner funding in both hardware and software during the quarter ended March 31, 2018 compared to the quarter ended March 31, 2017. The increase in partner funding was primarily due to changes to certain partner programs. As a result of the changes, certain incentives, which would normally be earned over the full year, were accelerated and were fully earned in the first quarter of 2018. The increase in margin from services net sales during the quarter ended March 31, 2018 compared to the quarter ended March 31, 2017 resulted from a higher volume of software maintenance and cloud subscription products that are recorded on a net basis.2019.  

25


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

The year over year improvement in gross margin was primarily attributable to the following:

 

APAC’s gross profit increased 20% forAn increase in higher margin services net sales, which contributed 152 basis points of the three months ended March 31, 2018margin expansion, partially offset by a net decrease in product margin, which includes partner funding and freight, of 54 basis points.

The increase in margin from services net sales during the current quarter resulted from a higher volume of Insight delivered services and a higher volume of cloud solutions that are recorded net.

The decrease in product margin is primarily the result of a reduction in partner funding due to lower hardware sales in the current quarter compared to the three months ended March 31, 2017, with gross margin decreasing to 16.1% for the three months ended March 31, 2018 compared to 20.4% for the three months ended March 31, 2017. Excluding the effects of fluctuating foreign currency exchange rates, gross profit increased 16% compared to the first quarter of last year. The decrease in gross marginsame period in the first quarter of 2018 compared to the first quarter of 2017 was due primarily to lower services sales during the three months ended March 31, 2018 compared to the three months ended March 31, 2017.prior year.

Operating Expenses.

Selling and Administrative Expenses.Selling and administrative expenses increased $10.5 million, or 6%, for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. Excluding the effects of fluctuating foreign currency exchange rates, consolidated selling and administrative expenses increased 3% year over year in the first quarter of 2018 compared to the first quarter of 2017. Our selling and administrative expenses as a percent of net sales by operating segment were as follows for the three months ended March 31, 2018 and 2017 (dollars in thousands):

 

   Three Months Ended March 31, 
   2018   % of
Net
Sales
  2017   % of
Net
Sales
 

North America

  $132,640    10.1 $131,010    11.7

EMEA

   48,283    12.1  40,143    12.2

APAC

   7,257    13.2  6,479    17.9
  

 

 

    

 

 

   

Consolidated

  $188,180    10.7 $177,632    12.0
  

 

 

    

 

 

   

North America’s selling and administrative expenses increased 1%, or $1.6 million, for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 and decreased approximately 160 basis points year to year as a percentage of net sales to 10.1%. The increase in expenses was primarily driven by a $3.0 million increase in salaries and wages, contract labor and teammate benefits expenses and a $2.4 million increase in variable compensation on increased sales andEMEA’s gross profit for the three months ended March 31, 2018 increased $933,000, or 2% (9% excluding the effects of fluctuating foreign currency exchange rates), compared to the three months ended March 31, 2017. These increases2018.  As a percentage of net sales, gross margin increased approximately 80 basis points, year over year.  The year over year improvement in teammate expensesgross margin was primarily resulted fromattributable to an increase in headcount. Partially offsetting these increaseshigher margin services net sales, which contributed 138 basis points of the margin expansion, partially offset by a net decrease in teammate expenses were decreases in depreciationproduct margin, which includes partner funding and amortization expensefreight, of $1.9 million and other general and administrative expenses of $1.1 million55 basis points.          

APAC’s gross profit for the three months ended March 31, 20182019 remained flat compared to the three months ended March 31, 2017.2018.  As a percentage of net sales, gross margin increased approximately 130 basis points, year over year.  The increase in gross margin in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to an increase in mix of sales of software maintenance and cloud solutions recorded net and higher gross profits from Insight delivered services.

EMEA’s

Operating Expenses.

