We
have audited the accompanying consolidated balance sheets of Insight Enterprises, Inc. and subsidiaries (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income,
stockholders equity, and cash flows for each of the years in the three-year period ended December 31, 2016. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Insight Enterprises, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board (United States), Insight Enterprises, Inc.s internal control over financial reporting as of December 31, 2016, based on criteria established in
Internal
Control Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 17, 2017 expressed an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.
We have audited Insight Enterprises, Inc.s internal control over financial reporting as of December 31, 2016, based on criteria
established in
Internal Control Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Insight Enterprises, Inc.s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A (a),
Managements Annual Report on Internal Control over
Financial Reporting
. Our responsibility is to express an opinion on Insight Enterprises, Inc.s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Insight Enterprises, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2016, based on criteria established in
Internal Control Integrated Framework (2013)
issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of
Insight Enterprises, Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, stockholders equity, and cash flows for each of the years in the three-year period
ended December 31, 2016, and our report dated February 17, 2017 expressed an unqualified opinion on those consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Operations and Summary of Significant Accounting Policies
Description of Business
We are a Fortune
500-ranked
global provider of information technology (IT) hardware, software, Cloud and service solutions to business, government, healthcare and educational clients
.
Our Company is organized in
the following three operating segments, which are primarily defined by their related geographies:
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Operating Segment
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|
Geography
|
North America
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|
United States and Canada
|
EMEA
|
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Europe, Middle East and Africa
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APAC
|
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Asia-Pacific
|
Our offerings in North America and select 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 select software-related services.
Acquisitions
Effective September 1, 2016, we acquired Ignia Pty Ltd (Ignia), a business technology consulting and managed services provider
headquartered in Perth, Australia, with an additional office in Melbourne, for a cash purchase price, net of cash acquired, of approximately $10,804,000. The acquisition was funded using cash on hand.
Effective October 1, 2015, we acquired BlueMetal Architects, Inc. (BlueMetal), an interactive design and technology
architecture firm based in the Boston area with offices in Chicago and New York, for a cash purchase price, net of cash acquired, of approximately $44,221,000. The acquisition was funded using borrowings under our accounts receivable securitization
financing facility.
Our results of operations include the results of Ignia and BlueMetal from their acquisition dates of
September 1, 2016 and October 1, 2015, respectively. (See Note 22 for a discussion of our acquisitions.)
Principles of Consolidation and
Presentation
The consolidated financial statements include the accounts of Insight Enterprises, Inc. and its wholly owned
subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. References to the Company, Insight, we, us, our and other similar words refer to
Insight Enterprises, Inc. and its consolidated subsidiaries, unless the context suggests otherwise.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP)
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Additionally, these estimates
and assumptions affect the reported amounts of 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.
Cash and
Cash Equivalents
We consider all highly liquid investments with maturities at the date of purchase of three months or less to be cash
equivalents.
47
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Book overdrafts represent the amount by which outstanding checks issued, but not yet
presented to our banks for disbursement, exceed balances on deposit in applicable bank accounts and a legal right of offset with our positive cash balances in other financial institution accounts does not exist. Our book overdrafts, which are
not directly linked to a credit facility or other bank overdraft arrangement, do not result in an actual bank financing, but rather constitute normal unpaid trade payables at the end of a reporting period. These amounts are included within our
accounts payable balance in our consolidated balance sheets. The changes in these book overdrafts are included within the changes in accounts payable line item as a component of cash flows from operating activities in our consolidated
statements of cash flows.
Allowance for Doubtful Accounts
We establish an allowance for doubtful accounts to reflect our best estimate of probable losses inherent in our accounts receivable balance.
The allowance is based on our evaluation of the aging of the receivables, historical write-offs and the current economic environment. We write off individual accounts against the reserve when we no longer believe that it is probable that we will
collect the receivable because we become aware of a clients or partners inability to meet its financial obligations. Such awareness may be as a result of bankruptcy filings, or deterioration in the clients or partners
operating results or financial position.
Inventories
We state inventories, principally purchased IT hardware, at the lower of weighted average cost (which approximates cost under the
first-in,
first-out
method) or market. We evaluate inventories for excess, obsolescence or other factors that may render inventories unmarketable at normal margins.
Write-downs are recorded so that inventories reflect the approximate net realizable value and take into account contractual provisions with our partners governing price protection, stock rotation and return privileges relating to obsolescence.
Because of the large number of transactions and the complexity of managing the price protection and stock rotation process, estimates are made regarding write-downs of the carrying amount of inventories. Additionally, assumptions about future
demand, market conditions and decisions by manufacturers/publishers to discontinue certain products or product lines can affect our decision to write down inventories.
Inventories not available for sale relate to product sales transactions in which we are warehousing the product and will be deploying the
product to our clients designated locations subsequent to
period-end.
Additionally, we may perform services on a portion of the product prior to shipment to our clients and will be paid a fee for doing
so. Although these product contracts are
non-cancelable
with customary credit terms beginning the date the inventories are segregated in our warehouse and invoiced to the client and the warranty periods begin
on the date of invoice, these transactions do not meet the sales recognition criteria under GAAP. Therefore, we do not record sales and the inventories are classified as inventories not available for sale on our consolidated balance sheet until the
product is delivered. If clients remit payment before we deliver the product to them, we record the payments received as deferred revenue on our consolidated balance sheet until such time as the product is delivered.
Property and Equipment
We record
property and equipment at cost. We capitalize major improvements and betterments, while maintenance, repairs and minor replacements are expensed as incurred. Depreciation or amortization is provided using the straight-line method over the following
estimated economic lives of the assets:
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Estimated Economic Life
|
Leasehold improvements
|
|
Shorter of underlying lease term or asset life
|
Furniture and fixtures
|
|
2 7 years
|
Equipment
|
|
3 5 years
|
Software
|
|
3 10 years
|
Buildings
|
|
29 years
|
Costs incurred to develop
internal-use
software during the application
development stage, including capitalized interest, are recorded in property and equipment at cost. External direct costs of materials and services consumed in developing or obtaining
internal-use
computer
software and payroll and payroll-related costs for teammates who are directly associated with and who devote time to
internal-use
computer software development projects, to the extent of the time spent
directly on the project and specific to application development, are capitalized.
48
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Reviews are regularly performed to determine whether facts and circumstances exist which
indicate that the useful life is shorter than originally estimated or the carrying amount of assets may not be recoverable. When an indication exists that the carrying amount of long-lived assets may not be recoverable, we assess the recoverability
of our assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Such impairment test is based on the lowest level for
which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Impairment, if any, is based on the excess of the carrying amount over the estimated fair value of those assets.
Goodwill
Goodwill is recorded when the
purchase price paid for an acquisition exceeds the estimated fair value of net identified tangible and intangible assets acquired. Goodwill is tested for impairment at the reporting unit level on an annual basis in the fourth quarter and between
annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. We may first perform a qualitative assessment to determine whether it is more likely than
not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform a quantitative
two-step
goodwill impairment test. Otherwise,
the
two-step
goodwill impairment test is not required. The quantitative
two-step
goodwill impairment review process compares the fair value of the reporting unit in
which goodwill resides to its carrying value. The Company has three reporting units, which are the same as our operating segments. Multiple valuation techniques can be used to assess the fair value of the reporting unit. All of these techniques
include the use of estimates and assumptions that are inherently uncertain. Changes in these estimates and assumptions could materially affect the determination of fair value or goodwill impairment, or both.
Intangible Assets
We amortize intangible
assets acquired in business combinations using the straight-line method over the following estimated economic lives of the intangible assets from the date of acquisition:
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Estimated Economic
Life
|
Customer relationships
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|
2 11 years
|
Tradenames and Restrictive Covenant Agreements
|
|
9 months 3 years
|
We regularly perform reviews to determine if facts and circumstances exist which indicate that the useful
lives of our intangible assets are shorter than originally estimated or the carrying amount of these assets may not be recoverable. When an indication exists that the carrying amount of intangible assets may not be recoverable, we assess the
recoverability of our assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Such impairment test is based on the
lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Impairment, if any, is based on the excess of the carrying amount over the estimated fair value of those assets.
Trade Credits
Trade credit liabilities
arise from aged unclaimed credit memos, duplicate payments, payments for returned product or overpayments made to us by our clients, and, to a lesser extent, from goods received by us from a partner for which we were never invoiced. Trade credit
liabilities are included in accrued expenses and other current liabilities in our consolidated balance sheets. We derecognize the liability as a reduction of costs of goods sold only if it has been extinguished, upon either (1) our payment of
the liability to relieve our obligation or (2) our legal release from the related obligation.
Self Insurance
We are self-insured in the United States for medical insurance up to certain annual stop-loss limits and workers compensation claims up
to certain deductible limits. We establish reserves for claims, both reported and incurred but not reported, using currently available information as well as our historical claims experience.
49
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Treasury Stock
We record repurchases of our common stock as treasury stock at cost. We also record the subsequent retirement of these treasury shares at cost.
The excess of the cost of the shares retired over their par value is allocated between additional
paid-in
capital and retained earnings. The amount recorded as a reduction of
paid-in
capital is based on the excess of the average original issue price of the shares over par value. The remaining amount is recorded as a reduction of retained earnings.
Sales Recognition
Sales are recognized
when title and risk of loss are passed to the client, there is persuasive evidence of an arrangement for sale, delivery has occurred and/or services have been rendered, the sales price is fixed or determinable and collectibility is reasonably
assured. Our standard sales terms are F.O.B. shipping point or equivalent, at which time title and risk of loss have passed to the client. However, because we either (i) have a general practice of covering client losses while products are in
transit despite title and risk of loss contractually transferring at the point of shipment or (ii) have specifically stated F.O.B. destination contractual terms with the client, delivery is not deemed to have occurred until the point in time
when the product is received by the client.
We 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 when the product is received by the
client. We recognize revenue on a gross basis as the principal in the transaction because we control the transaction as the primary obligor for product 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, we assume credit risk for the amounts invoiced, and we work closely with our clients to determine their hardware and software specifications.
We make provisions for estimated product returns that we expect to occur under our return policy based upon historical return rates. Our
manufacturers warrant most of the products we market, and it is our policy to request that clients return their defective products directly to the manufacturer for warranty service during the manufacturers warranty period. On selected
products, and for selected client service reasons, we may accept returns directly from the client and then either credit the client or ship a replacement product. We generally offer a limited
15-
to
30-day
return policy for unopened products and certain opened products, which are consistent with manufacturers terms; however, for some products we may charge restocking fees. Products returned opened are
processed and returned to the manufacturer or partner for repair, replacement or credit to us. Subject to some manufacturers restrictions, certain products cannot be returned to the manufacturer for warranty processing. We resell most unopened
products returned to us. If we accept a return from a client that we cannot return to the partner, we try to mitigate our losses by selling to inventory liquidators, to end users as previously sold or used products, or
through other channels.
