News Column

INSIGHT ENTERPRISES INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

February 21, 2014

The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with the Consolidated Financial Statements and notes thereto included in Part II, Item 8 of this report. Our actual results could differ materially from those contained in forward-looking statements due to a number of factors, including those discussed in "Risk Factors" in Part I, Item 1A and elsewhere in this report.

Overview



We are a global provider of information technology ("IT") hardware, software and services solutions to businesses and public sector institutions in North America; Europe, the Middle East, Africa ("EMEA"); and Asia-Pacific ("APAC"). Currently, our offerings in North America and select countries in EMEA include IT hardware, software and services. Our offerings in the remainder of our EMEA segment and in APAC are almost entirely software and select software-related services.

Our vision is to be the trusted advisor to our clients, helping them enhance business performance through innovative technology solutions. Our strategy is to grow market share and profitability by delivering relevant product, service and solutions offerings to our clients on a scalable support and delivery platform.

For the full year 2013, our consolidated financial results did not meet our expectations, but we saw improvement in the second through the fourth quarter, after the slow start in the first quarter of 2013. For example:

Consolidated hardware sales for the full year 2013 declined 5%. However, we saw sequential growth each quarter beginning in the second quarter of 2013 and exited the year with a stronger run-rate in this category; Software product sales grew year over year for the full year 2013, but reported net sales declined slightly because of a higher mix of software maintenance sales, which are reported on a net basis in our financial statements; We executed well in mitigating the negative effects of partner program changes, realizing a decline in incentives from our largest software partner of $4 million compared to the amount we earned in 2012, a strong performance compared to our initial expected range for the reduction of gross profit of between $8 to $12 million; and We grew our services sales by 3% year over year at higher gross margins than we saw in 2012.



On a consolidated basis, for the year ended December 31, 2013, our net sales declined 3% to $5.1 billion, as growth in the services category was more than offset by declines in hardware and software. Our resulting gross profit decreased by $20.8 million, or 3%, while gross margin remained flat at 13.6% of net sales. Selling and administrative expenses decreased $296,000, or less than 1%, in 2013 compared to 2012 as the costs of our investments in our sales and services resources in North America were offset by lower expenses in EMEA from restructuring actions taken during the year. We reported earnings from operations of $121.2 million in 2013, a decline of 18% compared to the prior year, which represented 2.4% of net sales, compared to 2.8% in the prior year. Our effective tax rate in 2013 was 38.0% compared to 35.9% in 2012 and 29.3% in 2011. The increase in the tax rate from 2012 to 2013 was primarily due to higher losses in certain foreign jurisdictions in 2013, resulting in an increase in the valuation allowance for deferred tax assets related to these foreign operating losses. The 2011 effective tax rate was lower than recent years as a result of the discrete tax benefits recognized during 2011, as detailed below. Net earnings and diluted net earnings per share were $71.0 million and $1.64, respectively, for the year ended December 31, 2013. In 2012, we reported net earnings of $92.8 million and diluted net earnings per share of $2.07. In 2011, we reported net earnings of $100.2 million and diluted net earnings per share of $2.18.

The results of operations for the year ended December 31, 2013 include the following items:

severance and restructuring expenses of $12.7 million, $9.8 million net of tax; and the repurchase of approximately 3.0 million shares of the Company's common stock for $57.8 million. 22



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The results of operations for the year ended December 31, 2012 include the following items:

severance and restructuring expenses of $6.3 million, $4.3 million net of tax; a reduction in legal expenses of approximately $2.0 million associated with the recovery of legal fees incurred in previous periods; an operating gain of $1.2 million on the sale of a portfolio of non-core service contracts; and a non-operating gain on bargain purchase of $2.0 million as the fair value of the net assets acquired exceeded the purchase price paid by the Company for Inmac.



The results of operations for the year ended December 31, 2011 include the following items:

severance and restructuring expenses of $5.1 million, $3.4 million net of tax; tax benefits of $8.6 million primarily related to the recognition of foreign tax credits upon the reorganization of certain of our foreign operations and to other tax matters; and the repurchase of approximately 2.9 million shares of the Company's common stock for $50.0 million.