Selling and Administrative Expenses. Selling and administrative expenses increased $2.9 million, or 2%, for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.  Our selling and administrative expenses increased 20%, or $8.1 million,by major expense type for the three months ended March 31, 2019 and 2018 compared to the three months ended March 31, 2017 but decreasedwere as follows (dollars in thousands):

 

 

Three Months Ended March 31,

 

 

2019

 

 

 

2018

 

 

Personnel costs, including teammate benefits

 

$

150,491

 

 

 

$

147,836

 

 

Depreciation and amortization

 

 

8,867

 

 

 

 

9,044

 

 

Facility expenses

 

 

6,663

 

 

 

 

6,591

 

 

Travel and entertainment

 

 

6,246

 

 

 

 

6,128

 

 

Legal and professional fees

 

 

3,942

 

 

 

 

4,033

 

 

Marketing

 

 

2,322

 

 

 

 

2,644

 

 

Other

 

 

12,532

 

 

 

 

11,904

 

 

Total

 

$

191,063

 

 

 

$

188,180

 

 

Selling and administrative expenses increased approximately 1050 basis points year to year as a percentage of net sales to 12.1%. Excludingin the effectsfirst quarter of fluctuating foreign currency exchange rates, selling and administrative expenses increased 6%2019 compared to the first quarter of last year.2018.  The overall net increase in selling and administrative expenses was primarily driven by anreflects a $2.7 million increase in salaries and wages andpersonnel costs, including teammate benefits expenses primarily due to increased headcount, including the acquisition of Cardinal, and an increase inincreased variable compensation onresulting from increased sales and gross profit forin the three months ended March 31, 2018 compared to the three months ended March 31, 2017.

APAC’s selling and administrative expenses increased 12%, or $778,000, for the three months ended March 31, 2018 compared to the three months ended March 31, 2017, and decreased approximately 470 basis points year to year as a percentagefirst quarter of net sales to 13.2%. Excluding the effects of fluctuating foreign currency exchange rates, selling and administrative expenses increased 8%2019 compared to the first quarter of last year. The year over year increase was primarily driven by our investment in resources related to the planned expansion of the business technology consulting and managed services business we acquired with the Ignia, Pty Ltd transaction in 2016.2018.  

26


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Severance and Restructuring Expenses.  During the three months ended March 31, 2019, we recorded severance expense, net of adjustments, of approximately $370,000.  The charges in all three operating segments primarily related to a realignment of certain roles and responsibilities.  Current period charges were partially offset by adjustments for changes in estimates of previous accruals as cash payments were made.  Comparatively, during the three months ended March 31, 2018, North America, EMEA and APAC recorded severance expense, net of adjustments, of approximately $443,000, $1.1 million and $127,000, respectively.  The charges in all three operating segments primarily related to a realignment of certain roles and responsibilities. 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, 2017, North America, EMEA and APAC recorded severance expense, net of adjustments, of approximately $1.1 million, $3.5 million and $61,000, respectively.

Acquisition-related Expenses. During the three months ended March 31, 2018, we did not incur any direct third-party transaction costs related to business acquisitions. Comparatively, during the three months ended March 31, 2017, we incurred $2.9 million in direct third-party transaction costs related to the acquisition of Datalink in January 2017.

Non-Operating (Income) Expense.

Interest Income.  Interest income for the three months ended March 31, 20182019 and 20172018 was generated from interest earned on cash and cash equivalent bank balances.  The decreaseincrease in interest income foryear over year was primarily due to higher average interest-bearing cash and cash equivalent balances and to higher interest rates during the three months ended March 31, 20182019 compared to the three months ended March 31, 2017 was primarily due to lower average interest-bearing cash and cash equivalent balances during the three months ended March 31, 2018.

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, 2018 increased 53%2019 decreased 20%, or $2.1$1.2 million, compared to the three months ended March 31, 2017. This increase2018.  The decrease was due primarily to higher interest rates and higherlower average daily balances on our debt facilities in 2018 to fund working capital needs given the growth in our business year over year.first quarter of 2019 partially offset by higher interest rates.  Imputed interest under our inventory financing facility was $3.0 million for the three months ended March 31, 2019 compared to $2.5 million for the three months ended March 31, 2018, compared to $1.4 million for the three months ended March 31, 2017.2018.  The increase was a result of expanded use of the facility and a higher average incremental borrowing rate used to compute the imputed interest amounts during the 2018 period.first quarter of 2019.  For a description of our various financing facilities, see Note 45 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 ournon-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 of 26.0%23.5% for the three months ended March 31, 2019 was lower than our effective tax rate of 25.9% for the three months ended March 31, 2018 was relatively comparabledue primarily to our effectivean increase in tax ratebenefits on the settlement of 26.2%employee share-based awards and the recognition of tax benefits related to research and development activities for the three months ended March 31, 2017. Our effective tax rate for2019 compared to the first quarter of 2018 reflects the reduction in the United States federal statutory rate to 21.0% and state income taxes, net of federal benefit. Our effective tax rate for the first quarter of last year includes tax benefits of approximately $2.0 million recorded on the settlement of employee share-based awards in accordance with a newthree months ended March 31, 2018.