We record the freight we bill to our clients as net sales and the related freight costs we pay as costs of goods
sold. We report sales net of any sales-based taxes assessed by governmental authorities that are imposed on and concurrent with sales transactions.
Revenue is recognized from software sales when clients acquire the right to use or copy software under license, but in no case prior to the
commencement of the term of the initial software license agreement, provided that all other revenue recognition criteria have been met (i.e., evidence of the arrangement exists, the fee is fixed or determinable and collectibility of the fee is
probable).
We sell certain third-party service contracts, software maintenance and Cloud or
software-as-a-service
subscription products for which we are not the primary obligor. These sales do not meet the criteria for gross sales recognition, and thus are
recorded on a net sales recognition basis. As we enter into contracts with third-party service providers or vendors and our clients, we evaluate whether the subsequent sales of such services should be recorded as gross sales or net sales. We
determine whether we act as a principal in the transaction and assume the risks and rewards of ownership or if we are simply acting as an agent or broker. Under gross sales recognition, the selling price is recorded in sales and our cost to the
third-party service provider or vendor is recorded in costs of goods sold. Under net sales recognition, the cost to the third-party service provider or vendor is recorded as a reduction to sales, resulting in net sales equal to the gross profit on
the transaction, and there are no costs of goods sold.
50
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We recognize revenue for sales of services ratably over the time period over which the
service will be provided if there is no discernible pattern of recognition of the cost to perform the service. Billings for such services that are made in advance of the related revenue recognized are recorded as deferred revenue and recognized as
revenue ratably over the billing coverage period. Revenue from certain arrangements that allow for the use of a product or service over a period of time without taking possession of software are also accounted for ratably over the time period over
which the service will be provided.
We recognize revenue for professional services engagements that are on a time and materials basis
based upon hours incurred as the services are performed and amounts are earned. Net sales for these services engagements are not a significant portion of our consolidated net sales.
Additionally, we sell certain professional services contracts on a fixed fee basis. Revenues for fixed fee professional services contracts are
recognized based on the ratio of costs incurred to total estimated costs. Net sales for these service contracts are not a significant portion of our consolidated net sales.
In certain arrangements, we may provide a combination of hardware and software products and the provision of services. Services that are
performed by us in conjunction with hardware and software sales that are completed in our facilities prior to shipment of the product are recognized upon delivery, when title passes to the client, for the hardware sale. Net sales of services that
are performed at client locations are primarily service-only contracts and are recorded as sales when the services are performed. The total consideration for an arrangement with multiple deliverables is allocated to all deliverables that represent a
separate unit of accounting using the relative selling price method.
Costs of Goods Sold
Costs of goods sold include product costs, direct costs incurred associated with delivering services, outbound and inbound freight costs and
provisions for inventory reserves. These costs are reduced by provisions for supplier discounts and certain payments and credits received from partners, as described under Partner Funding below.
Selling and Administrative Expenses
Selling and administrative expenses include salaries and wages, bonuses and incentives, stock-based compensation expense, employee-related
expenses, facility-related expenses, marketing and advertising expense, reduced by certain payments and credits received from partners related to shared marketing expense programs, as described under Partner Funding below, depreciation
of property and equipment, professional fees, amortization of intangible assets, provisions for losses on accounts receivable and other operating expenses.
Partner Funding
We receive payments and
credits from partners, including consideration pursuant to volume sales incentive programs, volume purchase incentive programs and shared marketing expense programs. Partner funding received pursuant to volume sales incentive programs is recognized
as it is earned as a reduction to costs of goods sold. Partner funding received pursuant to volume purchase incentive programs is allocated as a reduction to inventories based on the applicable incentives earned from each partner and is recorded in
cost of goods sold as the related inventory is sold. Partner funding received pursuant to shared marketing expense programs is recorded as it is earned as a reduction of the related selling and administrative expenses in the period the program takes
place if the consideration represents a reimbursement of specific, incremental, identifiable costs. Consideration that exceeds the specific, incremental, identifiable costs is classified as a reduction of costs of goods sold. The amount of partner
funding recorded as a reduction of selling and administrative expenses in our statements of operations totaled $45,801,000, $43,311,000 and $40,106,000 in 2016, 2015 and 2014, respectively.
Concentrations of Risk
Credit Risk
Although we are affected by the international economic climate, management does not believe material credit risk concentration existed at
December 31, 2016. We monitor our clients financial condition and do not require collateral. No single client accounted for more than 3% of our consolidated net sales in 2016.
51
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Supplier Risk
Purchases from Microsoft accounted for approximately 27% of our aggregate purchases in 2016. No other partner accounted for more than 10% of
purchases in 2016. Our top five partners as a group for 2016 were Microsoft, Ingram Micro (a distributor), HP Inc., Cisco and Tech Data (a distributor), and approximately 59% of our total purchases during 2016 came from this group of partners.
Although brand names and individual products are important to our business, we believe that competitive sources of supply are available in substantially all of our product categories such that, with the exception of Microsoft, we are not dependent
on any single partner for sourcing products.
Advertising Costs
Advertising costs are expensed as they are incurred. Advertising expense of $37,565,000, $33,568,000 and $31,214,000 was recorded in 2016, 2015
and 2014, respectively. These amounts were predominantly offset by partner funding earned pursuant to shared marketing expense programs recorded as a reduction of selling and administrative expenses, as discussed in Partner Funding
above.
Stock-Based Compensation
Stock-based compensation is measured based on the fair value of the award on the date of grant and the corresponding expense is recognized over
the period during which an employee is required to provide service in exchange for the reward. Stock-based compensation expense is classified in the same line item of our consolidated statements of operations as other payroll-related expenses
specific to the employee. Compensation expense related to service-based restricted stock units (RSUs) is recognized on a straight-line basis over the requisite service period for the entire award. Compensation expense related to
performance-based RSUs is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was,
in-substance,
multiple awards (i.e., a
graded vesting basis).
Foreign Currencies
We use the U.S. dollar as our reporting currency. The functional currencies of our foreign subsidiaries are the local currencies. Accordingly,
assets and liabilities of the subsidiaries are translated into U.S. dollars at the exchange rate in effect at the balance sheet dates. Income and expense items are translated at the average exchange rate for each month within the year. The resulting
translation adjustments are recorded directly in accumulated other comprehensive income (loss), net of tax foreign currency translation adjustments as a separate component of stockholders equity. Net foreign currency transaction
gains/losses, including transaction gains/losses on intercompany balances that are not of a long-term investment nature and
non-functional
currency cash balances, are reported as a separate component of
non-operating
(income) expense in our consolidated statements of operations.
Derivative Financial Instruments
We enter into forward foreign exchange contracts to mitigate the risk of
non-functional
currency monetary assets and liabilities on our consolidated financial statements. These forward contracts are not designated as hedge instruments. The fair value of all derivative assets and liabilities are recorded gross in the other current
assets and accrued expenses and other current liabilities sections of our consolidated balance sheets. Gains/losses are recorded net in
non-operating
(income) expense in our consolidated statements of
operations.
Income Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable earnings in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.
We recognize net deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a
determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income,
tax-planning
strategies and
results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would
reduce the provision for income taxes.
52
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We record uncertain tax positions on the basis of a
two-step
process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax
positions that meet the
more-likely-than-not
recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the
related tax authority. Interest and penalties related to unrecognized tax benefits are recognized within the income tax expense line in our consolidated statements of operations. Accrued interest and penalties are included within the related tax
liability line in our consolidated balance sheets.
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 year. Diluted EPS is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential
common shares include outstanding RSUs. A reconciliation of the denominators of the basic and diluted EPS calculations follows (in thousands, except per share data):
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Years Ended December 31,
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2016
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2015
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2014
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|
Numerator:
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|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
84,690
|
|
|
$
|
75,851
|
|
|
$
|
75,684
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Denominator:
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|
|
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|
|
Weighted-average shares used to compute basic EPS
|
|
|
36,102
|
|
|
|
37,984
|
|
|
|
41,062
|
|
Dilutive potential common shares due to dilutive RSUs, net of tax effect
|
|
|
336
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|
|
|
291
|
|
|
|
296
|
|
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|
|
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|
|
|
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|
|
Weighted-average shares used to compute diluted EPS
|
|
|
36,438
|
|
|
|
38,275
|
|
|
|
41,358
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Net earnings per share:
|
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Basic
|
|
$
|
2.35
|
|
|
$
|
2.00
|
|
|
$
|
1.84
|
|
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Diluted
|
|
$
|
2.32
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|
|
$
|
1.98
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|
|
$
|
1.83
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In 2016, 2015 and 2014, approximately 36,000, 1,000 and 20,000, 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.
Recently
Issued Accounting Standards
In November 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard
Update (ASU)
No. 2016-18,
Restricted Cash. The new standard requires companies to include cash and cash equivalents that have restrictions on withdrawal or use within total cash
and cash equivalents when reconciling the
beginning-of-period
and
end-of-period
total
amounts shown on the statement of cash flows. The new standard is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The new standard should be adopted retrospectively. We plan to
adopt this new standard in the first quarter of 2018 and do not expect the adoption to have a material effect on our consolidated financial statements.
In August 2016, the FASB issued ASU
No. 2016-15,
Classification of Certain Cash Receipts
and Cash Payments. The new standard is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. It addresses eight specific cash flow issues to clarify the presentation and
classification of cash receipts and cash payments in the statement of cash flows. The new standard is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The new standard should be
adopted retrospectively. We plan to adopt this new standard in the first quarter of 2018 and do not expect the adoption to have a material effect on our consolidated financial statements.
53
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In February 2016, the FASB issued ASU
No. 2016-02,
Leases, which supersedes the existing lease recognition requirements in the existing accounting standard for leases. The core principal of the new standard is that an entity
should recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The new standard will be effective for fiscal years beginning after
December 15, 2018, including interim periods within such fiscal years. Early adoption is permitted. The new standard is to be applied using a modified retrospective transition method with the option to elect a number of practical expedients. We
expect to adopt the new standard in the first quarter of 2019 and are in the process of determining the effect that the adoption of ASU
2016-02
will have on our consolidated financial statements and
disclosures. We have not yet selected our planned transition approach.
In March 2016, FASB issued ASU
No. 2016-09,
Improvements to Employee Share-Based Payment Accounting. This new standard simplifies the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities and classification on the statement of cash flows. This new standard requires that excess tax benefits and deficiencies be recognized as income tax benefit or expense in the income statement,
and, therefore, we anticipate increased income tax expense volatility after adoption of this new standard. The new standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within such fiscal
years. We will adopt the new standard in the first quarter of 2017 and do not expect it to have a material effect on our consolidated financial statements.
