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: September 30, 20172018
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
INSIGHT ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
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)
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 whether
Yes ☒ | No ☐ |
Indicate 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-TR (§ egulation 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 | ☐ | 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 November 3, 20172, 2018 was 35,792,243.35,479,670.
QUARTERLY REPORT ON FORM10-Q
Three Months Ended September 30, 20172018
TABLE OF CONTENTS
Page | ||||||
Item 1 – | ||||||
Consolidated Balance Sheets (unaudited) - September 30, | 1 | |||||
2 | ||||||
3 | ||||||
4 | ||||||
5 | ||||||
Item 2 – | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
29 | ||||||
Item 3 – | ||||||
46 | ||||||
Item 4 – | ||||||
46 | ||||||
PART II - | ||||||
Item 1 – | ||||||
47 | ||||||
Item 1A – | ||||||
47 | ||||||
Item 2 – | ||||||
47 | ||||||
Item 3 – | ||||||
48 | ||||||
Item 4 – | ||||||
48 | ||||||
Item 5 – | 48 | |||||
Item 6 – | 48 | |||||
49 |
INSIGHT ENTERPRISES, INC.
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 include: expectations regarding net sales, gross profit, gross margin, operating expenses, earnings from operations,non-operating income and expenses, net earnings orand cash flows, cash uses and needs, the payment of accrued expenses and liabilities, the timing of the inventory shipments; the expected effects of seasonality on our business; 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 orand 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 intention not to repatriate certain foreign undistributed earnings where management considers those earnings to be reinvested indefinitely and plans relating thereto; 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; our expectations about Datalink profitability objectives and the future benefits of our acquisitions and our plans related thereto, including potential expansion into wider regions; 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, 2016:
2017:
actions of our competitors, including manufacturers and publisherspublishers of products we sell;
INSIGHT ENTERPRISES, INC.
failure to comply with the terms and conditions of our commercial and public sector contracts;
legal proceedings and the results of client and public sector audits and failure to comply with laws and regulations;
accounts receivable risks, including increased credit loss experience or extended payment terms with our clients;
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 - FINANCIALFINANCIAL INFORMATION
INSIGHT ENTERPRISES, INC.
(in thousands, except per share data)
(unaudited)
September 30, 2017 | December 31, 2016 |
| September 30, 2018 |
|
| December 31, 2017 |
| |||||||||
ASSETS |
|
|
|
|
|
|
|
| ||||||||
Current assets: |
|
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents | $ | 236,411 | $ | 202,882 |
| $ | 111,055 |
|
| $ | 105,831 |
| ||||
Accounts receivable, net of allowance for doubtful accounts of $9,628 and $9,138, respectively | 1,483,234 | 1,436,742 | ||||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $10,135 and $10,158, respectively |
|
| 1,682,005 |
|
|
| 1,814,560 |
| ||||||||
Inventories | 235,313 | 148,203 |
|
| 171,197 |
|
|
| 194,529 |
| ||||||
Inventories not available for sale | 56,322 | 68,619 |
|
| 648 |
|
|
| 36,956 |
| ||||||
Other current assets | 151,032 | 127,159 |
|
| 103,778 |
|
|
| 152,467 |
| ||||||
|
| |||||||||||||||
Total current assets | 2,162,312 | 1,983,605 |
|
| 2,068,683 |
|
|
| 2,304,343 |
| ||||||
Property and equipment, net of accumulated depreciation and amortization of $330,192 and $308,127, respectively | 77,530 | 70,910 | ||||||||||||||
Property and equipment, net of accumulated depreciation and amortization of $331,605 and $335,078, respectively |
|
| 74,097 |
|
|
| 75,252 |
| ||||||||
Goodwill | 131,552 | 62,645 |
|
| 167,065 |
|
|
| 131,431 |
| ||||||
Intangible assets, net of accumulated amortization of $35,198 and $22,982, respectively | 105,140 | 20,707 | ||||||||||||||
Intangible assets, net of accumulated amortization of $48,646 and $37,357, respectively |
|
| 116,608 |
|
|
| 100,778 |
| ||||||||
Deferred income taxes | 40,175 | 52,347 |
|
| 13,844 |
|
|
| 17,064 |
| ||||||
Other assets | 62,583 | 29,086 |
|
| 70,220 |
|
|
| 56,783 |
| ||||||
|
| |||||||||||||||
$ | 2,579,292 | $ | 2,219,300 | |||||||||||||
|
|
| $ | 2,510,517 |
|
| $ | 2,685,651 |
| |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
| ||||||||
Current liabilities: |
|
|
|
|
|
|
|
| ||||||||
Accounts payable—trade | $ | 682,946 | $ | 1,070,259 |
| $ | 758,035 |
|
| $ | 899,075 |
| ||||
Accounts payable—inventory financing facility | 224,072 | 154,930 |
|
| 237,556 |
|
|
| 319,468 |
| ||||||
Accrued expenses and other current liabilities | 151,206 | 151,895 |
|
| 180,101 |
|
|
| 175,860 |
| ||||||
Current portion of long-term debt | 15,344 | 480 |
|
| 17,360 |
|
|
| 16,592 |
| ||||||
Deferred revenue | 99,338 | 61,098 |
|
| 63,696 |
|
|
| 88,979 |
| ||||||
|
| |||||||||||||||
Total current liabilities | 1,172,906 | 1,438,662 |
|
| 1,256,748 |
|
|
| 1,499,974 |
| ||||||
Long-term debt | 534,385 | 40,251 |
|
| 251,334 |
|
|
| 296,576 |
| ||||||
Deferred income taxes | 915 | 900 |
|
| 427 |
|
|
| 717 |
| ||||||
Other liabilities | 44,336 | 26,044 |
|
| 59,001 |
|
|
| 44,915 |
| ||||||
|
|
|
| 1,567,510 |
|
|
| 1,842,182 |
| |||||||
1,752,542 | 1,505,857 | |||||||||||||||
|
| |||||||||||||||
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; 35,792 shares at September 30, 2017 and 35,484 shares at December 31, 2016 issued and outstanding | 358 | 355 | ||||||||||||||
Common stock, $0.01 par value, 100,000 shares authorized; 35,459 shares at September 30, 2018 and 35,829 shares at December 31, 2017 issued and outstanding |
|
| 355 |
|
|
| 358 |
| ||||||||
Additionalpaid-in capital | 315,078 | 309,650 |
|
| 319,065 |
|
|
| 317,155 |
| ||||||
Retained earnings | 536,052 | 459,537 |
|
| 657,625 |
|
|
| 550,220 |
| ||||||
Accumulated other comprehensive loss – foreign currency translation adjustments | (24,738 | ) | (56,099 | ) |
|
| (34,038 | ) |
|
| (24,264 | ) | ||||
|
| |||||||||||||||
Total stockholders’ equity | 826,750 | 713,443 |
|
| 943,007 |
|
|
| 843,469 |
| ||||||
|
|
| $ | 2,510,517 |
|
| $ | 2,685,651 |
| |||||||
$ | 2,579,292 | $ | 2,219,300 | |||||||||||||
|
|
See accompanying notes to consolidated financial statements.