27


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

accounting standard, which was adopted effective January 1, 2017, and the recognition of certain tax benefits related to the release of reserves for specific uncertain tax positions during the prior year first quarter, both of which served to reduce the rate below the federal statutory rate at that time.

Liquidity and Capital Resources

The following table sets forth certain consolidated cash flow information for the three months ended March 31, 20182019 and 20172018 (in thousands):

 

   Three Months Ended
March 31,
 
   2018   2017 

Net cash provided by (used in) operating activities

  $150,745   $(152,102

Net cash used in investing activities

   (5,044   (190,911

Net cash (used in) provided by financing activities

   (153,232   318,132 

Foreign currency exchange effect on cash, cash equivalent and restricted cash balances

   1,937    5,820 
  

 

 

   

 

 

 

Decrease in cash, cash equivalents and restricted cash

   (5,594   (19,061

Cash, cash equivalents and restricted cash at beginning of period

   107,445    205,946 
  

 

 

   

 

 

 

Cash, cash equivalents and restricted cash at end of period

  $101,851   $186,885 
  

 

 

   

 

 

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Net cash provided by operating activities

 

$

121,913

 

 

$

150,745

 

Net cash used in investing activities

 

 

(6,114

)

 

 

(5,044

)

Net cash used in financing activities

 

 

(132,640

)

 

 

(153,232

)

Foreign currency exchange effect on cash, cash equivalent

   and restricted cash balances

 

 

(986

)

 

 

1,937

 

Increase in cash, cash equivalents and restricted cash

 

 

(17,827

)

 

 

(5,594

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

144,293

 

 

 

107,445

 

Cash, cash equivalents and restricted cash at end of period

 

$

126,466

 

 

$

101,851

 

Cash and Cash Flow

Our primary uses of cash during the three months ended March 31, 20182019 were to pay down our debt balances to repurchase shares of our common stock and for capital expenditures, as well as funding our working capital requirements throughout the quarter. requirements.  

Operating activities provided $150.7$121.9 million in cash during the three months ended March 31, 2018,2019, compared to $152.1$150.7 million of cash used in operating activities during the three months ended March 31, 2017. The 2017 results were affected by a significant transaction at the beginning of the prior year period, whereby a single significant payment to a supplier was due and paid in January 2017, but the related receivable was collected from a client in the fourth quarter of 2016, as discussed in more detail below. During the three months ended March 31, 2018, we2018.

We had net repayments under our inventory financing facility of $91.4 million, compared to net repayments under the facility of $4.2$44.0 million during the three months ended March 31, 2017. 2019, compared to net repayments of $91.4 million during the three months ended March 31, 2018.  

We also had combined net repayments under our revolving facility and ABS facility that decreased our outstanding long-term debt by $49.8 million, including scheduled amortization payments under our Term Loan A (“TLA”). $82.0 million.  

Capital expenditures were $5.0$5.4 million in the three months ended March 31, 2018, a decrease of 50% compared to the total capital expenditures made in the prior year period. The prior year period reflected higher capital expenditures due to planned investments in IT infrastructure upgrades, our global web site and our digital marketing platforms. 2019.  

Cash, cash equivalents and restricted cash balances in the three months ended March 31, 2019 were negatively affected by $1.0 million, while the balances in the three months ended March, 31 2018 and 2017 were positively affected by $1.9 million, and $5.8 million, respectively, as a result of foreign currency exchange rates.

We expect 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.

Net cash provided by operating activities  

Cash flow from operating activities in the first three months of 2019 was $121.9 million compared to $150.7 million in the first three months of 2018.  

The decrease in accounts receivable and accounts payable reflects our continued enhanced focus on collection of receivables and optimization of working capital.  