In July 2015, the FASB issued ASU
No. 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. This standard is effective for reporting periods beginning after December 15, 2016 and shall be applied
prospectively. We will adopt the standard in the first quarter of 2017 and do not expect it to have a material effect on our consolidated financial statements.
On May 28, 2014, the FASB issued ASU
No. 2014-09,
Revenue from Contracts with
Customers, which amends the existing accounting standards for revenue recognition. The core principle of the guidance 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 expects to be entitled in exchange for those goods or services. In July 2015, the FASB voted to amend ASU
2014-09
by approving a
one-year
deferral of the mandatory effective date as well as providing the option to early adopt the standard on the original effective date. Accordingly, the Company may adopt the standard in either its first
quarter of 2017 or 2018. An entity may choose to adopt the new standard either retrospectively or through a cumulative effect adjustment as of the start of the first period for which it applies the new standard. We are in the process of determining
the effect that the adoption will have on our consolidated financial statements. Based on our analysis to date, we have reached the following tentative conclusions regarding the new standard and how we expect it to affect our consolidated financial
statements and related disclosures:
|
|
|
We expect to adopt the standard in the first quarter of 2018 and will not early adopt.
|
|
|
|
We expect to use the cumulative effect transition method. Such method provides that upon applying the new standard, the cumulative effect from prior periods is recognized in our consolidated balance sheet as of the date
of adoption, including an adjustment to retained earnings. Prior periods will not be retrospectively adjusted.
|
|
|
|
We believe that since substantially all of our revenue is contractual, substantially all of our revenue falls within the scope of ASU
No. 2014-09,
as amended.
|
|
|
|
As discussed above, our hardware and software revenue is generally recognized on a gross basis upon delivery. Third party service contracts, software maintenance and Cloud or
software-as-a-service
subscription products are generally recognized on a net basis. Upon adoption of the new standard, we do not expect this to change. However, we are
continuing to analyze each of our less material revenue streams to determine any changes that may be required under the new standard.
|
|
|
|
We believe that the only significant incremental costs incurred to obtain contracts with our clients within the scope of ASU
2014-09,
as amended, are sales commissions. Under
current accounting standards, we recognize sales commissions as earned and record such amounts within selling and administrative expenses in our statements of operations. The majority of our contracts are completed within a
one-year
performance period. Under the new standard, we expect to 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 discussed above, we hold inventories not available for sale related to certain product sales transactions in which we are warehousing the product and will be deploying the product to our clients designated
locations subsequent to
period-end.
We are currently still evaluating the effect of the new standard on our inventories not available for sale to identify the differing performance conditions within the
underlying contracts and to determine if a portion of revenue under the contracts should be recognized at an earlier point in time than we are recognizing under current accounting standards.
|
|
|
|
We expect that our disclosures in our notes to our consolidated financial statements related to revenue recognition will be significantly expanded under the new standard.
|
54
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 remains to be completed due to the complexity of the new standard, the application of judgment and the requirement for the use of estimates in applying the new standard, as well as the volume
of our client portfolio and the related terms and conditions of our contracts that must be reviewed. The quantification of the effects of the new standard, including the items discussed above, is a significant undertaking. Further, we will be
required to implement necessary changes in our processes, accounting systems and internal controls in conjunction with applying the new standard.
(2)
Property and Equipment
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Software
|
|
$
|
159,442
|
|
|
$
|
157,291
|
|
Buildings
|
|
|
63,253
|
|
|
|
65,423
|
|
Equipment
|
|
|
93,553
|
|
|
|
93,956
|
|
Furniture and fixtures
|
|
|
36,526
|
|
|
|
36,170
|
|
Leasehold improvements
|
|
|
21,132
|
|
|
|
21,969
|
|
Land
|
|
|
5,131
|
|
|
|
5,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
379,037
|
|
|
|
379,924
|
|
Accumulated depreciation and amortization
|
|
|
(308,127
|
)
|
|
|
(291,643
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
70,910
|
|
|
$
|
88,281
|
|
|
|
|
|
|
|
|
|
|
We periodically assess whether any indicators of impairment existed related to our property and equipment. We
incurred
non-cash
charges of $535,000 and $741,000 during 2015 and 2014, respectively, to
write-off
certain property and equipment. No such charges were incurred in
2016.
Depreciation and amortization expense related to property and equipment was $27,493,000, $26,649,000 and $29,243,000 in 2016, 2015
and 2014, respectively. Interest charges capitalized in connection with
internal-use
software development projects in 2016, 2015 and 2014 were immaterial.
(3)
Goodwill
The changes in the
carrying amount of goodwill for the year ended December 31, 2016 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
EMEA
|
|
|
APAC
|
|
|
Consolidated
|
|
Goodwill
|
|
$
|
379,617
|
|
|
$
|
151,439
|
|
|
$
|
13,973
|
|
|
$
|
545,029
|
|
Accumulated impairment losses
|
|
|
(323,422
|
)
|
|
|
(151,439
|
)
|
|
|
(13,973
|
)
|
|
|
(488,834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
|
56,195
|
|
|
|
|
|
|
|
|
|
|
|
56,195
|
|
Goodwill acquired during 2016
|
|
|
(507
|
)
|
|
|
|
|
|
|
6,957
|
|
|
|
6,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
55,688
|
|
|
$
|
|
|
|
$
|
6,957
|
|
|
$
|
62,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On September 1, 2016, we acquired Ignia, which has been integrated into our APAC business. Under the
purchase method of accounting, the purchase price for the acquisition was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The excess purchase price over fair value
of net assets acquired of approximately $6,957,000 was recorded as goodwill in the APAC reporting unit (see Note 22). The primary driver for this acquisition was to expand our global footprint in the areas of application design, digital solutions,
Cloud, mobility and business analytics, while also building on our unique position to bring solutions powered by Intelligent Technology to our clients in the Asia-Pacific region.
55
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On October 1, 2015, we acquired BlueMetal, which has been integrated into our North
America business. Under the purchase method of accounting, the purchase price for the acquisition was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The excess
purchase price over fair value of net assets acquired of approximately $29,938,000 was recorded as goodwill in the North America reporting unit (see Note 22). The primary driver for this acquisition was to strengthen our services capabilities to
bring value to our clients businesses in the area of application design, mobility and big data. In 2016, we resolved the working capital contingency associated with the acquisition of BlueMetal. We recorded the adjustment of the purchase price
allocation as a reduction of goodwill in our North America operating segment upon the receipt of $507,000 in cash during 2016.
During
2016, we periodically assessed whether any indicators of impairment existed which would require us to perform an interim impairment review. As of each interim period end during the year, we concluded that a triggering event had not occurred that
would more likely than not reduce the fair value of our reporting units below their carrying values. We performed our annual test of goodwill for impairment during the fourth quarter of 2016. The results of the first step of the
two-step
goodwill impairment test indicated that the fair values of our North America and APAC reporting units, estimated using the market approach, were in excess of their respective carrying values, and thus we
did not perform step two of the impairment test.
(4)
Intangible Assets
Intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Customer relationships
|
|
$
|
41,711
|
|
|
$
|
119,749
|
|
Other
|
|
|
1,978
|
|
|
|
1,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,689
|
|
|
|
121,389
|
|
Accumulated amortization
|
|
|
(22,982
|
)
|
|
|
(94,406
|
)
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
20,707
|
|
|
$
|
26,983
|
|
|
|
|
|
|
|
|
|
|
In September 2016, the customer relationship intangible assets associated with the 2006 acquisition of
Software Spectrum Inc. and the 2008 acquisition of MINX Limited in the United Kingdom were fully amortized. As such, the gross intangible assets balance and the accumulated amortization balance were both reduced by approximately $81,817,000, having
no effect on the net intangible assets balance reported in the accompanying consolidated balance sheet as of December 31, 2016.
During 2016, we periodically assessed whether any indicators of impairment existed related to our intangible assets. As of each interim period
end during the year, we concluded that a triggering event had not occurred that would more likely than not reduce the fair value of our intangible assets below their carrying values.
Amortization expense recognized in 2016, 2015 and 2014 was $10,637,000, $11,308,000 and $11,327,000, respectively. Future amortization expense
for the remaining unamortized balance as of December 31, 2016 is estimated as follows (in thousands):
|
|
|
|
|
Years Ending December 31,
|
|
Amortization Expense
|
|
2017
|
|
$
|
5,187
|
|
2018
|
|
|
4,735
|
|
2019
|
|
|
2,178
|
|
2020
|
|
|
2,178
|
|
2021
|
|
|
2,178
|
|
Thereafter
|
|
|
4,251
|
|
|
|
|
|
|
Total amortization expense
|
|
$
|
20,707
|
|
|
|
|
|
|
(5)
Accounts Payable - Inventory Financing Facility
We have entered into an agreement with a financial intermediary to facilitate the purchase of inventory from various suppliers under certain
terms and conditions, as described below. These amounts are classified separately as accounts payable - inventory financing facility in the accompanying consolidated balance sheets.
56
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The aggregate availability for vendor purchases under our inventory financing facility is
$325,000,000. Prior to June 23, 2016, the maximum borrowing capacity was $250,000,000. 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. The facility matures on June 23, 2021. Additionally, the facility may be renewed under certain circumstances described in the agreement for successive
12-month
periods. Interest does not accrue on accounts payable under this facility provided the accounts payable are paid within stated vendor terms (ranging from 30 to 60 days). We impute interest on the
average daily balance outstanding during these stated vendor terms based on our blended incremental borrowing rate during the period under our senior revolving credit facility and our accounts receivable securitization financing facility. Imputed
interest of $3,385,000, $3,406,000 and $2,386,000 was recorded in 2016, 2015 and 2014, respectively. If balances are not paid within stated vendor terms, they will accrue interest at prime plus 1.25%. In conjunction with the amendment to the
revolving facility in June 2016, an immaterial amount of unamortized capitalized deferred financing fees were written off to interest expense, and an additional $150,000 of deferred financing fees were capitalized. Such fees are being amortized to
interest expense over the term of the facility. The facility is guaranteed by the Company and each of its material domestic subsidiaries and is secured by a lien on substantially all of the Companys and each guarantors assets.
(6)
Debt, Capital Lease and Other Financing Obligations
Debt
Our long-term debt consists of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Senior revolving credit facility
|
|
$
|
|
|
|
$
|
|
|
Accounts receivable securitization financing facility
|
|
|
39,500
|
|
|
|
89,000
|
|
Capital leases and other financing obligations
|
|
|
1,231
|
|
|
|
1,535
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
40,731
|
|
|
|
90,535
|
|
Less: current portion of capital leases and other financing obligations
|
|
|
(480
|
)
|
|
|
(1,535
|
)
|
Less: current portion of revolving credit facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
40,251
|
|
|
$
|
89,000
|
|
|
|
|
|
|
|
|
|
|
On June 23, 2016, we entered into amendments to our senior revolving credit facility (revolving
facility) and our accounts receivable securitization financing facility (ABS facility).