1
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, |
| 2018 |
|
| 2017 |
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| 2018 |
|
| 2017 |
| |||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||||
Net sales | $ | 1,757,973 | $ | 1,392,716 | $ | 4,919,548 | $ | 4,017,932 | ||||||||||||||||||||||||
Costs of goods sold | 1,531,892 | 1,210,908 | 4,233,861 | 3,465,799 | ||||||||||||||||||||||||||||
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|
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| |||||||||||||||||||||||||||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Products |
| $ | 1,548,273 |
|
| $ | 1,598,973 |
|
| $ | 4,724,888 |
|
| $ | 4,426,406 |
| ||||||||||||||||
Services |
|
| 199,453 |
|
|
| 159,000 |
|
|
| 606,202 |
|
|
| 493,142 |
| ||||||||||||||||
Total net sales |
|
| 1,747,726 |
|
|
| 1,757,973 |
|
|
| 5,331,090 |
|
|
| 4,919,548 |
| ||||||||||||||||
Costs of goods sold: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Products |
|
| 1,415,808 |
|
|
| 1,463,414 |
|
|
| 4,319,181 |
|
|
| 4,036,486 |
| ||||||||||||||||
Services |
|
| 97,004 |
|
|
| 68,478 |
|
|
| 272,355 |
|
|
| 197,375 |
| ||||||||||||||||
Total costs of goods sold |
|
| 1,512,812 |
|
|
| 1,531,892 |
|
|
| 4,591,536 |
|
|
| 4,233,861 |
| ||||||||||||||||
Gross profit | 226,081 | 181,808 | 685,687 | 552,133 |
|
| 234,914 |
|
|
| 226,081 |
|
|
| 739,554 |
|
|
| 685,687 |
| ||||||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Selling and administrative expenses | 180,390 | 143,872 | 538,774 | 440,177 |
|
| 184,095 |
|
|
| 180,390 |
|
|
| 561,739 |
|
|
| 538,774 |
| ||||||||||||
Severance and restructuring expenses | 494 | 788 | 6,211 | 3,053 |
|
| 683 |
|
|
| 494 |
|
|
| 2,709 |
|
|
| 6,211 |
| ||||||||||||
Loss on sale of foreign entity | 3,646 | — | 3,646 | — |
|
| — |
|
|
| 3,646 |
|
|
| — |
|
|
| 3,646 |
| ||||||||||||
Acquisition-related expenses | 106 | 741 | 3,329 | 741 |
|
| 188 |
|
|
| 106 |
|
|
| 282 |
|
|
| 3,329 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Earnings from operations | 41,445 | 36,407 | 133,727 | 108,162 |
|
| 49,948 |
|
|
| 41,445 |
|
|
| 174,824 |
|
|
| 133,727 |
| ||||||||||||
Non-operating (income) expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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| ||||||||||||||||
Interest income | (227 | ) | (318 | ) | (863 | ) | (784 | ) |
|
| (330 | ) |
|
| (227 | ) |
|
| (653 | ) |
|
| (863 | ) | ||||||||
Interest expense | 5,555 | 2,517 | 13,814 | 6,357 |
|
| 6,132 |
|
|
| 5,555 |
|
|
| 17,249 |
|
|
| 13,814 |
| ||||||||||||
Net foreign currency exchange loss | 341 | �� | 579 | 972 | 1,042 |
|
| 539 |
|
|
| 341 |
|
|
| 19 |
|
|
| 972 |
| |||||||||||
Other expense, net | 339 | 352 | 980 | 979 |
|
| 393 |
|
|
| 339 |
|
|
| 1,019 |
|
|
| 980 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Earnings before income taxes | 35,437 | 33,277 | 118,824 | 100,568 |
|
| 43,214 |
|
|
| 35,437 |
|
|
| 157,190 |
|
|
| 118,824 |
| ||||||||||||
Income tax expense | 13,025 | 11,642 | 42,309 | 36,978 |
|
| 11,060 |
|
|
| 13,025 |
|
|
| 40,554 |
|
|
| 42,309 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net earnings | $ | 22,412 | $ | 21,635 | $ | 76,515 | $ | 63,590 |
| $ | 32,154 |
|
| $ | 22,412 |
|
| $ | 116,636 |
|
| $ | 76,515 |
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Net earnings per share: |
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Basic | $ | 0.63 | $ | 0.61 | $ | 2.14 | $ | 1.75 |
| $ | 0.91 |
|
| $ | 0.63 |
|
| $ | 3.27 |
|
| $ | 2.14 |
| ||||||||
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Diluted | $ | 0.62 | $ | 0.60 | $ | 2.11 | $ | 1.74 |
| $ | 0.89 |
|
| $ | 0.62 |
|
| $ | 3.24 |
|
| $ | 2.11 |
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Shares used in per share calculations: |
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| ||||||||||||||||
Basic | 35,787 | 35,474 | 35,718 | 36,310 |
|
| 35,468 |
|
|
| 35,787 |
|
|
| 35,622 |
|
|
| 35,718 |
| ||||||||||||
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|
|
| |||||||||||||||||||||||||||||
Diluted | 36,203 | 35,790 | 36,186 | 36,596 |
|
| 35,957 |
|
|
| 36,203 |
|
|
| 36,012 |
|
|
| 36,186 |
| ||||||||||||
|
|
|
|
See accompanying notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, |
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| |||||||||||||||||
Net earnings | $ | 22,412 | $ | 21,635 | $ | 76,515 | $ | 63,590 |
| $ | 32,154 |
|
| $ | 22,412 |
|
| $ | 116,636 |
|
| $ | 76,515 |
| ||||||||
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Foreign currency translation adjustments | 15,106 | 169 | 31,361 | (1,669 | ) |
|
| 657 |
|
|
| 15,106 |
|
|
| (9,774 | ) |
|
| 31,361 |
| |||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total comprehensive income | $ | 37,518 | $ | 21,804 | $ | 107,876 | $ | 61,921 |
| $ | 32,811 |
|
| $ | 37,518 |
|
| $ | 106,862 |
|
| $ | 107,876 |
| ||||||||
|
|
|
|
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30, |
| Nine Months Ended September 30, |
| |||||||||||||
2017 | 2016 |
| 2018 |
|
| 2017 |
| |||||||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
| ||||||||
Net earnings | $ | 76,515 | $ | 63,590 |
| $ | 116,636 |
|
| $ | 76,515 |
| ||||
Adjustments to reconcile net earnings to net cash used in operating activities: | ||||||||||||||||
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
| ||||||||
Depreciation and amortization of property and equipment | 19,430 | 20,785 |
|
| 16,018 |
|
|
| 19,430 |
| ||||||
Amortization of intangible assets | 12,643 | 9,312 |
|
| 11,399 |
|
|
| 12,643 |
| ||||||
Provision for losses on accounts receivable | 3,429 | 1,401 |
|
| 2,572 |
|
|
| 3,429 |
| ||||||
Write-downs of inventories | 1,991 | 2,297 |
|
| 2,410 |
|
|
| 1,991 |
| ||||||
Write-off of property and equipment | 378 | — |
|
| 367 |
|
|
| 378 |
| ||||||
Non-cash stock-based compensation | 10,134 | 8,308 |
|
| 10,764 |
|
|
| 10,134 |
| ||||||
Deferred income taxes | (209 | ) | 3,424 |
|
| 2,964 |