The significant increases in both other assets and accrued expenses and other liabilities for the three months ended March 31, 2019 resulted from a single significant transaction in 2019 with no comparable activity in the prior year.  

28


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Net cash provided by (used in) operating activities. Cash flows from operating activities for the three months ended March 31, 2018 and 2017 reflect our net earnings, adjusted fornon-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, exclusive of the acquisition of Datalink’s accounts receivable balances and the assumption of Datalink’s accounts payable balances during the 2017 period, we anticipated the cash inflows from decreases in accounts receivable and cash outflows from decreases in accounts payable due to the seasonal changes in net sales from the fourth quarter to the first quarter. However, the 2017 results were also affected by a single significant payment to a supplier of approximately $160 million that was due and paid in January 2017 for which the related receivable was collected from the client in the fourth quarter of 2016, as noted previously. Excluding the effects of this individually significant timing difference, cash flow from operations would have been nominal for the first quarter of 2017. Further impacting our year over year operating cash flows comparison was the fact that we report cash flows associated with trade payables financed under our inventory financing facility in the financing section of our statement of cash flows. In the fourth quarter of 2017, we expanded the use of that facility with certain vendors and subsequently paid down those balances under their stated terms during the first quarter of 2018. Had we not leveraged the facility during the fourth quarter of 2017, the net repayment under our inventory financing facility of $91.4 million that are reflected as cash flows used in financing activities would have been included within the change in trade payables, which is reflected in the operating activities section of our statement of cash flows. For the prior year period, the increase in inventories was primarily attributable to an increase in inventory levels at March 31, 2017 to support specific large enterprise client engagements. The increase in other assets for the three months ended March 31, 2018 was a result of the change in accounting under the new revenue recognition standard, which resulted in accelerated revenue recognition for certain contracts with payment terms that exceed one year. As a result, we recorded a related long-term receivable within other assets in the accompanying consolidated balance sheet as of March 31, 2018. See Note 2 to the Consolidated Financial Statements in Part I, Item 1 of this report.

Our consolidated cash flow operating metrics were as follows:

 

   Three Months Ended
March 31,
 
   2018   2017 

Days sales outstanding in ending accounts receivable (“DSOs”)(a)

   89    85 

Days inventory outstanding (“DIOs”)(b)

   12    11 

Days purchases outstanding in ending accounts payable (“DPOs”)(c)

   (66   (67
  

 

 

   

 

 

 

Cash conversion cycle (days)(d)

   35    29 
  

 

 

   

 

 

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Days sales outstanding in ending accounts receivable (“DSOs”) (a)

 

 

92

 

 

 

91

 

Days inventory outstanding (“DIOs”) (b)

 

 

11

 

 

 

12

 

Days purchases outstanding in ending accounts payable (“DPOs”) (c)

 

 

(73

)

 

 

(67

)

Cash conversion cycle (days) (d)

 

 

30

 

 

 

36

 

 

(a)

(a)

Calculated as the balance of current 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 90 days.

 

(b)

(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 90 days.

 

(c)

(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 90 days.

 

(d)

(d)

Calculated as DSOs plus DIOs, less DPOs.

Our cash conversion cycle was 3530 days in the first quarter of 2018, up 62019, down six days from the first quarter of 2017. 2018.  

The increasedecrease resulted from the net effect of a fourone day increase in DSOs and a onesix day decreaseincrease in DPOs due to the relative timing of client receipts and supplier payments during the respective quarters andquarters.

This was partially offset by a one day increasedecrease in DIOsDIO due to investment indelivering inventory foragainst client specific client engagements. These operating metrics include the effects of the adoption of the new revenue recognition standard effective January 1, 2018, resulting in a higher current accountsengagements and an overall focus on minimizing inventory on hand.  

INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

receivable balance at March 31, 2018 compared to March 31, 2017. These accounting adjustments did not have a comparable increase in net sales due to the high volume of sales reported on a net basis, thus negatively affecting the DSO metric for the three months ended March 31, 2018.

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 20182019 in excess of working capital needs to pay down our debt balances, to repurchase shares of our common stock and to support our capital expenditures for the year.  We also may use cash to fund potential acquisitions to add select capabilities within our current geographic operating segments.

Net cash used in investing activities.