The revolving facility is used
for general corporate purposes, which may include acquisitions and share repurchases, and may be used for borrowings in certain foreign currencies and for letters of credit, in each case up to specified sublimits. Although the maximum borrowing
capacity remained at an aggregate U.S. dollar equivalent amount of $350,000,000, our revolving facility was amended to increase the portion of the maximum borrowing capacity that may be used for borrowing in certain foreign currencies from
$25,000,000 to $50,000,000. From time to time and at our option, we may request to increase the aggregate amount available for borrowing under the revolving facility by up to an aggregate of the U.S. dollar equivalent of $175,000,000, subject to
customary conditions. (See Note 23 for a discussion of our amendment to the revolving facility effective January 6, 2017.) The revolving facility is guaranteed by the Companys material domestic subsidiaries and is secured by a lien on
substantially all of the Companys and each guarantors assets.
The interest rates applicable to borrowings under the revolving
facility 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 facility 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 a
pre-determined
spread of 1.25% to 2.25%. The floating interest rate applicable at December 31, 2016 was 1.96% per annum. In
addition, we pay a quarterly commitment fee on the unused portion of the facility of 0.25% to 0.45%, and our letter of credit participation fee ranges from 1.25% to 2.25%. In conjunction with the amendment to the revolving facility in June 2016, an
immaterial amount of unamortized capitalized deferred financing fees were written off to interest expense, and an additional $2,800,000 of deferred financing fees were capitalized. Such fees are being amortized to interest expense over the term of
the facility. During 2016, 2015 and 2014, due to availability under our ABS facility, weighted average borrowings under our revolving facility were $35,811,000, $21,987,000 and $6,634,000, respectively. Interest expense associated with the revolving
facility was $2,191,000, $1,813,000 and $1,571,000 in 2016, 2015 and 2014, respectively, including the commitment fee and amortization of deferred financing fees. As of December 31, 2016, $350,000,000 was available under the revolving facility.
See discussion of the maximum leverage ratio under Debt Covenants below. The amended revolving facility matures on June 23, 2021.
57
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Our ABS facility was amended in June 2016 to increase the aggregate borrowing availability
from $200,000,000 to $250,000,000, to renew the borrowing program under the ABS facility for a three-year term expiring June 23, 2019, and to modify interest rates and fees for used and unused capacity under the facility. Under our ABS
facility, we can sell receivables periodically to a special purpose accounts receivable and financing entity (the SPE), which is exclusively engaged in purchasing receivables from us. The SPE is a wholly-owned, bankruptcy-remote entity
that we have included in our consolidated financial statements. The SPE funds its purchases by selling undivided interests in eligible trade accounts receivable to independent financial institution purchasers under the ABS facility
(Purchasers), which is administered by an independent financial institution agent. The SPEs assets are available first and foremost to satisfy the claims of the Purchasers, and we cannot convey any interest in the receivables sold
to the Purchasers (or allow any adverse claims on the receivables) without the consent of the Purchasers. In addition, the SPE is required to maintain a minimum capital amount and various reserves pursuant to the terms of the ABS facility. We
maintain effective control over the receivables that are sold. Accordingly, the receivables remain recorded on our consolidated balance sheets. At December 31, 2016 and 2015, the SPE owned $936,467,000 and $849,336,000, respectively, of
receivables recorded at fair value and included in the accompanying consolidated balance sheets. 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 December 31, 2016, qualified receivables were sufficient to permit access to the full $250,000,000 facility amount, of which $39,500,000 was outstanding. See discussion of the maximum leverage ratio under
Debt Covenants below.
Under the amended ABS facility, interest is payable monthly, and the floating interest rate applicable
at December 31, 2016 was 1.73% 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%. In conjunction with the amendment to the ABS
facility in June 2016, an immaterial amount of unamortized capitalized deferred financing fees were written off to interest expense, and an additional $410,000 of deferred financing fees were capitalized. Such fees are being amortized to interest
expense over the term of the facility. During the years ended December 31, 2016, 2015 and 2014, the weighted average interest rates on amounts outstanding under our ABS facility, including the usage and commitment fees and the amortization of
deferred financing fees, were 1.9%, 1.6% and 1.7%, respectively. Weighted average borrowings under our ABS facility in 2016, 2015 and 2014 were $145,376,000, $112,101,000 and $105,992,000, respectively.
Debt Covenants
Our revolving facility
and our ABS facility contain various covenants customary for transactions of this type, including limitations on the payment of dividends and the requirement that we comply with maximum leverage and minimum fixed charge ratio requirements, comply
with a minimum receivables 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 period of time. Further, the terms of the
ABS facility identify various circumstances that would result in an amortization event under the facility.
Our consolidated
debt balance that can be outstanding at the end of any fiscal quarter under our revolving facility and our ABS facility is limited by certain financial covenants, particularly a maximum leverage ratio. The maximum leverage ratio is calculated as
aggregate debt outstanding divided by the sum of our trailing twelve month net earnings (loss) plus (i) interest expense, excluding
non-cash
imputed interest on our inventory financing facility,
(ii) income tax expense (benefit), (iii) depreciation and amortization,
(iv) non-cash
stock-based compensation, (v) extraordinary or
non-recurring
non-cash
losses or expenses and (vi) certain cash restructuring and acquisition-related charges, not to exceed specified caps (adjusted earnings). The maximum leverage ratio permitted under the
facilities was increased from 2.75 times to 3.00 times trailing
twelve-month
adjusted earnings in conjunction with the amendments to the facilities in June 2016 and may increase to 3.50 times trailing
twelve-month adjusted earnings in certain circumstances. The maximum ratio was increased in conjunction with the acquisition of Datalink Corporation (Datalink) in January 2017 (see Note 23). 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 December 31, 2016, our
aggregate debt balance that could have been outstanding under our revolving facility and our ABS facility was the full amount of the maximum borrowing capacity of $600,000,000, of which $39,500,000 was outstanding at December 31, 2016.
58
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Capital Lease and Other Financing Obligations
In March 2016, we entered into a new capitalized lease with a
36-month
term for certain IT equipment.
Our obligations under capitalized leases are included in long-term debt in the accompanying consolidated balance sheets as of December 31, 2016 and 2015. The current and long-term portions of the obligations are included in the table above. The
capital lease was a
non-cash
transaction and, accordingly, has been excluded from our consolidated statement of cash flows for the year ended December 31, 2016.
From time to time, we also enter into other financing agreements with financial intermediaries to facilitate the purchase of products from
certain vendors. At December 31, 2015, amounts owed under other financing agreements of $1,309,000 are included in our current debt balance as summarized in the table above. No amounts were owed under other financing agreements as of
December 31, 2016.
(7)
Operating Leases
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 $14,444,000, $14,737,000 and $15,493,000 in 2016, 2015 and 2014, respectively, and is included in selling and administrative expenses in the accompanying consolidated statements of
operations.
Future minimum lease payments under
non-cancelable
operating leases (with initial or
remaining lease terms in excess of one year) as of December 31, 2016 are as follows (in thousands):
|
|
|
|
|
Years Ending December 31,
|
|
|
|
2017
|
|
$
|
14,571
|
|
2018
|
|
|
13,006
|
|
2019
|
|
|
11,804
|
|
2020
|
|
|
8,491
|
|
2021
|
|
|
6,175
|
|
Thereafter
|
|
|
12,508
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
66,555
|
|
|
|
|
|
|
Amounts in the table above exclude approximately $1.5 million in 2017 and approximately $1.6 million
in each of 2018 and 2019 in
non-cancellable
rental income.
(8)
Severance and Restructuring Activities
During 2016, 2015 and 2014, we recorded severance expense associated with the elimination of certain positions based on a
re-alignment
of roles and responsibilities, a continued review of resource needs in North America, including a headcount reduction as part of a cost reduction initiative early in 2016, and significant restructuring
activities in EMEA, primarily in the United Kingdom, Germany and France, as we worked to reduce our selling and administrative expenses in EMEA.
59
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table details the activity for each of the three years in the period ending
December 31, 2016 related to these resource actions, and the outstanding obligations as of December 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
EMEA
|
|
|
APAC
|
|
|
Consolidated
|
|
Balances at December 31, 2013
|
|
$
|
1,710
|
|
|
$
|
3,247
|
|
|
$
|
|
|
|
$
|
4,957
|
|
Severance costs, net of adjustments
|
|
|
971
|
|
|
|
3,356
|
|
|
|
106
|
|
|
|
4,433
|
|
Cash payments
|
|
|
(1,786
|
)
|
|
|
(3,475
|
)
|
|
|
(106
|
)
|
|
|
(5,367
|
)
|
Foreign currency translation adjustments
|
|
|
(38
|
)
|
|
|
(157
|
)
|
|
|
|
|
|
|
(195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2014
|
|
|
857
|
|
|
|
2,971
|
|
|
|
|
|
|
|
3,828
|
|
Severance costs, net of adjustments
|
|
|
1,126
|
|
|
|
3,781
|
|
|
|
|
|
|
|
4,907
|
|
Cash payments
|
|
|
(1,456
|
)
|
|
|
(3,534
|
)
|
|
|
|
|
|
|
(4,990
|
)
|
Foreign currency translation adjustments
|
|
|
(22
|
)
|
|
|
(235
|
)
|
|
|
|
|
|
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2015
|
|
|
505
|
|
|
|
2,983
|
|
|
|
|
|
|
|
3,488
|
|
Severance costs, net of adjustments
|
|
|
2,966
|
|
|
|
1,496
|
|
|
|
118
|
|
|
|
4,580
|
|
Cash payments
|
|
|
(2,524
|
)
|
|
|
(3,239
|
)
|
|
|
(118
|
)
|
|
|
(5,881
|
)
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2016
|
|
$
|
947
|
|
|
$
|
1,217
|
|
|
$
|
|
|
|
$
|
2,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments were recorded as a reduction to severance and restructuring expense in 2016, 2015 and 2014 of
$664,000, $600,000 and $1,023,000, respectively, due to changes in estimates.
The remaining outstanding obligations as of
December 31, 2016 are expected to be paid during the next 12 months and are therefore included in accrued expenses and other current liabilities.
(9)
Stock-Based Compensation
We
recorded the following
pre-tax
amounts in selling and administrative expenses for stock-based compensation, by operating segment, in the accompanying consolidated financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
North America
|
|
$
|
8,096
|
|
|
$
|
6,648
|
|
|
$
|
5,933
|
|
EMEA
|
|
|
2,530
|
|
|
|
1,908
|
|
|
|
1,547
|
|
APAC
|
|
|
432
|
|
|
|
366
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
11,058
|
|
|
$
|
8,922
|
|
|
$
|
7,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company Plan
Our Board of Directors adopted the Amended Insight Enterprises, Inc. 2007 Omnibus Plan (the Plan) on March 28, 2011. The Plan
was approved by our stockholders on May 18, 2011 at our 2011 annual meeting and, unless sooner terminated, will remain in place until May 18, 2021.