Net of tax amounts referenced above were computed using the statutory tax rate for the taxing jurisdictions in the operating segment in which the related expenses were recorded, adjusted for the effects of valuation allowances on net operating losses in certain jurisdictions.

Effective February 1, 2012, we acquired Inmac, a broad portfolio business-to-business hardware reseller based in Frankfurt, Germany and Amsterdam, Netherlands servicing clients in Western Europe. We believe that this acquisition supports our strategic plan to expand hardware capabilities into key markets in our existing European footprint.

Effective October 1, 2011, we acquired Ensynch, a leading professional services firm with multiple Microsoft Gold competencies across the complete Microsoft solution set, including cloud migration and management. The acquisition of Ensynch did not have a significant effect on results of operations in 2011.

During 2013, we generated $76.1 million of cash flows from operations. We repurchased $57.8 million of our common stock and utilized $19.0 million to fund capital investments primarily associated with our IT systems upgrades. During the year, we made combined net repayments of $13.5 million under our senior revolving credit facility and our accounts receivable securitization financing facility. We ended the year with $126.8 million of cash and cash equivalents and $66.5 million of debt outstanding under our long-term facilities.

As previously disclosed, our largest software partner has changed its channel incentive program beginning in October 2013. The changes vary in substance and timing across this partner's offerings. Some of the changes became effective in the fourth quarter of 2013, and some become effective as client contracts renew under their stated terms over the next few years. We currently believe that we will receive between $15 and $20 million less in incentives from this partner in 2014. We are taking the necessary strategic steps to preserve our profitability and have identified actions associated with new business and cost reduction measures in 2014 that we expect will offset the adverse effect of these changes.

Details about segment results of operations can be found in Note 18 to the Consolidated Financial Statements in Part II, Item 8 of this report.

Our discussion and analysis of financial condition and results of operations is intended to assist in the understanding of our consolidated financial statements, the changes in certain key items in those consolidated financial statements from year to year and the primary factors that contributed to those changes, as well as how certain critical accounting estimates affect our consolidated financial statements.

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Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). For a summary of significant accounting policies, see Note 1 to the Consolidated Financial Statements in Part II, Item 8 of this report. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results, however, may differ from our estimates. Members of our senior management have discussed the critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors.

We consider the following to be our critical accounting estimates used in the preparation of our consolidated financial statements:

Sales Recognition

Sales are recognized when title and risk of loss are passed to the client, there is persuasive evidence of an arrangement for sale, delivery has occurred and/or services have been rendered, the sales price is fixed or determinable and collectibility is reasonably assured. Our 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 make provisions for estimated product returns that we expect to occur under our return policy based upon historical return rates. Our manufacturers warrant most of the products we market, and it is our policy to request that clients return their defective products directly to the manufacturer for warranty service. On selected products, and for selected client service reasons, we may accept returns directly from the client and then either credit the client or ship a replacement product. We generally offer a limited 15- to 30-day return policy for unopened products and certain opened products, which are consistent with manufacturers' terms; however, for some products we may charge restocking fees. Products returned opened are processed and returned to the manufacturer or partner for repair, replacement or credit to us. We resell most unopened products returned to us. Subject to some manufacturers' restrictions, products that cannot be returned to the manufacturer for warranty processing, but are in working condition, are sold to inventory liquidators, to end users as "previously sold" or "used" products, or through other channels to reduce our losses from returned products.

We record 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).

The sale of hardware and software products may also include the provision of services, and the associated contracts may contain multiple elements or non-standard terms and conditions. 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 often service-only contracts and are recorded as sales when the services are performed. If the services are performed at a client location in conjunction with a hardware, software or other services sale, we recognize net sales for each portion of the overall arrangement fee that is attributable to the items as they are delivered or the services are performed. At the inception of the arrangement, the total consideration for the arrangement is allocated to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionately to each deliverable on the basis of each deliverable's selling price. We determine our best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. The revenue allocation is based on vendor-specific objective evidence of fair value of the products. We currently do not have any material instances in which we account for revenue from multiple element arrangements when vendor-specific evidence does not exist. If vendor-specific objective evidence were not available, we would utilize third-party evidence to allocate the selling price. If neither vendor-specific objective evidence nor third-party evidence were available, estimated selling price would be used for allocation purposes.