|
|
| (209 | ) | |||||
Loss on sale of foreign entity | 3,646 | — |
|
| — |
|
|
| 3,646 |
| ||||||
Gain on sale of real estate | — | (338 | ) | |||||||||||||
Changes in assets and liabilities, net of acquisitions and sale of foreign entity: |
|
|
|
|
|
|
|
| ||||||||
Decrease in accounts receivable | 108,284 | 133,289 |
|
| 222,047 |
|
|
| 108,284 |
| ||||||
Increase in inventories | (73,186 | ) | (59,707 | ) | ||||||||||||
Decrease (increase) in other assets | 320 | (22,713 | ) | |||||||||||||
Decrease (increase) in inventories |
|
| 24,373 |
|
|
| (73,186 | ) | ||||||||
Decrease in other assets |
|
| 31,555 |
|
|
| 320 |
| ||||||||
Decrease in accounts payable | (442,328 | ) | (278,097 | ) |
|
| (201,147 | ) |
|
| (442,328 | ) | ||||
Decrease in deferred revenue | (13,871 | ) | (6,645 | ) | ||||||||||||
(Decrease) increase in accrued expenses and other liabilities | (30,736 | ) | 244 | |||||||||||||
|
| |||||||||||||||
Net cash used in operating activities | (323,560 | ) | (124,850 | ) | ||||||||||||
|
| |||||||||||||||
Increase (decrease) in deferred revenue |
|
| 11,326 |
|
|
| (13,871 | ) | ||||||||
Decrease in accrued expenses and other liabilities |
|
| (4,043 | ) |
|
| (30,736 | ) | ||||||||
Net cash provided by (used in) operating activities |
|
| 247,241 |
|
|
| (323,560 | ) | ||||||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
| ||||||||
Purchases of property and equipment | (15,906 | ) | (9,714 | ) |
|
| (13,046 | ) |
|
| (15,906 | ) | ||||
Proceeds from sale of foreign entity | 1,517 | — |
|
| 479 |
|
|
| 1,517 |
| ||||||
Proceeds from sale of real estate, net | — | 1,378 | ||||||||||||||
Acquisitions, net of cash and cash equivalents acquired | (186,932 | ) | (10,297 | ) |
|
| (74,938 | ) |
|
| (186,932 | ) | ||||
|
| |||||||||||||||
Net cash used in investing activities | (201,321 | ) | (18,633 | ) |
|
| (87,505 | ) |
|
| (201,321 | ) | ||||
|
| |||||||||||||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
| ||||||||
Borrowings on senior revolving credit facility | 923,216 | 534,920 |
|
| 569,232 |
|
|
| 923,216 |
| ||||||
Repayments on senior revolving credit facility | (707,216 | ) | (506,420 | ) |
|
| (686,732 | ) |
|
| (707,216 | ) | ||||
Borrowings on accounts receivable securitization financing facility | 2,844,389 | 1,947,000 |
|
| 2,662,000 |
|
|
| 2,844,389 |
| ||||||
Repayments on accounts receivable securitization financing facility | (2,723,889 | ) | (1,822,000 | ) |
|
| (2,576,000 | ) |
|
| (2,723,889 | ) | ||||
Borrowings under Term Loan A | 175,000 | — |
|
| — |
|
|
| 175,000 |
| ||||||
Repayments under Term Loan A | (6,562 | ) | — |
|
| (9,844 | ) |
|
| (6,562 | ) | |||||
Repayments under other financing agreements | (5,176 | ) | (1,309 | ) |
|
| (2,312 | ) |
|
| (5,176 | ) | ||||
Payments on capital lease obligations | (614 | ) | (270 | ) |
|
| (1,002 | ) |
|
| (614 | ) | ||||
Net borrowings under inventory financing facility | 45,641 | 29,456 | ||||||||||||||
Net (repayments) borrowings under inventory financing facility |
|
| (81,911 | ) |
|
| 45,641 |
| ||||||||
Payment of debt issuance costs | (1,123 | ) | (3,360 | ) |
|
| (270 | ) |
|
| (1,123 | ) | ||||
Payment of payroll taxes on stock-based compensation through shares withheld | (4,703 | ) | (2,159 | ) |
|
| (3,195 | ) |
|
| (4,703 | ) | ||||
Repurchases of common stock | — | (50,000 | ) |
|
| (22,069 | ) |
|
| — |
| |||||
|
| |||||||||||||||
Net cash provided by financing activities | 538,963 | 125,858 | ||||||||||||||
|
| |||||||||||||||
Foreign currency exchange effect on cash and cash equivalent balances | 19,447 | 5,342 | ||||||||||||||
|
| |||||||||||||||
Increase (decrease) in cash and cash equivalents | 33,529 | (12,283 | ) | |||||||||||||
Cash and cash equivalents at beginning of period | 202,882 | 187,978 | ||||||||||||||
|
| |||||||||||||||
Cash and cash equivalents at end of period | $ | 236,411 | $ | 175,695 | ||||||||||||
|
| |||||||||||||||
Net cash (used in) provided by financing activities |
|
| (152,103 | ) |
|
| 538,963 |
| ||||||||
Foreign currency exchange effect on cash, cash equivalents and restricted cash balances |
|
| (2,434 | ) |
|
| 19,635 |
| ||||||||
Increase in cash, cash equivalents and restricted cash |
|
| 5,199 |
|
|
| 33,717 |
| ||||||||
Cash, cash equivalents and restricted cash at beginning of period |
|
| 107,445 |
|
|
| 205,946 |
| ||||||||
Cash, cash equivalents and restricted cash at end of period |
| $ | 112,644 |
|
| $ | 239,663 |
|
See accompanying notes to consolidated financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation and Recently Issued Accounting Standards
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 Insight Intelligent Technology SolutionsTM. We empower our and services to maximize the business value of IT. As 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 selectcertain 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 selectcertain software-related services.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly our financial position as of September 30, 2017,2018 and our results of operations for the three and nine months ended September 30, 2018 and 2017 and 2016 and our cash flows for the nine months ended September 30, 20172018 and 2016.2017. The consolidated balance sheet as of December 31, 20162017 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, 2016.2017. Our results of operations include the results of Datalink Corporation (“Datalink”) from its acquisition date of January 6, 2017, Caase Group B.V. (doing business as, and referred(referred to herein as, “Caase.com”) from its acquisition date of September 26, 2017 Datalink Corporationand Cardinal Solutions Group, Inc. (“Datalink”Cardinal”) from its acquisition date of January 6, 2017 and Ignia, Pty Ltd (“Ignia”) from its acquisition date of SeptemberAugust 1, 2016.2018. See Note 1012 for further discussion of our acquisitionsacquisition of Caase.com and Datalink.Cardinal.
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.