The Plan allows the Company to grant options, stock appreciation rights, stock awards, restricted stock, stock units (which may also be
referred to as restricted stock units), performance shares, performance units, cash-based awards and other awards payable in cash or shares of common stock to eligible
non-employee
directors,
employees and consultants. Consultants and independent contractors are eligible if they provide bona fide services that are not related to capital raising or promoting or maintaining a market for the Companys stock.
On February 17, 2016, the Board of Directors adopted the First Amendment to the Plan (the First Amendment). On May 18,
2016 at our 2016 annual meeting, our stockholders approved the First Amendment. The First Amendment: (a) updates the list of performance criteria contained in Section 16.1 of the Plan; (b) imposes a limit on the dollar value of awards
that may be granted to any one participant who is a
non-employee
director during any one calendar year; and (c) adds an objective clawback provision expressly providing that every award granted under the
Plan is subject to potential forfeiture or recovery to the fullest extent called for by law, listing standard or Company policy. The First Amendment did not increase the number of shares available for grant under the Plan or extend the term of the
Plan.
60
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Plan is administered by the Compensation Committee of Insights Board of Directors,
and, except as provided below, the Compensation Committee has the exclusive authority to administer the Plan, including the power to determine eligibility, the types of awards to be granted, the price and the timing of awards. Under the Plan, the
Compensation Committee may delegate some of its authority to our Chief Executive Officer to grant awards to individuals other than individuals who are subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, as
amended. As of December 31, 2016, of the 7,250,000 shares of common stock reserved and available for grant under the Plan, 3,384,684 shares of common stock remain available for grant under the Plan.
Accounting for Restricted Stock Units
We
issue RSUs as incentives to certain officers and teammates and as compensation to members of our Board of Directors. We recognize compensation expense associated with the issuance of such RSUs over the vesting period for each respective RSU. The
total compensation expense associated with RSUs represents the value based upon the number of RSUs awarded multiplied by the closing price of our common stock on the date of grant, adjusted for our estimate of forfeitures. The number of RSUs to be
awarded under our service-based RSUs is fixed at the grant date. The number of RSUs ultimately awarded under our performance-based RSUs varies based on whether the Company achieves certain financial results. We record compensation expense each
period based on our estimate of the most probable number of RSUs that will be issued under the grants of performance-based RSUs. Recipients of RSUs do not have voting or dividend rights until the vesting conditions are satisfied and shares are
released.
As of December 31, 2016, total compensation cost related to nonvested RSUs not yet recognized is $15,986,000, which is
expected to be recognized over the next 1.24 years on a weighted-average basis.
The following table summarizes our RSU activity during
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Weighted Average
Grant Date Fair Value
|
|
|
Fair Value
|
|
Nonvested at the beginning of year
|
|
|
951,784
|
|
|
$
|
24.35
|
|
|
|
|
|
Granted
|
|
|
551,675
|
|
|
$
|
25.97
|
|
|
|
|
|
Vested, including shares withheld to cover taxes
|
|
|
(354,487
|
)
|
|
$
|
23.56
|
|
|
$
|
9,235,102
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(81,415
|
)
|
|
$
|
25.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at the end of year
|
|
|
1,067,557
|
|
|
$
|
25.37
|
|
|
$
|
43,172,005
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest
|
|
|
1,003,490
|
|
|
|
|
|
|
$
|
40,581,136
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The aggregate fair value of vested RSUs represents the total
pre-tax
fair value, based on the closing stock price on the day of vesting, which would have been received by holders
of RSUs had all such holders sold their underlying shares on that date. The aggregate intrinsic value for RSUs which vested during 2015 and 2014 was $9,168,784 and $8,371,565, respectively.
|
(b)
|
The aggregate fair value of the nonvested RSUs and the RSUs expected to vest represents the total
pre-tax
fair value, based on
our closing stock price of $40.44 as of December 30, 2016 (December 31, 2016 was not a trading day), which would have been received by holders of RSUs had all such holders sold their underlying shares on that date.
|
During each of the years in the three-year period ended December 31, 2016, the RSUs that vested for teammates in the United States were
net-share
settled such that we withheld shares with value equivalent to the teammates minimum statutory United States tax obligation for the applicable income and other employment taxes and remitted the
equivalent cash amount to the appropriate taxing authorities. The total shares withheld during 2016, 2015 and 2014 of 84,953, 85,652 and 86,732, respectively, were based on the value of the RSUs on their vesting dates as determined by our closing
stock price on such dates. For 2016, 2015 and 2014, total payments for our teammates tax obligations to the taxing authorities were $2,219,000, $2,265,000 and $2,028,000, respectively, and are reflected as a financing activity within the
accompanying consolidated statements of cash flows. These
net-share
settlements had the effect of repurchases of our common stock as they reduced the number of shares that would have otherwise been issued as a
result of the vesting and did not represent an expense to us.
(10)
Assets Held for Sale
In May 2016, we sold real estate that we owned in Bloomingdale, Illinois that was previously classified as a held for sale asset and included
in other current assets in the accompanying consolidated balance sheet as of December 31, 2015. In previous years, we recorded
non-cash
charges to reduce the carrying amount of the related assets to their
estimated fair value less costs to sell. During the second quarter of 2016, we recorded a gain on sale of approximately $338,000, which is included in selling and administrative expenses in the accompanying consolidated statement of operations for
the twelve months ended December 31, 2016.
61
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In November 2014, we relocated our sales and administrative operations that were housed in
the property that we previously owned in Bloomingdale, Illinois. During 2014, our North America operating segment recorded
non-cash
charges of $5,178,000, consisting of an impairment loss of $4,558,000 and
accelerated depreciation of $620,000, to reduce the carrying amount of the related assets to their estimated fair value less costs to sell. The property continued to be marketed for sale, and during 2015, an additional
non-cash
impairment charge of $800,000 was recorded based on a decline in the estimated fair market value. The estimated fair market value was derived from Level 2 fair value inputs (observable market
based inputs or unobservable inputs that are corroborated by market data), which included a current market analysis indicating the price per square foot of previous sale transactions involving comparable property in the Bloomingdale area. The
charges are included in selling and administrative expenses in the accompanying consolidated statements of operations for 2015 and 2014.
(11)
Income Taxes
The following table presents the United States (U.S.) and foreign components of earnings before income
taxes and the related income tax expense (in thousands):
Earnings before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
United States
|
|
$
|
99,095
|
|
|
$
|
90,575
|
|
|
$
|
89,679
|
|
Foreign
|
|
|
40,363
|
|
|
|
28,601
|
|
|
|
34,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
139,458
|
|
|
$
|
119,176
|
|
|
$
|
124,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
27,947
|
|
|
$
|
24,369
|
|
|
$
|
27,332
|
|
U.S. State and local
|
|
|
2,200
|
|
|
|
2,705
|
|
|
|
3,242
|
|
Foreign
|
|
|
14,104
|
|
|
|
11,077
|
|
|
|
14,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,251
|
|
|
|
38,151
|
|
|
|
44,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
10,395
|
|
|
|
5,104
|
|
|
|
4,541
|
|
U.S. State and local
|
|
|
1,088
|
|
|
|
602
|
|
|
|
330
|
|
Foreign
|
|
|
(966
|
)
|
|
|
(532
|
)
|
|
|
(1,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,517
|
|
|
|
5,174
|
|
|
|
3,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
54,768
|
|
|
$
|
43,325
|
|
|
$
|
48,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following schedule reconciles the differences between the U.S. federal income taxes at the U.S. statutory
rate and our income tax expense (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Statutory federal income tax rate
|
|
$
|
48,810
|
|
|
|
35.0
|
%
|
|
$
|
41,712
|
|
|
|
35.0
|
%
|
|
$
|
43,530
|
|
|
|
35.0
|
%
|
State income tax expense, net of federal income tax benefit
|
|
|
3,368
|
|
|
|
2.4
|
|
|
|
3,180
|
|
|
|
2.7
|
|
|
|
3,416
|
|
|
|
2.8
|
|
Audits and adjustments, net
|
|
|
(1,039
|
)
|
|
|
(0.7
|
)
|
|
|
(886
|
)
|
|
|
(0.7
|
)
|
|
|
(186
|
)
|
|
|
(0.2
|
)
|
Change in valuation allowances
|
|
|
3,742
|
|
|
|
2.7
|
|
|
|
2,944
|
|
|
|
2.5
|
|
|
|
6,471
|
|
|
|
5.2
|
|
Foreign income taxed at different rates
|
|
|
(6,611
|
)
|
|
|
(4.7
|
)
|
|
|
(5,729
|
)
|
|
|
(4.8
|
)
|
|
|
(5,309
|
)
|
|
|
(4.3
|
)
|
Change in U.S. tax law applicable to certain foreign entities
|
|
|
2,577
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible
compensation
|
|
|
518
|
|
|
|
0.4
|
|
|
|
474
|
|
|
|
0.4
|
|
|
|
404
|
|
|
|
0.3
|
|
Other, net
|
|
|
3,403
|
|
|
|
2.4
|
|
|
|
1,630
|
|
|
|
1.3
|
|
|
|
362
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
$
|
54,768
|
|
|
|
39.3
|
%
|
|
$
|
43,325
|
|
|
|
36.4
|
%
|
|
$
|
48,688
|
|
|
|
39.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A change in U.S. tax law was enacted in December 2016 related to the taxation of foreign currency translation
gains or losses arising from qualified business units. The change, which increased our U.S. federal income taxes, affects our foreign entities that are treated as branches for U.S. tax purposes. The Other, net line item in the schedule
above includes $1,296,000 related to the effect of
non-deductible
acquisition-related expenses incurred during the fourth quarter of 2016.
62
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For foreign entities not treated as branches for U.S. tax purposes, we do not provide for
U.S. income taxes on the undistributed earnings of these subsidiaries as these earnings are reinvested and, in the opinion of management, will continue to be reinvested indefinitely outside of the United States. The undistributed earnings of foreign
subsidiaries that are deemed to be indefinitely invested outside of the United States were approximately $105,291,000 at December 31, 2016. It is not practicable to determine the unrecognized deferred tax liability on those earnings.