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We sell certain third-party service contracts and software maintenance or subscription products for which we are not the primary obligor. These sales do not meet the criteria for gross sales recognition and, thus, are recorded on a net sales recognition basis. As we enter into contracts with third-party service providers or vendors 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.

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.

Additionally, we sell certain professional services contracts on a fixed fee basis. Revenues for fixed fee professional services contracts are recognized based on the ratio of costs incurred to total estimated costs. Net sales for these service contracts are not a significant portion of our consolidated net sales.

Partner Funding

We receive payments and credits from partners, including consideration pursuant to volume sales incentive programs, volume purchase incentive programs and shared marketing expense programs. Partner funding received pursuant to volume sales incentive programs is recognized as 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 costs 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 only if the consideration represents a reimbursement of specific, incremental, identifiable costs. Consideration that exceeds the specific, incremental, identifiable costs is classified as a reduction of costs of goods sold. Changes in estimates of anticipated achievement levels under individual partner programs may materially affect our results of operations and our cash flows.

See Note 1 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of our accounting policies related to partner funding.

Stock-Based Compensation

We recognize stock-based compensation net of an estimated forfeiture rate and only recognize compensation expense for those shares expected to vest over the requisite service period of the award. We primarily issue service-based and performance-based restricted stock units ("RSUs"). The number of RSUs ultimately awarded under performance-based RSUs varies based on whether we achieve certain financial results. We record compensation expense each period based on our estimate of the most probable number of RSUs that will be issued under the grants of performance-based RSUs. For any stock options awarded, modifications to previous awards or awards of RSUs that are tied to specified market conditions, we use option pricing models or lattice (binomial) models to determine fair value of the awards.

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No stock options were granted and no stock-based compensation expense related to stock options was recognized during the three years ended December 31, 2013. All previously granted unexercised stock options expired in December 2012. If we decide to issue stock options in the future, the estimated fair value of stock options will be determined on the date of the grant using the Black-Scholes-Merton ("Black-Scholes") option-pricing model. The Black-Scholes model requires us to apply highly subjective assumptions, including expected stock price volatility, expected life of the option and the risk-free interest rate. A change in one or more of the assumptions used in the option-pricing model could result in a material change to the estimated fair value of the stock-based compensation.

See Note 9 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of stock-based compensation.

Allowance for Doubtful Accounts

Our allowance for doubtful accounts is determined using estimated losses on accounts receivable based on evaluation of the aging of the receivables, historical write-offs and the current economic environment. Should our clients' or vendors' circumstances change or actual collections of client and vendor receivables differ from our estimates, adjustments to the provision for losses on accounts receivable and the related allowances for doubtful accounts would be recorded. See further information on our allowance for doubtful accounts in Note 17 to the Consolidated Financial Statements in Part II, Item 8 of this report.

Inventories

We evaluate inventories for excess, obsolescence or other factors that may render inventories unmarketable at expected margins. Write-downs are recorded so that inventories reflect the approximate net realizable value and take into account our contractual provisions with our partners governing price protection, stock rotation and return privileges relating to obsolescence. 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. If our assumptions about future demand change or actual market conditions are less favorable than those projected, additional write-downs of inventories may be required. In any case, actual values could be different from those estimated.

Valuation of Long-Lived Assets Including Purchased Intangible Assets and Goodwill

We review property, plant and equipment and purchased intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. If such events or changes in circumstances indicate a possible impairment, our asset impairment review assesses the recoverability of the assets based on the estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) and compares that value to the carrying value. Such impairment test is based on the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the carrying value exceeds the undiscounted future cash flows, an impairment loss is recognized for the difference between fair value and the carrying amount. This approach uses our estimates of future market growth, forecasted net sales and costs, expected periods the assets will be utilized and appropriate discount rates.

We perform an annual review of our goodwill in the fourth quarter of every year, or more frequently if indicators of potential impairment exist, to determine if the carrying value of our recorded goodwill is impaired. We continually assess whether any indicators of impairment exist, and that assessment requires a significant amount of judgment. Events or circumstances that could trigger an impairment review include a significant adverse change in legal factors or in the business climate, unanticipated competition, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, significant declines in our stock price for a sustained period or significant underperformance relative to expected historical or projected future cash flows or results of operations. Any adverse change in these factors, among others, could have a significant effect on the recoverability of goodwill and could have a material effect on our consolidated financial statements.