5
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Recently Issued Accounting Standards
In March 2016,Effective January 1, 2018, we adopted the Financial Accounting Standards BoardBoard’s (“FASB”) issued Accounting StandardsStandard Update (“ASU”)No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” This new standard simplifies the accounting for share-based payment transactions, including the income tax consequences, the calculationASU No. 2016-18, “Restricted Cash,” ASU No. 2016-15, “Classification of diluted earnings per share, the treatmentCertain Cash Receipts and Cash Payments,” and ASU No. 2016-01, “Financial Instruments Overview: Recognition and Measurement of forfeitures, the classification of awards as either equity or liabilitiesFinancial Assets and the classification on the statement of cash flows. This new standard increases volatility in the statement of operations by requiring all excess tax benefits and deficiencies to be recognized as income tax benefit or expense in the statement of operations and treated as discrete items in the period in which they occur. We adopted the new standard as of January 1, 2017, and prospectively applied the provisions in this guidance requiring recognition of excess tax benefits and deficits in the statement of operations, which resulted in an income tax benefit of $69,000 and $2,258,000 for the three and nine months ended September 30, 2017, respectively.Financial Liabilities.” The corresponding increase in net earnings had no effect on diluted earnings per share during the three months ended September 30, 2017 and equated to $0.06 per diluted share during the nine months ended September 30, 2017. Also, as a result of the adoption of thethese new standard, we made an accounting policy election to recognize forfeitures as they occur and no longer estimate expected forfeitures. The provisions in this guidance requiring the use of a modified retrospective transition method would have required us to record a cumulative effect adjustment in retained earnings as of January 1, 2017. We elected not to adjust retained earnings and to record such cumulative effect adjustment as stock-based compensation in the first quarter of 2017 on the basis of immateriality. Lastly, we applied the provisions of this guidance relating to classification on the statement of cash flows retrospectively. As a result, excess tax benefits from employee gains on stock-based compensation of $293,000 were reclassified from cash flows from financing activities to cash flows from operating activities for the nine months ended September 30, 2016 to conform to the current period presentation.
In July 2015, the FASB issued ASUNo. 2015-11, “Simplifying the Measurement of Inventory.” This standard changes the measurement from lower of cost or market to lower of cost and net realizable value. We adopted the standard in the first quarter of 2017 and applied the provisions prospectively. The standardstandards did not have a material effect on our consolidated financial statements.
On May 28, 2014, the FASB issued Additionally, we adopted ASUNo. 2014-09, “Revenue from Contracts with Customers,” effective January 1, 2018, as discussed in Note 2.
As a result of the adoption of ASU No. 2016-18, we began including amounts generally described as restricted cash or restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows for the nine months ended September 30, 2018. Amounts shown in the consolidated statement of cash flows for the nine months ended September 30, 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 nine months ended September 30, 2018 and 2017 (in thousands):
|
| September 30, 2018 |
|
| December 31, 2017 |
| ||
Cash and cash equivalents |
| $ | 111,055 |
|
| $ | 105,831 |
|
Restricted cash included in other current assets |
|
| 17 |
|
|
| 46 |
|
Restricted cash included in other non-current assets |
|
| 1,572 |
|
|
| 1,568 |
|
Total cash, cash equivalents and restricted cash shown in the statement of cash flows |
| $ | 112,644 |
|
| $ | 107,445 |
|
|
| September 30, 2017 |
|
| December 31, 2016 |
| ||
Cash and cash equivalents |
| $ | 236,411 |
|
| $ | 202,882 |
|
Restricted cash included in other current assets |
|
| 80 |
|
|
| 51 |
|
Restricted cash included in other non-current assets |
|
| 3,172 |
|
|
| 3,013 |
|
Total cash, cash equivalents and restricted cash shown in the statement of cash flows |
| $ | 239,663 |
|
| $ | 205,946 |
|
Amounts 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. Restricted cash shown in the statement of cash flows for the nine months ended September 30, 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 other non-current assets.
In February 2016, the FASB issued ASU No. 2016-02, “Leases,” (Topic 842) which amendssupersedes the existing lease recognition requirements in the current accounting standardsstandard for revenue recognition.leases. The core principleprincipal of the guidancenew standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expectsright-of-use (“ROU”) assets and lease liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The new standard is to be entitled in exchange for those goods or services.applied using a modified retrospective transition method with the option to elect a number of practical expedients. The new standard as amended, will be effective for the Companyfiscal years beginning in the first quarter of 2018. The standard permits two methods of adoption: retrospectively to each prior reporting period presented (the full retrospective transition method) or retrospectively with the cumulative effect adjustment of initially applying the new standard recognized at the date of initial application (the modified retrospective transition method).
We will adopt the standard on January 1,after December 15, 2018, and expect to utilize the modified retrospective transition method. While we are still finalizing our accounting policies under the new standard and are in the process of quantifying the cumulative effect adjustment from priorincluding interim periods that will be recognized in our consolidated balance sheet as of the date of adoption as an adjustment to retained earnings, to date we have concluded:
The accounting for inventories not available for sale related to certain product net sales transactions in which we are warehousing the product and will be deploying the product to our clients’ designated locations subsequent toperiod-end will changewithin such that a portion of revenue under the contracts is generally expected to be recognized at an earlier point in
fiscal years.
6
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
We will changeadopt the new lease standard as of January 1, 2019 and plan to delay revenue recognition untilutilize the beginningretrospective cumulative effect adjustment transition method with a cumulative effect adjustment being recorded as of the renewal period.
cash flows. Our analysis and evaluation of the new standard will continue through its effective date in the first quarter of 2018. A substantial amount of work has been completed, and findings and progress2019, including continuing to date have been reported to management andmonitor any potential changes in the Audit Committee. Although we do not currently expectstandard proposed by the changes resulting from the adoption of the new standard to materially affect our results of operations, our conclusions are still being finalized.FASB.
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, 20162017 that affect or may affect our current financial statements.
2. | New Accounting Standard – Sales Recognition |
2. We adopted ASU No. 2014-09, “Revenue from Contracts with Customers,” which created FASB Topic 606 (“Topic 606”) with a date of initial application of January 1, 2018. Topic 606 also includes Subtopic 340-40, “Other Assets and Deferred Costs – Contracts with Customers,” which requires the deferral of incremental costs 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. In adopting 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 and for the years ended December 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.
For 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.
7
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The accounting for renewals of certain software term/usage licenses changed to delay or accelerate revenue recognition to 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.
The accounting for recording sales returns allowance changed from being recorded against accounts receivable to being recorded as a refund liability. As a result, in our consolidated balance sheets, we reclassified our sales returns allowance balance from accounts receivable, net to accrued expenses and other current liabilities. Under previous guidance, we recorded the sales returns allowance in accounts receivable, net and not as a separately stated liability.
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.