Capital expenditures were $5.0$5.4 million and $10.1$5.0 million for the three months ended March 31, 2019 and 2018, and 2017, respectively.  

We expect capital expenditures for the full year 20182019 to be between $15.0$20.0 million and $20.0$25.0 million, primarily for technology-related upgrade projects.    

Net cash used in financing activities  

During the three months ended March 31, 2017,2019, we acquired Datalink in North America for approximately $180.9 million,had net of cashcombined repayments under our revolving facility and cash equivalents acquired.

Net cash providedour ABS facility that decreased our outstanding long-term debt balance by financing activities. During$82.0 million.  Comparatively, during the three months ended March 31, 2018, we had net combined repayments under our revolving credit facility and our ABS facility that decreased our outstanding long-term debt balance by $49.8 million, including scheduled amortization payments under our TLA.  

29


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

We also had net repayments under our inventory financing facility of $44.0 million during the three months ended March 31, 2019 compared to $91.4 million during the three months ended March 31, 2018.  

During the three months ended March 31, 2018,2019 we alsodid not repurchase any shares of our common stock.  We repurchased an aggregate of $7.7 million of our common stock under a previously announced repurchase program. Comparatively,program during the three months ended March 31, 2017, 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 $331.5 million, including the expansion of our revolving facility by $175.0 million in the form of an incremental TLA to fund, in part, the acquisition of Datalink, and had net repayments under our inventory financing facility of $4.2 million. During the three months ended March 31, 2017, we did not repurchase any shares of our common stock.2018.  

Financing Facilities

Our consolidated debt balance that can be outstanding at the end of any fiscal quarter under our revolving facility our TLA and our ABS facility is limited by certain financial covenants, particularly a maximum leverage ratio.  

The maximum leverage ratio is calculated as aggregate debt outstanding divided by the sum of the Company’s trailing twelve month net earnings (loss) plus (i) interest expense, excludingnon-cash imputed interest on our inventory financing facility, (ii) income tax expense (benefit), (iii) depreciation and amortization,(iv) non-cash stock-based compensation, (v) extraordinary ornon-recurringnon-cash non-recurring non-cash losses or expenses and (vi) certain cash restructuring and acquisition-related charges and synergies, not to exceed a specified cap (“adjusted earnings”).  

The maximum leverage ratio permitted under the facilities is currently 3.253.0 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

A significant drop in the Company’s adjusted earnings would limit the amount of indebtedness that could be outstanding at the end of any fiscal quarter to a level that would be below the Company’s consolidated maximum facility amount.  We anticipate that we will be in compliance with our maximum leverage ratio requirements over the next four quarters.  

Based on the maximum permitted leverage ratio as of March 31, 2018,2019, the Company’s debt balance that could have been outstanding under our revolving facility TLA and ABS facility was the full amount of the maximum borrowing capacity of $763.0$600.0 million, of which $2.0$112.0 million was outstanding under the ABS facility and no amount was outstanding under our revolving facility $163.0 million was outstanding under our TLA and $94.0 million was outstanding under our ABS facility at March 31, 2018. Additionally, while2019.  

While our 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, 2018,2019, qualified receivables were sufficient to permit access to the full $250.0 million under the ABS facility.   

INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Our debt balance as of March 31, 20182019 was $261.9$114.4 million, including our capitalfinance lease obligations for certain IT equipment and other financing obligations.  As of March 31, 2018, the current portion of our long-term debt includes $14.2 million in amortization payments due through March 31, 2019 under our TLA. The remaining $2.2 million of current debt relates to our capital leases and our other financing obligations acquired from Datalink.

Our objective is to pay our debt balances down while retaining adequate cash balances to meet overall business objectives.

Our revolving facility our TLA 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 and minimum fixed charge ratio requirements, comply with a minimum receivable requirement 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, 2018,2019, 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, 2018,

30


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

The terms of the ABS facility identify various circumstances that would result in an “amortization event” under the facility.  At March 31, 2019, no such “amortization event” had occurred.

We also have an agreement with a financial intermediary to facilitate the purchase of inventory from various suppliers under certain terms and conditions.  

These amounts are classified separately as accounts payable – inventory financing facility in our consolidated balance sheets.  