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The goodwill impairment test is performed at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a "component"). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and management of the segment regularly reviews the operating results of that component. When two or more components of an operating segment have similar economic characteristics, the components may be aggregated and deemed a single reporting unit. An operating segment shall be deemed to be a reporting unit if all of its components are similar, if none of its components is a reporting unit, or if the segment comprises only a single component. Insight has three reporting units, which are equivalent to our operating segments.

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. In completing a quantitative test for a potential impairment of goodwill, we first compare the estimated fair value of each reporting unit in which the goodwill resides to its book value, including goodwill. Management must apply judgment in determining the estimated fair value of our reporting units. Multiple valuation techniques can be used to assess the fair value of the reporting unit, including the market and income approaches. All of these techniques include the use of estimates and assumptions that are inherently uncertain. Changes in these estimates and assumptions could materially affect the determination of fair value or goodwill impairment, or both. These estimates and assumptions primarily include, but are not limited to, an appropriate control premium in excess of the market capitalization of the Company, future market growth, forecasted sales and costs and appropriate discount rates. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates. Management evaluates the merits of each significant assumption, both individually and in the aggregate, used to determine the fair value of the reporting units. If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. To ensure the reasonableness of the estimated fair values of our reporting units, we perform a reconciliation of our total market capitalization to the estimated fair value of all of our reporting units.

If the fair value of the reporting unit is less than its book value, then we are required to perform the second step of the impairment analysis by comparing the carrying amount of the goodwill with its implied fair value. In step two of the analysis, we utilize the fair value of the reporting unit computed in the first step to perform a hypothetical purchase price allocation to the fair value of the assets and liabilities of the reporting unit. The difference between the fair value of the reporting unit calculated in step one and the fair value of the underlying assets and liabilities of the reporting unit is the implied fair value of the reporting unit's goodwill. Management must also apply judgment in determining the estimated fair value of these individual assets and liabilities and may include independent valuations of certain internally generated and unrecognized intangible assets, such as trademarks. Management also evaluates the merits of each significant assumption, both individually and in the aggregate, used to determine the fair values of these individual assets and liabilities. If the carrying amount of our goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess.

See further information on the carrying value of goodwill in Note 3 to the Consolidated Financial Statements in Part II, Item 8 of this report.

Income Taxes

Our effective tax rate includes the effect of certain undistributed foreign earnings for which no U.S. taxes have been provided because such earnings are planned to be reinvested indefinitely outside the U.S. Earnings remittance amounts are planned based on the projected cash flow needs as well as the working capital and long-term investment requirements of our foreign subsidiaries and our domestic operations. Material changes in our estimates of cash, working capital and long-term investment requirements could affect our effective tax rate.

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We consider past operating results, future market growth, forecasted earnings, historical and projected taxable income, the mix of earnings in the jurisdictions in which we operate, prudent and feasible tax planning strategies and statutory tax law changes in determining the need for a valuation allowance. If we were to determine that it is more likely than not that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period such determination is made. Likewise, if we later determine that it is more likely than not that all or part of the net deferred tax assets would be realized, then all or part of the previously provided valuation allowance would be reversed.

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We establish liabilities for potentially unfavorable outcomes associated with uncertain tax positions taken on specific tax matters. These liabilities are based on management's assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. There may be differences between the anticipated and actual outcomes of these matters that may result in subsequent recognition or derecognition of a tax position based on all the available information at the time. If material adjustments are warranted, it could affect our effective tax rate.

Additional information about the valuation allowance and uncertain tax positions can be found in Note 10 to the Consolidated Financial Statements in Part II, Item 8 of this report.

Contingencies

From time to time, we are subject to potential claims and assessments from third parties. We are also subject to various government agency, client and vendor audits. We continually assess whether or not such claims have merit and warrant accrual. An accrual is made if it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Such estimates are subject to change and may affect our results of operations and our cash flows. Additional information about contingencies can be found in Note 16 to the Consolidated Financial Statements in Part II, Item 8 of this report.