8
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following tables summarize the effects of adopting Topic 606 on the Company’s consolidated financial statements as of September 30, 2018 and for the three and nine months then ended (in thousands, except for per share data):
BALANCE SHEET AT SEPTEMBER 30, 2018
|
|
|
|
|
|
|
|
|
| Pre-Topic 606 |
| |
|
| As Reported |
|
| Adjustments |
|
| Adoption |
| |||
Cash and cash equivalents |
| $ | 111,055 |
|
| $ | — |
|
| $ | 111,055 |
|
Accounts receivable, net |
|
| 1,682,005 |
|
|
| (115,210 | ) |
|
| 1,566,795 |
|
Inventories |
|
| 171,197 |
|
|
| — |
|
|
| 171,197 |
|
Inventories not available for sale |
|
| 648 |
|
|
| 72,529 |
|
|
| 73,177 |
|
Other current assets |
|
| 103,778 |
|
|
| 37,356 |
|
|
| 141,134 |
|
Total current assets |
|
| 2,068,683 |
|
|
| (5,325 | ) |
|
| 2,063,358 |
|
Property and equipment, net |
|
| 74,097 |
|
|
| — |
|
|
| 74,097 |
|
Goodwill |
|
| 167,065 |
|
|
| — |
|
|
| 167,065 |
|
Intangible assets, net |
|
| 116,608 |
|
|
| — |
|
|
| 116,608 |
|
Deferred income taxes |
|
| 13,844 |
|
|
| — |
|
|
| 13,844 |
|
Other assets |
|
| 70,220 |
|
|
| (15,793 | ) |
|
| 54,427 |
|
|
| $ | 2,510,517 |
|
| $ | (21,118 | ) |
| $ | 2,489,399 |
|
Accounts payable – trade |
| $ | 758,035 |
|
| $ | (47,159 | ) |
| $ | 710,876 |
|
Accounts payable – inventory financing facility |
|
| 237,556 |
|
|
| — |
|
|
| 237,556 |
|
Accrued expenses and other current liabilities |
|
| 180,101 |
|
|
| (20,880 | ) |
|
| 159,221 |
|
Current portion of long-term debt |
|
| 17,360 |
|
|
| — |
|
|
| 17,360 |
|
Deferred revenue |
|
| 63,696 |
|
|
| 67,171 |
|
|
| 130,867 |
|
Total current liabilities |
|
| 1,256,748 |
|
|
| (868 | ) |
|
| 1,255,880 |
|
Long-term debt |
|
| 251,334 |
|
|
| — |
|
|
| 251,334 |
|
Deferred income taxes |
|
| 427 |
|
|
| — |
|
|
| 427 |
|
Other liabilities |
|
| 59,001 |
|
|
| (13,768 | ) |
|
| 45,233 |
|
|
|
| 1,567,510 |
|
|
| (14,636 | ) |
|
| 1,552,874 |
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
| — |
|
|
| — |
|
|
| — |
|
Common stock |
|
| 355 |
|
|
| — |
|
|
| 355 |
|
Additional paid-in capital |
|
| 319,065 |
|
|
| — |
|
|
| 319,065 |
|
Retained earnings |
|
| 657,625 |
|
|
| (6,407 | ) |
|
| 651,218 |
|
Accumulated other comprehensive loss – foreign currency translation adjustments |
|
| (34,038 | ) |
|
| (75 | ) |
|
| (34,113 | ) |
Total stockholders’ equity |
|
| 943,007 |
|
|
| (6,482 | ) |
|
| 936,525 |
|
|
| $ | 2,510,517 |
|
| $ | (21,118 | ) |
| $ | 2,489,399 |
|
9
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2018
|
|
|
|
|
|
|
|
|
| Pre-Topic 606 |
| |
|
| As Reported |
|
| Adjustments |
|
| Adoption |
| |||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
| $ | 1,548,273 |
|
| $ | 56,880 |
|
| $ | 1,605,153 |
|
Services |
|
| 199,453 |
|
|
| (1,981 | ) |
|
| 197,472 |
|
Total net sales |
|
| 1,747,726 |
|
|
| 54,899 |
|
|
| 1,802,625 |
|
Costs of goods sold: |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
| 1,415,808 |
|
| $ | 49,985 |
|
|
| 1,465,793 |
|
Services |
|
| 97,004 |
|
|
| 1,230 |
|
|
| 98,234 |
|
Total costs of goods sold |
|
| 1,512,812 |
|
|
| 51,215 |
|
|
| 1,564,027 |
|
Gross profit |
|
| 234,914 |
|
|
| 3,684 |
|
|
| 238,598 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
| 184,095 |
|
|
| 28 |
|
|
| 184,123 |
|
Severance and restructuring expenses |
|
| 683 |
|
|
| — |
|
|
| 683 |
|
Acquisition-related expenses |
|
| 188 |
|
|
| — |
|
|
| 188 |
|
Earnings from operations |
|
| 49,948 |
|
|
| 3,656 |
|
|
| 53,604 |
|
Non-operating expense, net |
|
| 6,734 |
|
|
| — |
|
|
| 6,734 |
|
Earnings before income taxes |
|
| 43,214 |
|
|
| 3,656 |
|
|
| 46,870 |
|
Income tax expense |
|
| 11,060 |
|
|
| 887 |
|
|
| 11,947 |
|
Net earnings |
| $ | 32,154 |
|
| $ | 2,769 |
|
| $ | 34,923 |
|
Net earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.91 |
|
| $ | 0.07 |
|
| $ | 0.98 |
|
Diluted |
| $ | 0.89 |
|
| $ | 0.08 |
|
| $ | 0.97 |
|
Shares used in per share calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 35,468 |
|
|
| — |
|
|
| 35,468 |
|
Diluted |
|
| 35,957 |
|
|
| — |
|
|
| 35,957 |
|
10
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018
|
|
|
|
|
|
|
|
|
| Pre-Topic 606 |
| |
|
| As Reported |
|
| Adjustments |
|
| Adoption |
| |||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
| $ | 4,724,888 |
|
| $ | 85,551 |
|
| $ | 4,810,439 |
|
Services |
|
| 606,202 |
|
|
| (9,045 | ) |
|
| 597,157 |
|
Total net sales |
|
| 5,331,090 |
|
|
| 76,506 |
|
|
| 5,407,596 |
|
Costs of goods sold: |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
| 4,319,181 |
|
|
| 75,407 |
|
|
| 4,394,588 |
|
Services |
|
| 272,355 |
|
|
| (378 | ) |
|
| 271,977 |
|
Total costs of goods sold |
|
| 4,591,536 |
|
|
| 75,029 |
|
|
| 4,666,565 |
|
Gross profit |
|
| 739,554 |
|
|
| 1,477 |
|
|
| 741,031 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
| 561,739 |
|
|
| 277 |
|
|
| 562,016 |
|
Severance and restructuring expenses |
|
| 2,709 |
|
|
| — |
|
|
| 2,709 |
|
Acquisition-related expenses |
|
| 282 |
|
|
| — |
|
|
| 282 |
|
Earnings from operations |
|
| 174,824 |
|
|
| 1,200 |
|
|
| 176,024 |
|
Non-operating expense, net |
|
| 17,634 |
|
|
| — |
|
|
| 17,634 |
|
Earnings before income taxes |
|
| 157,190 |
|
|
| 1,200 |
|
|
| 158,390 |
|
Income tax expense |
|
| 40,554 |
|
|
| 430 |
|
|
| 40,984 |
|
Net earnings |
| $ | 116,636 |
|
| $ | 770 |
|
| $ | 117,406 |
|
Net earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 3.27 |
|
| $ | 0.03 |
|
| $ | 3.30 |
|
Diluted |
| $ | 3.24 |
|
| $ | 0.02 |
|
| $ | 3.26 |
|
Shares used in per share calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 35,622 |
|
|
| — |
|
|
| 35,622 |
|
Diluted |
|
| 36,012 |
|
|
| — |
|
|
| 36,012 |
|
STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 nine months ended September 30, 2018. The adjustment to net earnings noted above in reconciling our reported results of operations for the nine months ended September 30, 2018 under Topic 606 to pre-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.
11
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
We record the freight we bill to our clients as product net sales and the related freight costs we pay as product 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.
Product Offerings
Hardware
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 principal 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 fulfillment 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 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 product 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 a separate fee. The client is invoiced and title transfers to the client upon receipt of the product at our warehouse. These product contracts are non-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.
12
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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 sheets, 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 sheets until such time as the product was delivered.