The significant components of deferred tax assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Goodwill and other intangibles
|
|
$
|
34,302
|
|
|
$
|
42,281
|
|
Net operating losses
|
|
|
18,964
|
|
|
|
17,433
|
|
Foreign tax credits
|
|
|
13,115
|
|
|
|
12,972
|
|
Accruals
|
|
|
6,315
|
|
|
|
7,423
|
|
Stock-based compensation
|
|
|
4,238
|
|
|
|
3,558
|
|
Inventories
|
|
|
2,598
|
|
|
|
2,667
|
|
Accounts receivable
|
|
|
2,547
|
|
|
|
3,749
|
|
Deferred revenue
|
|
|
468
|
|
|
|
351
|
|
Property and equipment
|
|
|
20
|
|
|
|
|
|
Other
|
|
|
56
|
|
|
|
2,391
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
82,623
|
|
|
|
92,825
|
|
Valuation allowances
|
|
|
(30,972
|
)
|
|
|
(28,750
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
51,651
|
|
|
|
64,075
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(204
|
)
|
|
|
(226
|
)
|
Property and equipment
|
|
|
|
|
|
|
(1,102
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(204
|
)
|
|
|
(1,328
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
51,447
|
|
|
$
|
62,747
|
|
|
|
|
|
|
|
|
|
|
The net
non-current
deferred tax assets and liabilities are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net
non-current
deferred tax assets
|
|
$
|
52,347
|
|
|
$
|
62,986
|
|
Net
non-current
deferred tax liabilities
|
|
|
(900
|
)
|
|
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
51,447
|
|
|
$
|
62,747
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016, we have U.S. state net operating loss carryforwards (NOLs) of
$388,000 that will expire between 2016 and 2031. We also have NOLs from various
non-U.S.
jurisdictions of $68,934,000. While the majority of the
non-U.S.
NOLs have no
expiration date, $4,180,000 will expire between 2017 and 2023.
On the basis of currently available information, we have provided
valuation allowances for certain of our deferred tax assets where we believe it is more likely than not that the related tax benefits will not be realized. At December 31, 2016 and 2015, our valuation allowances totaled $30,972,000 and
$28,750,000, respectively, representing
non-U.S.
NOLs, foreign depreciation allowances and foreign tax credits.
We believe it is more likely than not that forecasted income, including income that may be generated as a result of prudent and feasible tax
planning strategies, together with the tax effects of deferred tax liabilities, will be sufficient to fully recover our remaining deferred tax assets. In the future, if we determine that realization of the remaining deferred tax assets and the
availability of certain previously paid taxes to be refunded are not more likely than not, we will need to increase our valuation allowances and record additional income tax expense.
63
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the change in the valuation allowance (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Valuation allowances at beginning of year
|
|
$
|
28,750
|
|
|
$
|
28,709
|
|
Increase in income tax expense
|
|
|
3,742
|
|
|
|
2,944
|
|
Foreign currency translation adjustments
|
|
|
(1,035
|
)
|
|
|
(1,743
|
)
|
Other
|
|
|
(485
|
)
|
|
|
(1,160
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowances at end of year
|
|
$
|
30,972
|
|
|
$
|
28,750
|
|
|
|
|
|
|
|
|
|
|
Various taxing jurisdictions are examining our tax returns for certain tax years. Although the outcome of tax
audits cannot be predicted with certainty, management believes the ultimate resolution of these examinations will not result in a material adverse effect to our financial position, results of operations or cash flows.
As of December 31, 2016 and 2015, we had approximately $2,246,000 and $3,335,000, respectively, of unrecognized tax benefits. Of
these amounts, approximately $195,000 and $296,000, respectively, related to accrued interest. A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest, is as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
3,039
|
|
Additions for tax positions in prior periods
|
|
|
31
|
|
Additions for tax positions in current period
|
|
|
366
|
|
Subtractions due to foreign currency translation
|
|
|
(33
|
)
|
Subtractions due to audit settlements and statute expirations
|
|
|
(1,352
|
)
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
2,051
|
|
|
|
|
|
|
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 2014. Although the timing of the resolutions and/or closures
of audits is highly uncertain, it is reasonably possible that the examination phase of these audits may be concluded within the next 12 months which could significantly increase or decrease the balance of our gross unrecognized tax benefits.
However, based on the status of the various examinations in multiple jurisdictions, an estimate of the range of reasonably possible outcomes cannot be made at this time, but the estimated effect on our income tax expense and net earnings is not
expected to be significant.
We, including our subsidiaries, file income tax returns in the U.S. federal jurisdiction and many state and
local and
non-U.S.
jurisdictions. In the United States, federal income tax returns for 2013, 2014, 2015 and 2016 remain open to examination. For U.S. state and local taxes as well as in
non-U.S.
jurisdictions, the statute of limitations generally varies between three and ten years.
(12)
Market Risk
Management
Interest Rate Risk
We have interest rate exposure arising from our financing facilities, which have variable interest rates. These variable interest rates are
affected by changes in
short-term
interest rates. We currently do not hedge our interest rate exposure.
We do not believe that the effect of reasonably possible near-term changes in interest rates will be material to our financial position,
results of operations and cash flows. Our financing facilities expose our net earnings to changes in
short-term
interest rates since interest rates on the underlying obligations are variable. We had no amounts
outstanding under our revolving facility and $39,500,000 outstanding under our ABS facility at December 31, 2016. The interest rate attributable to the borrowings under our ABS facility was 1.73% per annum at December 31, 2016. The change
in annual
pre-tax
earnings from operations resulting from a hypothetical 10% increase or decrease in the applicable interest rate would have been immaterial.
64
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Foreign Currency Exchange Risk
We have foreign currency exchange risk related to the translation of our foreign subsidiaries operating results, assets and liabilities
(see Note 1 for a description of our Foreign Currencies policy). We also maintain cash accounts denominated in currencies other than the functional currency, which expose us to fluctuations in foreign exchange rates. Remeasurement of these cash
balances results in gains/losses that are also reported as a separate component of
non-operating
(income) expense. We monitor our foreign currency exposure and selectively enter into forward exchange contracts
to mitigate risk associated with certain
non-functional
currency monetary assets and liabilities related to foreign denominated payables, receivables and cash balances. Transaction gains and losses resulting
from
non-functional
currency assets and liabilities are offset by gains and losses on forward contracts in
non-operating
(income) expense, net in our consolidated
statements of operations. The counterparties associated with our foreign exchange forward contracts are large creditworthy commercial banks. The derivatives transacted with these institutions are short in duration and, therefore, we do not consider
counterparty concentration and
non-performance
to be material risks. The Company does not have a significant concentration of credit risk with any single counterparty.
(13)
Derivative Financial Instruments
We use derivatives to partially offset our exposure to fluctuations in certain foreign currencies. We do not enter into derivative contracts
for speculative or trading purposes. Derivatives are recorded at fair value on the balance sheet based on observable market based inputs or unobservable inputs that are corroborated by market data (Level 2). Gains or losses resulting from changes in
fair value of the derivative are recorded currently in income. We do not designate our hedges for hedge accounting, and our foreign currency derivative instruments are not subject to any master netting arrangements with our counterparties.
We use foreign exchange forward contracts to mitigate risk associated with certain
non-functional
currency assets and liabilities from fluctuations in foreign currency exchange rates. Our
non-functional
currency assets and liabilities are primarily related to foreign currency denominated payables,
receivables, and cash balances. The foreign currency forward contracts, carried at fair value, typically have a maturity of one month or less. We currently enter into approximately three foreign exchange forward contracts per month with an average
notional value of $11,337,000 and an average maturity of approximately eleven days.
Our derivative financial instruments as of
December 31, 2016 were not material. The effect of our derivative financial instruments on our results of operations during the years ended December 31, 2016, 2015 and 2014 were a loss of $2,722,000, a loss of $942,000 and a loss of
$205,000, respectively. These amounts are reported within the net foreign currency exchange (gain) loss line item in our consolidated statements of operations.
(14)
Fair Value Measurements
Fair
value measurements are determined based on the following three categories:
Level 1: Quoted market prices in active markets for identical
assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
We have elected to use the income approach to value our foreign exchange derivatives, using observable Level 2 market expectations at the
measurement date and standard valuation techniques to convert future amounts to a single present value amount assuming that participants are motivated, but not compelled, to transact. Level 2 inputs for the valuations are limited to quoted
prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR rates, foreign exchange rates, and foreign exchange forward points).
Mid-market
pricing is used as a practical expedient for fair value measurements. Fair value measurement of an asset or liability must reflect the nonperformance risk of the entity and the counterparty. Therefore,
the impact of the counterpartys creditworthiness when in an asset position and the Companys creditworthiness when in a liability position has also been factored into the fair value measurement of the derivative instruments and did not
have a material impact on the fair value of these derivative instruments. Both the counterparty and the Company are expected to continue to perform under the contractual terms of the instruments.
As of December 31, 2016, we have no
non-financial
assets or liabilities that are measured and
recorded at fair value on a recurring basis, and our other financial assets or liabilities generally consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities and long-term debt. The
estimated fair values of our cash and cash equivalents approximate their carrying values and are determined based on quoted prices in active markets for identical assets (Level 1). The estimated fair values of our long-term debt balances approximate
their carrying values based on their variable interest rate terms that are based on current market interest rates for similar debt instruments. The fair values of the other financial assets and liabilities are based on the values that would be
received or paid in an orderly transaction between market participants and approximate their carrying values due to their nature and short duration.
65
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(15)
Benefit Plans
We adopted a defined contribution benefit plan (the Defined Contribution Plan) for our U.S. teammates which complies with
section 401(k) of the Internal Revenue Code. The Company provides a discretionary match to all participants who make 401(k) contributions pursuant to the Defined Contribution Plan. The discretionary match provided to participants is equivalent
to 25% of a participants
pre-tax
contributions up to a maximum of 6% of eligible compensation per pay period. Additionally, we offer several defined contribution benefit plans to our teammates outside of
the United States. These plans and their related terms vary by country. Total consolidated contribution expense under these plans was $7,684,000, $7,190,000 and $7,083,000 for 2016, 2015 and 2014, respectively.
(16)
Share Repurchase Programs
In
February 2016, February 2015, October 2014, October 2013 and February 2013, our Board of Directors authorized share repurchase programs of $50,000,000, $75,000,000, $25,000,000, $50,000,000 and $50,000,000, respectively. The following table
summarizes the shares of our common stock that we repurchased on the open market under these repurchase programs, in thousands, except per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Total Number
of Shares
Purchased
|
|
|
Average Price
Paid per Share
|
|
|
Approximate Dollar
Value of Shares
Purchased
|
|
2016
|
|
|
1,891
|
|
|
$
|
26.43
|
|
|
$
|
50,000
|
|
2015
|
|
|
3,300
|
|
|
|
27.83
|
|
|
|
91,843
|
|
2014
|
|
|
2,140
|
|
|
|
23.54
|
|
|
|
50,383
|
|
2013
|
|
|
3,000
|
|
|
|
19.26
|
|
|
|
57,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,331
|
|
|
|
|
|
|
$
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All shares repurchased were retired.
(17)
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 December 31, 2016, we had approximately $2,198,000 of performance bonds outstanding. These bonds are issued on our behalf by a surety company on an unsecured basis; however, if the surety company is ever required to pay out
under the bonds, we have contractually agreed to reimburse the surety company.