RESULTS OF OPERATIONS



The following table sets forth certain financial data as a percentage of net sales for the years ended December 31, 2013, 2012 and 2011:

2013 2012 2011 Net sales 100.0 % 100.0 % 100.0 % Costs of goods sold 86.4 86.4 86.6 Gross profit 13.6 13.6 13.4 Operating expenses: Selling and administrative expenses 11.0 10.7 10.5 Severance and restructuring expenses 0.2 0.1 0.1 Earnings from operations 2.4 2.8 2.8 Non-operating expense, net 0.2 0.1 0.1 Earnings before income taxes 2.2 2.7 2.7 Income tax expense 0.8 1.0 0.8 Net earnings 1.4 % 1.7 % 1.9 %



Throughout this "Results of Operations" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations," we refer to changes in net sales, gross profit and selling and administrative expenses in EMEA and APAC excluding the effects of foreign currency movements. In computing these change amounts and percentages, we compare the current year amount as translated into U.S. dollars under the applicable accounting standards to the prior year amount in local currency translated into U.S. dollars utilizing the average translation rate for the current year.

2013 Compared to 2012

Net Sales. Net sales for the year ended December 31, 2013 decreased 3% to $5.1 billion compared to the year ended December 31, 2012. Our net sales by operating segment for the years ended December 31, 2013 and 2012 were as follows (dollars in thousands): 2013 2012 % Change North America $ 3,470,760$ 3,626,357 (4 %) EMEA 1,469,174 1,463,607 - APAC 204,413 211,477 (3 %) Consolidated $ 5,144,347$ 5,301,441 (3 %) 28



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Net sales in North America decreased $155.6 million or 4% for the year ended December 31, 2013 compared to the year ended December 31, 2012. Net sales of services increased 1% year over year, while net sales of hardware and software decreased 5% and 4%, respectively, year to year. The services growth was primarily driven by higher SaaS offerings and cloud sales. We experienced a decline in hardware purchases by our large enterprise clients as we believe they reduced their budgets for capital expenditure investments and delayed the timing of capital projects. Software sales declined year to year due to a higher mix of software maintenance sales to public sector clients, which are recorded on a net basis in our financial statements.

Net sales in EMEA remained relatively flat at $1.5 billion, in U.S. dollars, for the year ended December 31, 2013 compared to the year ended December 31, 2012. Excluding the effects of foreign currency movements, net sales were down 1% compared to the prior year. Net sales of software and services were up 4% and 23%, respectively, year over year, while net sales of hardware declined 7% year to year. Excluding the effects of foreign currency movements, software and services increased 2% and 22%, respectively, while hardware decreased 6%, compared to the year ended December 31, 2012. The decline in hardware sales was attributable to reduced volume across all client groups. The increase in software sales was due to higher volume with large enterprise and mid-market clients, which more than offset lower volume with our existing public sector clients. The increase in net sales of services was due primarily to new client engagements and higher volume with existing clients.

Net sales in APAC decreased $7.1 million or 3% for the year ended December 31, 2013 compared to the year ended December 31, 2012. Excluding the effects of foreign currency movements, net sales increased 2% compared to the prior year due to higher volume with new and existing clients.

Net sales by category for North America, EMEA and APAC were as follows for the years ended December 31, 2013 and 2012:

North America EMEA APAC Sales Mix 2013 2012 2013 2012 2013 2012 Hardware 61 % 62 % 34 % 37 % 3 % 2 % Software 33 % 32 % 64 % 61 % 94 % 94 % Services 6 % 6 % 2 % 2 % 3 % 4 % 100 % 100 % 100 % 100 % 100 % 100 %



Gross Profit. Gross profit decreased 3% to $698.9 million for the year ended December 31, 2013 compared to the year ended December 31, 2012, with gross margin remaining flat at 13.6% of net sales. Our gross profit and gross profit as a percent of net sales by operating segment for the years ended December 31, 2013 and 2012 were as follows (dollars in thousands):

% of Net % of Net 2013 Sales 2012 Sales North America $ 472,187 13.6 % $ 478,522 13.2 % EMEA 191,324 13.0 % 203,845 13.9 % APAC 35,376 17.3 % 37,309 17.6 % Consolidated $ 698,887 13.6 % $ 719,676 13.6 %



North America's gross profit for the year ended December 31, 2013 decreased 1% compared to the year ended December 31, 2012, but as a percentage of net sales, gross margin increased by approximately 40 basis points year over year, due primarily to an 18 basis points increase in margin from sales of higher margin services and a 17 basis point increase in product margin, which includes partner funding and freight, driven primarily by strong execution under partner incentive programs, most notably in the hardware category.