Software
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. For renewals, 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 to true-up, whereby additional perpetual licenses are sold under the client’s pre-existing master agreement. Such true-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 the true-up, software revenue related to the underlying additional licenses is recognized when we agree to the true-up with our client and the partner. This is consistent with our accounting treatment prior to the adoption of Topic 606.
Services Offerings
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 11, we report all fees earned from activities reported net within our services net sales category in our consolidated statements of operations.
Cloud / Software-as-a-Service Offerings
Cloud or software-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 these software-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 obligations 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.
13
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
This is consistent with our accounting treatment prior to the adoption of Topic 606. As discussed in Note 11, we report all fees earned from activities reported net within our services net sales category in our consolidated statements of operations.
Insight Delivered Services
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-party sub-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 from 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.
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 from us. 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. This is consistent with our accounting treatment prior to the adoption of Topic 606.
On our consolidated 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.
14
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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 may purchase 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 any follow-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-party sub-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-party sub-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.
Disaggregation of Revenue
In the following table, revenue is disaggregated by our reportable operating segments, which are primarily defined by 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 and nine months ended September 30, 2018 (in thousands):
|
| Three Months Ended September 30, 2018 |
| |||||||||||||
|
| North America |
|
| EMEA |
|
| APAC |
|
| Consolidated |
| ||||
Major Offerings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware |
| $ | 953,431 |
|
| $ | 147,497 |
|
| $ | 6,041 |
|
| $ | 1,106,969 |
|
Software |
|
| 259,602 |
|
|
| 168,603 |
|
|
| 13,099 |
|
|
| 441,304 |
|
Services |
|
| 158,426 |
|
|
| 29,080 |
|
|
| 11,947 |
|
|
| 199,453 |
|
|
| $ | 1,371,459 |
|
| $ | 345,180 |
|
| $ | 31,087 |
|
| $ | 1,747,726 |
|
Major Client Groups |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large Enterprise / Corporate |
| $ | 986,665 |
|
| $ | 265,430 |
|
| $ | 10,715 |
|
| $ | 1,262,810 |
|
Public Sector |
|
| 141,895 |
|
|
| 62,720 |
|
|
| 6,255 |
|
|
| 210,870 |
|
Small and Medium-Sized Businesses |
|
| 242,899 |
|
|
| 17,030 |
|
|
| 14,117 |
|
|
| 274,046 |
|
|
| $ | 1,371,459 |
|
| $ | 345,180 |
|
| $ | 31,087 |
|
| $ | 1,747,726 |
|
Revenue Recognition based on acting as Principal or Agent in the Transaction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue recognition (Principal) |
| $ | 1,322,391 |
|
| $ | 326,671 |
|
| $ | 26,638 |
|
| $ | 1,675,700 |
|
Net revenue recognition (Agent) |
|
| 49,068 |
|
|
| 18,509 |
|
|
| 4,449 |
|
|
| 72,026 |
|
|
| $ | 1,371,459 |
|
| $ | 345,180 |
|
| $ | 31,087 |
|
| $ | 1,747,726 |
|
15
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
| Nine Months Ended September 30, 2018 |
| |||||||||||||
|
| North America |
|
| EMEA |
|
| APAC |
|
| Consolidated |
| ||||
Major Offerings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware |
| $ | 2,724,916 |
|
| $ | 505,844 |
|
| $ | 22,518 |
|
| $ | 3,253,278 |
|
Software |
|
| 828,231 |
|
|
| 551,920 |
|
|
| 91,459 |
|
|
| 1,471,610 |
|
Services |
|
| 465,458 |
|
|
| 104,086 |
|
|
| 36,658 |
|
|
| 606,202 |
|
|
| $ | 4,018,605 |
|
| $ | 1,161,850 |
|
| $ | 150,635 |
|
| $ | 5,331,090 |
|
Major Client Groups |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large Enterprise / Corporate |
| $ | 2,945,880 |
|
| $ | 836,865 |
|
| $ | 37,770 |
|
| $ | 3,820,515 |
|
Public Sector | �� |
| 388,109 |
|
|
| 273,821 |
|
|
| 67,134 |
|
|
| 729,064 |
|
Small and Medium-Sized Businesses |
|
| 684,616 |
|
|
| 51,164 |
|
|
| 45,731 |
|
|
| 781,511 |
|
|
| $ | 4,018,605 |
|
| $ | 1,161,850 |
|
| $ | 150,635 |
|
| $ | 5,331,090 |
|
Revenue Recognition based on acting as Principal or Agent in the Transaction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue recognition (Principal) |
| $ | 3,857,104 |
|
| $ | 1,093,110 |
|
| $ | 133,542 |
|
| $ | 5,083,756 |
|
Net revenue recognition (Agent) |
|
| 161,501 |
|
|
| 68,740 |
|
|
| 17,093 |
|
|
| 247,334 |
|
|
| $ | 4,018,605 |
|
| $ | 1,161,850 |
|
| $ | 150,635 |
|
| $ | 5,331,090 |
|
Contract Balances
The following table provides information about receivables, contract assets and contract liabilities as of September 30, 2018 and January 1, 2018 (in thousands):
|
| September 30, |
|
| January 1, |
| ||
|
| 2018 |
|
| 2018 |
| ||
Current receivables, which are included in “Accounts receivable, net” |
| $ | 1,682,005 |
|
| $ | 1,909,074 |
|
Non-current receivables, which are included in “Other assets” |
|
| 31,288 |
|
|
| 32,227 |
|
Contract assets, which are included in “Other current assets” |
|
| 652 |
|
|
| 595 |
|
Contract liabilities, which are included in “Deferred revenue” and “Other liabilities” |
|
| 83,339 |
|
|
| 86,743 |
|
Significant changes in the contract assets and the contract liabilities balances during the nine months ended September 30, 2018 are as follows (in thousands):
|
| Increase (Decrease) |
| |||||
|
| Contract |
|
| Contract |
| ||
|
| Assets |
|
| Liabilities |
| ||
Balances at January 1, 2018 |
| $ | 595 |
|
| $ | 86,743 |
|
Reclassification of the beginning contract liabilities to revenue, as the result of performance obligations satisfied |
|
| — |
|
|
| (53,022 | ) |
Cash received in advance and not recognized as revenue |
|
| — |
|
|
| 49,685 |
|
Reclassification of the beginning contract assets to receivables, as the result of rights to consideration becoming unconditional |
|
| (590 | ) |
|
| — |
|
Contract assets recognized, net of reclassification to receivables |
|
| 647 |
|
|
| — |
|
Cumulative catch-up adjustment arising from changes in estimates of transaction price |
|
| — |
| �� |
| (67 | ) |
Balances at September 30, 2018 |
| $ | 652 |
|
| $ | 83,339 |
|
16
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Transaction price allocated to the remaining performance obligations
The following table includes estimated net sales related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2018 that are expected to be recognized in the future (in thousands):
|
| Products |
|
| Services |
|
| Total |
| |||
Remaining three months of 2018 |
| $ | 3 |
|
| $ | 39,990 |
|
| $ | 39,993 |
|
2019 |
|
| 13 |
|
|
| 70,061 |
|
|
| 70,074 |
|
2020 |
|
| 5 |
|
|
| 27,335 |
|
|
| 27,340 |
|
2021 |
|
| — |
|
|
| 9,621 |
|
|
| 9,621 |
|
2022 |
|
| — |
|
|
| 3,877 |
|
|
| 3,877 |
|
2023 |
|
| — |
|
|
| 1,474 |
|
|
| 1,474 |
|
2024 and thereafter |
|
| — |
|
|
| 221 |
|
|
| 221 |
|
Total remaining performance obligations |
| $ | 21 |
|
| $ | 152,579 |
|
| $ | 152,600 |
|
Topic 606 allows for certain practical expedients which we have elected to apply. As a result, we do not disclose information about remaining performance obligations that have original expected durations of one year or less in the table above. Amounts not included in the table above have an average original expected duration of eight 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 September 30, 2018 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 13 months.