Employment Contracts and Severance Plans
We have employment contracts with, and plans covering, certain officers and management teammates under which severance payments would become
payable in the event of specified terminations without cause or terminations under certain circumstances after a change in control. In addition, vesting of outstanding nonvested RSUs would accelerate following a change in control. If severance
payments under the current employment agreements or plan payments were to become payable, the severance payments would generally range from three to twenty-four months of salary.
Indemnifications
From time to time, in
the ordinary course of business, we enter into contractual arrangements under which we agree to indemnify either our clients or third-party service providers from certain losses incurred relating to services performed on our behalf or for losses
arising from defined events, which may include litigation or claims relating to past performance. These arrangements include, but are not limited to, the indemnification of our clients for certain claims arising out of our performance under our
sales contracts, the indemnification of our landlords for certain claims arising from our use of leased facilities and the indemnification of the lenders that provide our credit facilities for certain claims arising from their extension of credit to
us. Such indemnification obligations may not be subject to maximum loss clauses.
66
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Management believes that payments, if any, related to these indemnifications are not probable
at December 31, 2016. Accordingly, we have not accrued any liabilities related to such indemnifications in the accompanying consolidated financial statements.
We have entered into separate indemnification agreements with certain of our executive officers and with each of our directors. These
agreements require us, among other requirements, to indemnify such officers and directors against expenses (including attorneys fees), judgments and settlements incurred by such individual in connection with any action arising out of such
individuals status or service as our executive officer or director (subject to exceptions such as where the individual failed to act in good faith or in a manner the individual reasonably believed to be in, or not opposed to, the best
interests of the Company) and to advance expenses incurred by such individual with respect to which such individual may be entitled to indemnification by us. There are no pending legal proceedings that involve the indemnification of any of the
Companys directors or officers.
Contingencies Related to Third-Party Review
From time to time, we are subject to potential claims and assessments from third parties. We are also subject to various governmental, client
and partner audits. We continually assess whether or not such claims have merit and warrant accrual. Where appropriate, we accrue estimates of anticipated liabilities in our 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 alleged
non-compliance
with contract provisions and claims related to alleged violations of laws and regulations. We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable or there is a reasonable possibility
that a loss, or an additional loss, may have been incurred and determine if accruals are appropriate. If accruals are not appropriate, we further evaluate each legal proceeding to assess whether an estimate of possible loss or range of possible loss
can be made for disclosure. Although litigation is inherently unpredictable, we believe that we have adequate provisions for any probable and estimable losses. It is possible, nevertheless, that our consolidated financial position, results of
operations or liquidity could be materially and adversely affected in any particular period by the resolution of a legal proceeding. Legal expenses related to defense, negotiations, settlements, rulings and advice of outside legal counsel are
expensed as incurred.
The Company is not involved in any pending or threatened legal proceedings that it believes would reasonably be
expected to have a material adverse effect on its financial condition, results of operations or liquidity.
(18)
Related Party Transaction
In December 2014, we sold a Company-owned 21,375 square feet facility (and its furnishings) that previously served as executive
offices and administration space in Tempe, Arizona to a trust. Timothy A. Crown, the Chair of our Board of Directors, serves as trustee of that trust. For approximately twelve months prior to the sale, the facility had been leased to another entity
in which Mr. Crown has an interest. Annual rent was not material and was based on a review by our outside real estate brokerage adviser of comparable rentals in the relevant market area.
The facility was sold for $2,500,000, the full appraisal value based on two property valuations provided by independent real estate brokers.
The Audit Committee approved the sale of the facility, as required under the Companys Code of Ethics and Business Practices and other applicable policies, practices and requirements. The Company was not required to pay a commission. Total
proceeds from the sale of $2,472,000, net of related closing costs and fees, were collected in December 2014, and no amounts related to this transaction remain outstanding. During 2014, the Company recognized a gain of $895,000 on the sale of the
facility.
67
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(19)
Supplemental Financial Information
Additions and deductions related to the allowance for doubtful accounts receivable for 2016, 2015 and 2014 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning
of Year
|
|
|
Additions
|
|
|
Deductions
|
|
|
Balance at
End of Year
|
|
Allowance for doubtful accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
$
|
11,872
|
|
|
$
|
2,452
|
|
|
$
|
(5,186
|
)
|
|
$
|
9,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
$
|
19,336
|
|
|
$
|
6,761
|
|
|
$
|
(14,225
|
)
|
|
$
|
11,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2014
|
|
$
|
19,908
|
|
|
$
|
4,409
|
|
|
$
|
(4,981
|
)
|
|
$
|
19,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2015, we undertook a project to analyze our older accounts receivable to attempt further collection
action, or where appropriate, to write off such accounts as uncollectible. Since these aged accounts receivable had been fully reserved against, the write off was accomplished through the elimination of the associated allowance, with no effect on
net accounts receivable balances. The reduction of the allowance for doubtful accounts from $19,336,000 at December 31, 2014 to $11,872,000 at December 31, 2015 was a direct result of the write off of these older fully reserved accounts
receivable as well as an overall improvement in managing the receivables portfolio. The reduction of the reserve during 2015 related to these actions had no effect on our results of operations.
(20)
Cash Flows
Cash payments for
interest on indebtedness and cash payments for taxes on income were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest
|
|
$
|
3,782
|
|
|
$
|
2,866
|
|
|
$
|
2,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for income taxes, net of refunds
|
|
$
|
39,051
|
|
|
$
|
41,062
|
|
|
$
|
51,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing activities for 2016, 2015 and 2014 included
$791,000, $662,000 and $1,668,000, respectively, of capital expenditures in accounts payable, representing additions purchased at period end but not yet paid for in cash.
68
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(21)
Segment and Geographic Information
We operate in three reportable geographic operating segments: North America; EMEA; and APAC. Our offerings in North America and select
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 select software-related services. Net sales by offering for North America, EMEA and APAC
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
Years Ended December 31,
|
|
Sales Mix
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Hardware
|
|
$
|
2,455,159
|
|
|
$
|
2,336,788
|
|
|
$
|
2,175,397
|
|
Software
|
|
|
1,234,792
|
|
|
|
1,231,269
|
|
|
|
1,174,234
|
|
Services
|
|
|
281,877
|
|
|
|
255,471
|
|
|
|
213,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,971,828
|
|
|
$
|
3,823,528
|
|
|
$
|
3,562,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
Years Ended December 31,
|
|
Sales Mix
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Hardware
|
|
$
|
481,505
|
|
|
$
|
531,308
|
|
|
$
|
572,494
|
|
Software
|
|
|
811,013
|
|
|
|
799,761
|
|
|
|
930,763
|
|
Services
|
|
|
46,042
|
|
|
|
40,068
|
|
|
|
36,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,338,560
|
|
|
$
|
1,371,137
|
|
|
$
|
1,539,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APAC
Years Ended December 31,
|
|
Sales Mix
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Hardware
|
|
$
|
18,925
|
|
|
$
|
14,333
|
|
|
$
|
12,463
|
|
Software
|
|
|
143,709
|
|
|
|
158,046
|
|
|
|
193,533
|
|
Services
|
|
|
12,493
|
|
|
|
6,046
|
|
|
|
7,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
175,127
|
|
|
$
|
178,425
|
|
|
$
|
213,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The method for determining what information regarding operating segments, products and services, geographic
areas of operation and major clients to report is based upon the management approach, or the way that management organizes the operating segments within a company, for which separate financial information is evaluated regularly by the
Chief Operating Decision Maker (CODM) in deciding how to allocate resources. Our CODM is our Chief Executive Officer.
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 in 2016, 2015 or 2014.
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.
69
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The tables below present information about our reportable operating segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
|
North
America
|
|
|
EMEA
|
|
|
APAC
|
|
|
Consolidated
|
|
Net sales
|
|
$
|
3,971,828
|
|
|
$
|
1,338,560
|
|
|
$
|
175,127
|
|
|
$
|
5,485,515
|
|
Costs of goods sold
|
|
|
3,446,347
|
|
|
|
1,152,873
|
|
|
|
143,193
|
|
|
|
4,742,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
525,481
|
|
|
|
185,687
|
|
|
|
31,934
|
|
|
|
743,102
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
|
|
401,316
|
|
|
|
160,269
|
|
|
|
23,658
|
|
|
|
585,243
|
|
Severance and restructuring expenses
|
|
|
2,966
|
|
|
|
1,496
|
|
|
|
118
|
|
|
|
4,580
|
|
Acquisition-related expenses
|
|
|
4,278
|
|
|
|
|
|
|
|
169
|
|
|
|
4,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
$
|
116,921
|
|
|
$
|
23,922
|
|
|
$
|
7,989
|
|
|
$
|
148,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,204,351
|
|
|
$
|
562,293
|
|
|
$
|
119,778
|
|
|
$
|
2,886,422
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
|
|
North
America
|
|
|
EMEA
|
|
|
APAC
|
|
|
Consolidated
|
|
Net sales
|
|
$
|
3,823,528
|
|
|
$
|
1,371,137
|
|
|
$
|
178,425
|
|
|
$
|
5,373,090
|
|
Costs of goods sold
|
|
|
3,321,965
|
|
|
|
1,184,850
|
|
|
|
149,943
|
|
|
|
4,656,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
501,563
|
|
|
|
186,287
|
|
|
|
28,482
|
|
|
|
716,332
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
|
|
396,603
|
|
|
|
165,879
|
|
|
|
22,424
|
|
|
|
584,906
|
|
Severance and restructuring expenses
|
|
|
1,126
|
|
|
|
3,781
|
|
|
|
|
|
|
|
4,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
$
|
103,834
|
|
|
$
|
16,627
|
|
|
$
|
6,058
|
|
|
$
|
126,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,999,485
|
|
|
$
|
543,146
|
|
|
$
|
114,973
|
|
|
$
|
2,657,604
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2014
|
|
|
|
North
America
|
|
|
EMEA
|
|
|
APAC
|
|
|
Consolidated
|
|
Net sales
|
|
$
|
3,562,726
|
|
|
$
|
1,539,968
|
|
|
$
|
213,535
|
|
|
$
|
5,316,229
|
|
Costs of goods sold
|
|
|
3,085,279
|
|
|
|
1,340,052
|
|
|
|
178,495
|
|
|
|
4,603,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
477,447
|
|
|
|
199,916
|
|
|
|
35,040
|
|
|
|
712,403
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
|
|
372,936
|
|
|
|
178,816
|
|
|
|
25,215
|
|
|
|
576,967
|
|
Severance and restructuring expenses
|
|
|
971
|
|
|
|
3,356
|
|
|
|
106
|
|
|
|
4,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
$
|
103,540
|
|
|
$
|
17,744
|
|
|
$
|
9,719
|
|
|
$
|
131,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,840,057
|
|
|
$
|
575,757
|
|
|
$
|
117,437
|
|
|
$
|
2,533,251
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Consolidated total assets do not reflect intercompany eliminations and corporate assets of $667,122,000, $643,587,000 and $585,413,000 at December 31, 2016, 2015 and 2014, respectively.
|
70
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following is a summary of our geographic net sales and long-lived assets, consisting of
property and equipment, net (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
United Kingdom
|
|
|
Other Foreign
|
|
|
Total
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,776,352
|
|
|
$
|
671,999
|
|
|
$
|
1,037,164
|
|
|
$
|
5,485,515
|
|
Total long-lived assets
|
|
$
|
46,774
|
|
|
$
|
13,570
|
|
|
$
|
10,566
|
|
|
$
|
70,910
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,645,876
|
|
|
$
|
711,957
|
|
|
$
|
1,015,257
|
|
|
$
|
5,373,090
|
|
Total long-lived assets
|
|
$
|
58,748
|
|
|
$
|
16,810
|
|
|
$
|
12,723
|
|
|
$
|
88,281
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,368,798
|
|
|
$
|
746,123
|
|
|
$
|
1,201,308
|
|
|
$
|
5,316,229
|
|
Total long-lived assets
|
|
$
|
70,439
|
|
|
$
|
19,522
|
|
|
$
|
14,220
|
|
|
$
|
104,181
|
|
Net sales by geographic area are presented by attributing net sales to external customers based on the
domicile of the selling location.