EMEA's gross profit decreased 6% in U.S. dollars for the year ended December 31, 2013 compared to the year ended December 31, 2012. Excluding the effects of foreign currency movements, gross profit was down 7% compared to the prior year. As a percentage of net sales, gross margin decreased by approximately 90 basis points year to year due primarily to an 84 basis point decline in product margin, which includes partner funding and freight, primarily driven by the hardware category. The decline in hardware margin was primarily attributable to a higher mix of lower margin hardware products and a reduction in partner funding due to decreased volume and partner program changes during 2013.

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APAC's gross profit decreased 5% for the year ended December 31, 2013 compared to the year ended December 31, 2012. Excluding the effects of foreign currency movements, gross profit increased 1% compared to the prior year. As a percentage of net sales, gross margin decreased by approximately 30 basis points, due primarily to a 29 basis point decrease in margin contributed by agency fees from enterprise software agreements.

Operating Expenses.

Selling and Administrative Expenses. Selling and administrative expenses decreased $296,000 or less than 1%, for the year ended December 31, 2013 compared to the year ended December 31, 2012. Selling and administrative expenses increased 30 basis points as a percentage of net sales for the year ended December 31, 2013 compared to the year ended December 31, 2012. Selling and administrative expenses as a percent of net sales by operating segment for the years ended December 31, 2013 and 2012 were as follows (dollars in thousands):

% of Net % of Net 2013 Sales 2012 Sales North America $ 362,380 10.4 % $ 359,634 9.9 % EMEA 178,012 12.1 % 179,979 12.3 % APAC 24,518 12.0 % 25,593 12.1 % Consolidated $ 564,910 11.0 % $ 565,206 10.7 %



North America's selling and administrative expenses increased 1%, or $2.7 million, for the year ended December 31, 2013 compared to the year ended December 31, 2012, and, as a percentage of net sales, selling and administrative expenses increased approximately 50 basis points to 10.4% of net sales for the year ended December 31, 2013. Selling and administrative expenses increased primarily because:

Salaries and wages and contract labor increased approximately $4.3 million due to investments in sales and services resources; and Professional fees increased approximately $2.9 million, due primarily to the effect on the year over year comparison of a prior year reduction in legal expenses of $2.0 million associated with the recovery during the year ended December 31, 2012 of legal fees incurred in previous periods (see further discussion under "Legal Proceedings" in Note 16 to the Consolidated Financial Statements in Part II, Item 8 of this report). The year over year comparison was also affected by a gain of $1.2 million on the sale of a portfolio of non-core service contracts during the prior year.



These increases in selling and administrative expenses were offset partially by:

A decrease in variable compensation of approximately $2.8 million and reduced stock-based compensation of approximately $1.1 million based on current year financial results; and Reduced marketing expenses of approximately $1.6 million as we controlled costs through our continued focus on discretionary spending.



EMEA's selling and administrative expenses decreased 1%, or $2.0 million, for the year ended December 31, 2013 compared to the year ended December 31, 2012, and, as a percentage of net sales, selling and administrative expenses decreased approximately 20 basis points to 12.1% of net sales for the year ended December 31, 2013. Excluding the effects of foreign currency movements, selling and administrative expenses decreased 2% compared to the prior year. The decrease in selling and administrative expenses is primarily attributable to a decrease in salaries and wages and contract labor of approximately $3.5 million due to restructuring actions taken during the year, as more fully described below. The year to year decrease in salaries and wages was offset partially by a $1.3 million increase in the provision for losses on accounts receivable due to higher write-offs in 2013, none of which were individually material.

APAC's selling and administrative expenses decreased 4%, or $1.1 million, for the year ended December 31, 2013 compared to the year ended December 31, 2012, and, as a percentage of net sales, selling and administrative expenses decreased approximately 10 basis points to 12.0% of net sales for the year ended December 31, 2013. Excluding the effects of foreign currency movements, selling and administrative expenses increased 1% compared to the prior year. The year over year increase is primarily due to higher salaries and wages from investments in headcount, mostly offset by lower variable compensation based on current year financial results.