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 September 30, 2018, in the table above.
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 a one-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 September 30, 2018, the related asset balance was $2,666,000, 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. | Immaterial Correction of an Error in Prior Periods |
We corrected immaterial errors identified in our March 31, 2018 and June 30, 2018 consolidated financial statements in the nine months ended September 30, 2018. The errors primarily relate to the incorrect presentation of certain software revenue transactions. In our consolidated statement of operations for the three months ended March 31, 2018, the effect was to reduce product net sales by $24.4 million, increase services net sales by $4.0 million, reduce product cost of goods sold by $23.7 million and increase services cost of goods sold by $3.0 million. In the three months ended March 31, 2018, gross profit, earnings from operations and net earnings increased by $258,000. Diluted earnings per share for the three months ended March 31, 2018 increased $0.01.
17
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
In our consolidated statement of operations for the three months ended June 30, 2018, the effect was to reduce product net sales by $900,000, increase services net sales by $4.9 million, reduce product cost of goods sold by $0.5 million and increase services cost of goods sold by $4.5 million. In our consolidated statement of operations for the six months ended June 30, 2018, the effect was to reduce product net sales by $25.3 million, increase services net sales by $8.9 million, reduce product cost of goods sold by $24.2 million and increase services cost of goods sold by $7.5 million. In the three months ended June 30, 2018, there was no impact to gross profit, earnings from operations or net earnings resulting from the revision. In the six months ended June 30, 2018, gross profit, earnings from operations and net earnings increased by $258,000. There was no impact to diluted earnings per share in either the three or six months ended June 30, 2018.
These revisions are appropriately reflected in the consolidated statement of operations for the nine months ended September 30, 2018. There is no impact to the audited consolidated financial statements for 2017 or any other prior period. We will present our revised historical consolidated statements of operations for the three months ended March 31, 2018 and the three and six months ended June 30, 2018 when the respective statements are presented in future filings.
4. | 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”).
7
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
A reconciliation of the denominators of the basic and diluted EPS calculations follows (in thousands, except per share data):
Three Months Ended September 30, | Nine Months Ended September 30, |
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| |||||||||||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net earnings | $ | 22,412 | $ | 21,635 | $ | 76,515 | $ | 63,590 |
| $ | 32,154 |
|
| $ | 22,412 |
|
| $ | 116,636 |
|
| $ | 76,515 |
| ||||||||
|
|
|
| |||||||||||||||||||||||||||||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Weighted average shares used to compute basic EPS | 35,787 | 35,474 | 35,718 | 36,310 |
|
| 35,468 |
|
|
| 35,787 |
|
|
| 35,622 |
|
|
| 35,718 |
| ||||||||||||
Dilutive potential common shares due to dilutive RSUs, net of tax effect | 416 | 316 | 468 | 286 |
|
| 489 |
|
|
| 416 |
|
|
| 390 |
|
|
| 468 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Weighted average shares used to compute diluted EPS | 36,203 | 35,790 | 36,186 | 36,596 |
|
| 35,957 |
|
|
| 36,203 |
|
|
| 36,012 |
|
|
| 36,186 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Basic | $ | 0.63 | $ | 0.61 | $ | 2.14 | $ | 1.75 |
| $ | 0.91 |
|
| $ | 0.63 |
|
| $ | 3.27 |
|
| $ | 2.14 |
| ||||||||
|
|
|
| |||||||||||||||||||||||||||||
Diluted | $ | 0.62 | $ | 0.60 | $ | 2.11 | $ | 1.74 |
| $ | 0.89 |
|
| $ | 0.62 |
|
| $ | 3.24 |
|
| $ | 2.11 |
| ||||||||
|
|
|
|
For the three and nine months ended September 30, 2017, 36,0002018, 5,000 and 48,000,13,000, 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. There were 5,00036,000 and 48,000 anti-dilutive RSUs for the three and nine months ended September 30, 2016,2017, respectively.
3. Debt, Inventory Financing Facility, Capital Leases and Other Financing Obligations18
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Debt
Our long-term debt consists of the following (in thousands):
September 30, 2017 | December 31, 2016 |
| September 30, 2018 |
|
| December 31, 2017 |
| |||||||||
Senior revolving credit facility | $ | 216,000 | $ | — |
| $ | — |
|
| $ | 117,500 |
| ||||
Term Loan A (less unamortized debt issuance costs of $936) | 167,502 | — | ||||||||||||||
Term Loan A (less unamortized debt issuance costs of $686 and $873, respectively) |
|
| 155,720 |
|
| 165,377 |
| |||||||||
Accounts receivable securitization financing facility | 160,000 | 39,500 |
|
| 111,000 |
|
|
| 25,000 |
| ||||||
Capital leases and other financing obligations | 6,227 | 1,231 |
|
| 1,974 |
|
|
| 5,291 |
| ||||||
|
| |||||||||||||||
Total | 549,729 | 40,731 |
|
| 268,694 |
|
|
| 313,168 |
| ||||||
Less: current portion of long-term debt | (15,344 | ) | (480 | ) |
|
| (17,360 | ) |
|
| (16,592 | ) | ||||
|
| |||||||||||||||
Long-term debt | $ | 534,385 | $ | 40,251 |
| $ | 251,334 |
|
| $ | 296,576 |
| ||||
|
|
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. OnIn January 6, 2017, we amended our revolving facility to expand the facility by $175,000,000 in the form of an incremental Term Loan A (“TLA”). Pricing and all other general terms and conditions of the TLA are governed by the existing revolving facility. 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. The revolving facility and TLA are guaranteed by the Company’s material domestic subsidiaries and are secured by a lien on substantially all of the Company’s and each guarantor’s assets. The interest rates applicable to borrowings under the revolving facility and the TLA are based on the leverage ratio of the Company as set forth on a pricing grid in the amended agreement. Amounts outstanding under the revolving
8
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
facility and TLA bear interest, payable quarterly, at a floating rate equal to the prime rate plus a predetermined spread of 0.00% to 0.75% or, at our option, a LIBOR rate plus apre-determined spread of 1.25% to 2.25%. The floating interest rate applicable at September 30, 2017 was 2.70% per annum for the revolving facility and 2.74% per annum for the TLA. In addition, we pay a quarterly commitment fee on the unused portion of the revolving facility of 0.25% to 0.45%, and our letter of credit participation fee ranges from 1.25% to 2.25%. As of September 30, 2017, we had $216,000,000 outstanding under our revolving facility and approximately $168,438,000 outstanding under the TLA.