We recorded the following
pre-tax
amounts, by operating
segment, for depreciation and amortization in the accompanying consolidated financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Depreciation and amortization of property and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
21,952
|
|
|
$
|
22,239
|
|
|
$
|
23,632
|
|
EMEA
|
|
|
4,908
|
|
|
|
3,757
|
|
|
|
5,025
|
|
APAC
|
|
|
633
|
|
|
|
653
|
|
|
|
586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,493
|
|
|
|
26,649
|
|
|
|
29,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
8,139
|
|
|
|
8,053
|
|
|
|
7,536
|
|
EMEA
|
|
|
1,951
|
|
|
|
2,834
|
|
|
|
3,300
|
|
APAC
|
|
|
547
|
|
|
|
421
|
|
|
|
491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,637
|
|
|
|
11,308
|
|
|
|
11,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,130
|
|
|
$
|
37,957
|
|
|
$
|
40,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22)
Acquisition
Effective September 1, 2016, we acquired Ignia, a business technology consulting and managed services provider headquartered in Perth,
Australia, with an additional office in Melbourne, for a cash purchase price, net of cash acquired, of approximately $10,804,000, subject to a final working capital adjustment. We believe that this acquisition expands our global footprint in the
areas of application design, digital solutions, Cloud, mobility and business analytics, while also building on our unique position to bring solutions powered by Intelligent Technology to our clients in the Asia-Pacific region.
The total fair value of net identifiable assets acquired initially recorded was approximately $5,324,000, including $1,463,000 of cash
acquired and $4,716,000 of identifiable intangible assets, consisting primarily of customer relationships and restrictive covenant agreements which are being amortized using the straight-line method over their estimated economic lives of eight years
and 27 months, respectively. The preliminary purchase price was allocated using the information available at the time. During the fourth quarter of 2016, we finalized the fair value assumptions for identifiable intangible assets acquired and reduced
the fair value of identifiable intangible assets acquired by approximately $218,000. Goodwill initially recorded of approximately $7,248,000, which was recorded in our APAC operating segment, was adjusted to $6,957,000 as of December 31, 2016
as a result of the net effects of the decrease in the value of acquired identifiable intangible assets noted previously and foreign currency translation adjustments. None of the goodwill is tax deductible. We will finalize the purchase price
allocation in the first quarter of 2017 when the final working capital adjustment is agreed upon and paid and the evaluation of uncertain tax positions, which could lead to an adjustment of the purchase price allocation, is completed.
71
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We consolidated the results of operations for Ignia within our APAC operating segment
beginning on September 1, 2016, the effective date of the acquisition. Our historical results would not have been materially affected by the acquisition of Ignia 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 statements of operations.
Effective October 1, 2015,
we acquired BlueMetal, an interactive design and technology architecture firm based in the Boston area, with offices in Chicago and New York, for a cash purchase price, net of cash acquired, of approximately $44,221,000. BlueMetal delivers strategic
design, application development, business intelligence solutions and data visualization platforms, and we believe this acquisition strengthens our services capabilities to bring value to our clients businesses in the area of application
design, mobility and big data.
The total fair value of net assets acquired was approximately $15,412,000, including $15,240,000 of
identifiable intangible assets, consisting primarily of customer relationships and restrictive covenant agreements which are being amortized using the straight-line method over their estimated economic lives of eight and three years, respectively.
Goodwill acquired approximated $29,938,000, which was recorded in our North America operating segment. In 2016, we resolved the working capital contingency associated with the acquisition of BlueMetal. We recorded an adjustment of the purchase price
as a reduction of goodwill in our North America operating segment upon the receipt of $507,000 in cash during 2016. The addition of the BlueMetal employees to our team and the opportunity to grow our services business are the primary factors making
up the goodwill recognized as part of the transaction. None of the goodwill is tax deductible.
We consolidated the results of operations
for BlueMetal beginning on October 1, 2015, the effective date of the acquisition. Our historical results would not have been materially affected by the acquisition of BlueMetal 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 statements of operations.
(23)
Subsequent Event
On January 6, 2017, we completed our acquisition of Datalink for a cash purchase price of approximately $257,500,000. We funded the
acquisition through a combination of cash on hand and approximately $196,000,000 in borrowings under our revolving facility. In conjunction with the acquisition, we amended our revolving facility to expand the facility by $175,000,000 in the form of
an incremental Term Loan A (TLA). Pricing, maturity 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% in
years one through five, respectively.
We are in the process of determining the fair value of net assets acquired, including identifiable
intangible assets, which will be recorded in our North America operating segment. We will consolidate the results of operations for Datalink beginning on January 6, 2017, the effective date of the acquisition.
72
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(24)
Selected Quarterly Financial Information (unaudited)
The following table sets forth selected unaudited consolidated quarterly financial information for 2016 and 2015 (in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
Dec. 31,
2016
|
|
|
Sept. 30,
2016
|
|
|
June 30,
2016
|
|
|
Mar. 31,
2016
|
|
|
Dec. 31,
2015
|
|
|
Sept. 30,
2015
|
|
|
June 30,
2015
|
|
|
Mar. 31,
2015
|
|
Net sales
|
|
$
|
1,467,583
|
|
|
$
|
1,392,716
|
|
|
$
|
1,456,234
|
|
|
$
|
1,168,982
|
|
|
$
|
1,387,185
|
|
|
$
|
1,342,195
|
|
|
$
|
1,424,031
|
|
|
$
|
1,219,679
|
|
Costs of goods sold
|
|
|
1,276,614
|
|
|
|
1,210,908
|
|
|
|
1,247,017
|
|
|
|
1,007,874
|
|
|
|
1,206,332
|
|
|
|
1,159,944
|
|
|
|
1,232,616
|
|
|
|
1,057,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
190,969
|
|
|
|
181,808
|
|
|
|
209,217
|
|
|
|
161,108
|
|
|
|
180,853
|
|
|
|
182,251
|
|
|
|
191,415
|
|
|
|
161,813
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
|
|
145,066
|
|
|
|
143,872
|
|
|
|
150,186
|
|
|
|
146,119
|
|
|
|
147,310
|
|
|
|
148,796
|
|
|
|
148,004
|
|
|
|
140,796
|
|
Severance and restructuring expenses
|
|
|
1,527
|
|
|
|
788
|
|
|
|
909
|
|
|
|
1,356
|
|
|
|
2,995
|
|
|
|
817
|
|
|
|
372
|
|
|
|
723
|
|
Acquisition-related expenses
|
|
|
3,706
|
|
|
|
741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
40,670
|
|
|
|
36,407
|
|
|
|
58,122
|
|
|
|
13,633
|
|
|
|
30,548
|
|
|
|
32,638
|
|
|
|
43,039
|
|
|
|
20,294
|
|
Non-operating
(income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
(282
|
)
|
|
|
(318
|
)
|
|
|
(216
|
)
|
|
|
(250
|
)
|
|
|
(172
|
)
|
|
|
(265
|
)
|
|
|
(192
|
)
|
|
|
(154
|
)
|
Interest expense
|
|
|
2,271
|
|
|
|
2,517
|
|
|
|
1,992
|
|
|
|
1,848
|
|
|
|
1,706
|
|
|
|
2,062
|
|
|
|
1,718
|
|
|
|
1,738
|
|
Net foreign currency exchange (gain) loss
|
|
|
(520
|
)
|
|
|
579
|
|
|
|
(153
|
)
|
|
|
616
|
|
|
|
535
|
|
|
|
(1,561
|
)
|
|
|
20
|
|
|
|
613
|
|
Other expense, net
|
|
|
311
|
|
|
|
352
|
|
|
|
359
|
|
|
|
268
|
|
|
|
326
|
|
|
|
357
|
|
|
|
281
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
38,890
|
|
|
|
33,277
|
|
|
|
56,140
|
|
|
|
11,151
|
|
|
|
28,153
|
|
|
|
32,045
|
|
|
|
41,212
|
|
|
|
17,766
|
|
Income tax expense
|
|
|
17,790
|
|
|
|
11,642
|
|
|
|
21,073
|
|
|
|
4,263
|
|
|
|
9,577
|
|
|
|
11,220
|
|
|
|
15,713
|
|
|
|
6,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
21,100
|
|
|
$
|
21,635
|
|
|
$
|
35,067
|
|
|
$
|
6,888
|
|
|
$
|
18,576
|
|
|
$
|
20,825
|
|
|
$
|
25,499
|
|
|
$
|
10,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.59
|
|
|
$
|
0.61
|
|
|
$
|
0.96
|
|
|
$
|
0.19
|
|
|
$
|
0.50
|
|
|
$
|
0.56
|
|
|
$
|
0.67
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.59
|
|
|
$
|
0.60
|
|
|
$
|
0.96
|
|
|
$
|
0.18
|
|
|
$
|
0.50
|
|
|
$
|
0.56
|
|
|
$
|
0.67
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
35,479
|
|
|
|
35,474
|
|
|
|
36,380
|
|
|
|
37,075
|
|
|
|
37,099
|
|
|
|
37,095
|
|
|
|
38,067
|
|
|
|
39,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
35,963
|
|
|
|
35,790
|
|
|
|
36,612
|
|
|
|
37,386
|
|
|
|
37,429
|
|
|
|
37,351
|
|
|
|
38,326
|
|
|
|
39,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
INSIGHT ENTERPRISES, INC.