Our inventory financing facility was amended on March 23, 2018 to increase thehas an aggregate availability for vendor purchases under our inventory financing facility from $325.0 million toof $400.0 million, of which $228.1$260.2 million was outstanding at March 31, 2018. In conjunction with the increase in the aggregate availability under the facility, we no longer have the option to request additional increases in the aggregate amount available under the inventory financing facility without amending the facility. 2019.  

The inventory financing facility matures on June 23, 2021 and may be renewed under certain circumstances described in the agreement for successive12-month periods.

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.  As a result of the U.S. federal tax reform enacted in December 2017, all undistributed foreign earnings are deemed distributed.  As of March 31, 2018,2019, we had approximately $80.7$106.9 million in cash and cash equivalents in certain of our foreign subsidiaries.  As of March 31, 2018,2019, the majority of our foreign cash resides in the Netherlands and Australia.Canada.  Certain of these cash balances will be remitted to the United States by paying down intercompany payables generated in the ordinary course of business or through actual dividend distributions.

Off-Balance Sheet Arrangements

We have entered intooff-balance sheet arrangements, which include indemnifications.  The indemnifications are discussed in Note 910 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 ouroff-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.

INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Recently Issued Accounting Standards

The information contained in Notes 1 and 2 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in Part II, Item 7 of our Annual Report on Form10-K for the year ended December 31, 2017.2018.

31


INSIGHT ENTERPRISES, INC.

Item 3.  Quantitative and QualitativeQualitative Disclosures About Market Risk.

There have been no material changes in our reported market risks, as described in “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our Annual Report on Form10-K for the year ended December 31, 2017.2018.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined underRules 13a-15(e) and15d-15(e)and 15d-15(e) of the Securities Exchange Act)Act of 1934, as amended (the “Exchange Act”)) and determined that as of March 31, 20182019 our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Change in Internal Control over Financial Reporting

Except as noted below, there

There was no change in ourthe Company’s internal control over financial reporting (as such term is defined inRules 13a-15(f) and15d-15(f)and 15d-15(f) under the Exchange Act) duringin the most recent fiscal quarter ended March 31, 2018 that has materially affected, or is reasonably likely to materially affect, ourthe Company’s internal control over financial reporting.

During the quarter ended March 31, 2018, we changed existing controls or developed new controls to ensure we adequately implemented the new accounting standard related to revenue recognition effective January 1, 2018. The modified and new controls were designed to address risks associated with recognizing revenue based on the five-step model provided in the new standard and to ensure completeness and accuracy of the expanded disclosures required by the new standard.

Inherent Limitations of Internal Control Over Financial Reporting

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

32


INSIGHT ENTERPRISES, INC.

Part II – OTHEROTHER INFORMATION

Item 1.   Legal Proceedings.

For a discussion of legal proceedings, see “– Legal Proceedings” in Note 910 to the Consolidated Financial Statements in Part I, Item 1 of this report, which section is incorporated by reference herein.

Item 1A.  Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors”, in our Annual Report on Form10-K for the year ended December 31, 2017,2018, which could materially affect our business, financial condition or future results.  The risks described in our Annual Report on Form10-K are not the only risks facing the Company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or operating results.

INSIGHT ENTERPRISES, INC.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

There were no unregistered sales of equity securities during the three months ended March 31, 2018.2019.

We have never paid a cash dividend on our common stock, and we currently do not intend to pay any cash dividends in the foreseeable future.  Our revolving facility, our ABS facility our TLA and our inventory financing facility contain restrictions on the payment of cash dividends.

Issuer Purchases of Equity Securities

 

Period

  (a)
Total Number
of Shares
Purchased
   (b)
Average Price
Paid per Share
   (c)
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
   (d)
Approximate Dollar Value
of Shares that May
Yet Be Purchased Under
the Plans or Programs
 

January 1, 2018 through

      January 31, 2018

   —     $—      —     $—   

February 1, 2018 through

      February 28, 2018

   —      —      —      50,000,000 

March 1, 2018 through

      March 31, 2018

   221,256    34.71    221,256    42,321,000 
  

 

 

     

 

 

   

Total

   221,256   $34.71    221,256   
  

 

 

     

 

 

   

On February 14, 2018, we announced that our Board of Directors had authorized theWe did not repurchase of up to $50 millionshares of our common stock. Repurchasesstock during the quarter ended March 31, 2018 are reflected in the table above. There is no stated expiration date for our current share repurchase plan. Any share repurchases may be made on the open market, through block trades, through10b5-1 plans or otherwise. The amount of shares purchased and the timing of the purchases will be based on market conditions, 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, 2018 were retired.2019.