Our accounts receivable securitization financing facility (the “ABS facility”) was amended on June 27, 2018 to, among other things, renew the borrowing program for a three-year term expiring June 23, 2021. The ABS facility has a maximum aggregate borrowing availability of $250,000,000, and matures on June 23, 2019. Interest is payable monthly, and the floating interest rate applicable at September 30, 2017 was 2.14% per annum, including a 0.85% usage fee on any outstanding balances. In addition, we pay a monthly commitment fee on the unused portion of the facility of 0.375%.$250,000,000. While the ABS facility has a stated maximum amount, the actual availability under the ABS facility is limited by the quantity and quality of the underlying accounts receivable. As of September 30, 2017,2018, qualified receivables were sufficient to permit access to the full $250,000,000 facility amount, of which $160,000,000$111,000,000 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 was increased to 3.50is currently 3.25 times our trailing twelve-month adjusted earnings in conjunction with the acquisition of Datalink effective January 6, 2017.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 September 30, 2017,2018, 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 $768,438,000, of which $216,000,000 was$756,406,000. We had no amounts outstanding under our revolving credit facility $168,438,000 wasand $156,406,000 and $111,000,000 outstanding under our TLA and $160,000,000 was outstanding under our ABS facility, respectively, at September 30, 2017.2018.
19
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Our inventory financing facility has a maximum borrowing capacity ofwas amended on March 23, 2018 to increase the aggregate availability for vendor purchases under the facility from $325,000,000 to $400,000,000, of which $224,072,000$237,556,000 was outstanding at September 30, 2017, and2018. 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%. From time to time and at our option, we may request to increase the aggregate amount available under the inventory financing facility by up to an aggregate of $25,000,000, subject to customary conditions. Amounts outstanding under this facility are classified separately as accounts payable -– inventory financing facility in the accompanying consolidated balance sheets. Interest does not accrue on advances paid within vendor terms. The inventory financing facility is guaranteed by the Company and each of its material domestic subsidiaries, and is secured by a lien on substantially all of the Company’s and each guarantor’s assets.
9
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Capital Lease and Other Financing Obligations
In March 2016 and May 2017, we entered into capitalized leases with36-month terms for certain IT equipment. Additionally, in August 2017, we entered into two12-month capital leases for certain IT equipment. The capital leases werenon-cash transactions and, accordingly, have been excluded from our consolidated statement of cash flows for the nine months ended September 30, 2017 and 2016. Our capital lease obligations totaled $3,277,000$1,517,000 and $1,231,000$2,802,000 as of September 30, 20172018 and December 31, 2016,2017, 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 $2,950,000$457,000 and $2,489,000 as of September 30, 2017.2018 and December 31, 2017, respectively.
The current and long-term portions of our capital lease and other financing obligations are included in the current and long-term portions of long-term debt in the table above and in our consolidated balance sheetsheets as of September 30, 2018 and December 31, 2017.
6. |
|
During the three and nine months ended September 30, 2017,2018, we recorded severance expense in each of our operating segments. The North America charges for the nine months ended September 30, 2017in all three operating segments primarily related to severance actions taken to realign certain roles and responsibilities subsequent to the acquisition of Datalink. The EMEA charges for the nine months ended September 30, 2017 primarily related to headcount reductions in France, Germany and the Netherlands as part of our cost reduction and restructuring initiatives. The APAC charges for the nine months ended September 30, 2017 primarily related to severance actions taken subsequent to the acquisition of Ignia.
responsibilities. The following table details the activity related to these resource actions for the nine months ended September 30, 20172018 and the outstanding obligations as of September 30, 20172018 (in thousands):
| North America |
|
| EMEA |
|
| APAC |
|
| Consolidated |
| |||||||||||||||||||||
North America | EMEA | APAC | Consolidated | |||||||||||||||||||||||||||||
Balances at December 31, 2016 | $ | 947 | $ | 1,217 | $ | — | $ | 2,164 | ||||||||||||||||||||||||
Balances at December 31, 2017 |
| $ | 1,631 |
|
| $ | 2,994 |
|
| $ | 15 |
|
| $ | 4,640 |
| ||||||||||||||||
Severance costs, net of adjustments | 2,045 | 4,062 | 104 | 6,211 |
|
| 1,034 |
|
|
| 1,545 |
|
|
| 130 |
|
|
| 2,709 |
| ||||||||||||
Cash payments | (2,277 | ) | (2,716 | ) | (89 | ) | (5,082 | ) |
|
| (1,403 | ) |
|
| (3,102 | ) |
|
| (145 | ) |
|
| (4,650 | ) | ||||||||
Foreign currency translation adjustments | 14 | 435 | — | 449 |
|
| (21 | ) |
|
| (12 | ) |
|
| — |
|
|
| (33 | ) | ||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Balances at September 30, 2017 | $ | 729 | $ | 2,998 | $ | 15 | $ | 3,742 | ||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Balances at September 30, 2018 |
| $ | 1,241 |
|
| $ | 1,425 |
|
| $ | — |
|
| $ | 2,666 |
|
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.
10
20
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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 September 30, | Nine Months Ended September 30, |
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| |||||||||||||||||
North America | $ | 2,589 | $ | 2,220 | $ | 7,716 | $ | 6,108 |
| $ | 2,837 |
|
| $ | 2,589 |
|
| $ | 8,172 |
|
| $ | 7,716 |
| ||||||||
EMEA | 694 | 681 | 2,130 | 1,858 |
|
| 754 |
|
|
| 694 |
|
|
| 2,234 |
|
|
| 2,130 |
| ||||||||||||
APAC | 102 | 124 | 288 | 342 |
|
| 126 |
|
|
| 102 |
|
|
| 358 |
|
|
| 288 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total Consolidated | $ | 3,385 | $ | 3,025 | $ | 10,134 | $ | 8,308 |
| $ | 3,717 |
|
| $ | 3,385 |
|
| $ | 10,764 |
|
| $ | 10,134 |
| ||||||||
|
|
|
|
As of September 30, 2017,2018, total compensation cost related to nonvested RSUs not yet recognized is $20,543,000,$23,929,000, which is expected to be recognized over the next 1.291.34 years on a weighted-average basis.
The following table summarizes our RSU activity during the nine months ended September 30, 2017:2018:
Number | Weighted Average Grant Date Fair Value | Fair Value | ||||||||||
Nonvested at January 1, 2017 | 1,067,557 | $ | 25.37 | |||||||||
Granted(a) | 331,250 | 44.29 | ||||||||||
Vested, including shares withheld to cover taxes | (413,807 | ) | 24.69 | $ | 18,258,878 | (b) | ||||||
|
| |||||||||||
Forfeited | (58,900 | ) | 30.94 | |||||||||
|
| |||||||||||
Nonvested at September 30, 2017(a) | 926,100 | 32.13 | $ | 42,526,512 | (c) | |||||||
|
|
|
|
|
| Number |
|
| Weighted Average Grant Date Fair Value |
|
| Fair Value |
|
| |||
Nonvested at January 1, 2018 |
|
| 892,113 |
|
| $ | 32.86 |
|
|
|
|
|
|
Granted(a) |
|
| 431,745 |
|
|
| 37.02 |
|
|
|
|
|
|
Vested, including shares withheld to cover taxes |
|
| (376,319 | ) |
|
| 29.74 |
|
| $ | 13,962,749 |
| (b) |
Forfeited |
|
| (37,469 | ) |
|
| 33.87 |
|
|
|
|
|
|
Nonvested at September 30, 2018(a) |
|
| 910,070 |
|
|
| 36.08 |
|
| $ | 49,225,686 |
| (c) |
(a) | Includes |
|