Item 3.  Defaults Upon Senior Securities.

Not applicable.

Item 4.  Mine Safety Disclosures.

Not applicable.

Item 5.  Other Information.

Not applicable.

33


INSIGHT ENTERPRISES, INC.

Item 6.  Exhibits.Exhibits.

 

      

Incorporated by Reference

   

Exhibit

Number

  

Exhibit Description

  

Form

  

File No.

  

Exhibit
Number

  

Filing

Date

  

Filed
Herewith

3.1  Amended and Restated Certificate of Incorporation of Insight Enterprises, Inc.  10-K  000-25092  3.1  February 17, 2006  
3.2  Certificate of Amendment of Amended and Restated Certificate of Incorporation of Insight Enterprises, Inc.  8-K  000-25092  3.1  May 21, 2015  
3.3  Amended and Restated Bylaws of Insight Enterprises, Inc.  8-K  000-25092  3.2  May 21, 2015  
4.1  Specimen Common Stock Certificate (P)  S-1  33-86142  4.1  January 20, 1995  
10.1  Third Omnibus Amendment to Loan Documents and Reaffirmation Agreement, dated as of March  23, 2018, by and among Calence, LLC, Insight Direct USA, Inc. and Insight Public Sector, Inc., as Resellers, the guarantors party thereto, Wells Fargo Capital Finance, LLC, as collateral agent, syndication agent and administrative agent, and the lenders party thereto  8-K  000-25092  10.1  March 30, 2018  
10.2  Amendment No. 2 to Fourth Amended and Restated Credit Agreement, dated as of March  13, 2018, by and among Insight Enterprises, Inc., Insight Enterprises B.V., Insight Direct (UK), Ltd., as borrowers, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto  8-K  000-25092  10.2  March 30, 2018  
31.1  Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule13a-14          X
31.2  Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule13a-14          X
32.1  Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002          X
101  Interactive data files pursuant to Rule 405 ofRegulation S-T          X

 

 

 

 

Incorporated by Reference

 

 

Exhibit

Number

 

Exhibit Description

 

Form

 

File No.

 

Exhibit

Number

 

Filing

Date

 

Filed

Herewith

3.1

 

Amended and Restated Certificate of Incorporation of Insight Enterprises, Inc.

 

10-K

 

000-25092

 

3.1

 

February 17, 2006

 

 

3.2

 

Certificate of Amendment of Amended and Restated Certificate of Incorporation of Insight Enterprises, Inc.

 

8-K

 

000-25092

 

3.1

 

May 21, 2015

 

 

3.3

 

Amended and Restated Bylaws of Insight Enterprises, Inc.

 

8-K

 

000-25092

 

3.2

 

May 21, 2015

 

 

4.1

 

Specimen Common Stock Certificate (P)

 

S-1

 

33-86142

 

4.1

 

January 20, 1995

 

 

31.1

 

Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14

 

 

 

 

 

 

 

 

 

X

31.2

 

Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14

 

 

 

 

 

 

 

 

 

X

32.1

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

 

 

X

101

 

Interactive data files pursuant to Rule 405 of Regulation S-T

 

 

 

 

 

 

 

 

 

X

(P) Paper exhibit.

34


INSIGHT ENTERPRISES, INC.

SIGNATURESSIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date:

May 1, 2019

Date: May 2, 2018

INSIGHT ENTERPRISES, INC.

By:

By:

/s/ Kenneth T. Lamneck

Kenneth T. Lamneck

President and Chief Executive Officer

(Duly Authorized Officer)

By:

By:

/s/ Glynis A. Bryan

Glynis A. Bryan

Chief Financial Officer

(Principal Financial Officer)

By:

By:

/s/ DanaRachael A. LeightyBertrandt

Dana

Rachael A. LeightyBertrandt      

Vice President, Finance

Global Corporate Controller

(Principal Accounting Officer)

 

4135