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Severance and Restructuring Expenses. During the year ended December 31, 2013, North America and EMEA recorded severance expense, net of adjustments, totaling $3.3 million and $9.4 million, respectively, related to a continued review of resource needs in North America and significant restructuring activities in EMEA, primarily in the United Kingdom and Germany, as we worked to rationalize our selling and administrative expenses in EMEA. In North America and EMEA, $3.4 million and $9.6 million, respectively, in new severance costs were offset by $104,000 and $188,000, respectively, of adjustments to prior severance accruals due to changes in estimates during 2013. During the year ended December 31, 2012, North America and EMEA recorded severance expense, net of adjustments, of $2.8 million and $3.5 million, respectively. See Note 8 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of severance and restructuring activities.

Non-Operating (Income) Expense.

Interest Income. Interest income for the years ended December 31, 2013 and 2012 was generated through short-term investments. The decrease in interest income year to year is primarily due to lower average invested cash balances during the year ended December 31, 2013.

Interest Expense. Interest expense primarily relates to borrowings under our financing facilities, our capital lease obligation and imputed interest under our inventory financing facility. Interest expense increased 4% for the year ended December 31, 2013 compared to the year ended December 30, 2012 due primarily to higher imputed interest year to year. Imputed interest under our inventory financing facility was $2.5 million for the year ended December 31, 2013, compared to $1.8 million for the year ended December 31, 2012. The increase was due to higher outstanding balances and increases in our average incremental borrowing rate used to compute the imputed interest amounts.

Gain on Bargain Purchase. Our EMEA operating segment reported a non-operating gain on bargain purchase of $2.0 million in 2012, as the fair value of the Inmac net assets we acquired exceeded the purchase price.

Net Foreign Currency Exchange Gains/Losses. These gains/losses result from foreign currency transactions, including foreign currency derivative contracts and intercompany balances that are not considered long-term in nature. The change in net foreign currency exchange gains/losses is due primarily to the underlying changes in the applicable exchange rates, mitigated by our use of foreign exchange forward contracts to hedge certain non-functional currency assets and liabilities against changes in exchange rate movements.

Other Expense, Net. Other expense, net, consists primarily of bank fees associated with our cash management activities.

Income Tax Expense. Our effective tax rate for the year ended December 31, 2013 was 38.0% compared to 35.9% for the year ended December 31, 2012. The effective tax rate in 2013 was higher than the federal statutory rate of 35.0% primarily due to higher losses in certain foreign jurisdictions resulting in an increase in the valuation allowance for deferred tax assets related to these foreign operating losses and to state taxes in the U.S. These increases in our effective tax rate for 2013 were offset partially by lower taxes on earnings in foreign jurisdictions and the recognition of certain tax benefits related to the re-measurement or settlement of specific uncertain tax positions during 2013. The effective tax rate in 2012 was slightly higher than the federal statutory rate of 35.0% primarily due to state taxes in the U.S. and to increases in the liability associated with unrecognized tax benefits, partially offset by lower taxes on earnings in foreign jurisdictions. See Note 10 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of income tax expense.

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2012 Compared to 2011

Net Sales. Net sales for the year ended December 31, 2012 remained flat at $5.3 billion compared to the year ended December 31, 2011. Our net sales by operating segment for the years ended December 31, 2012 and 2011 were as follows (dollars in thousands): 2012 2011 % Change North America $ 3,626,357$ 3,672,492 (1 %) EMEA 1,463,607 1,398,421 5 % APAC 211,477 216,315 (2 %) Consolidated $ 5,301,441$ 5,287,228 -



Net sales in North America decreased $46.1 million or 1% for the year ended December 31, 2012 compared to the year ended December 31, 2011. Net sales of software increased 7% year over year, while net sales of hardware and services decreased 4% and 13%, respectively, year to year. The software growth was primarily driven by new client wins and stable demand for business productivity software across the large, mid-market and public sector client groups. Our public sector business in particular saw strong growth in 2012 in this category, gaining market share in the federal and state and local markets with new client wins. Hardware sales in the mid-market increased in 2012 compared to 2011, but we experienced a decline in 2012 in purchases by our large enterprise clients as we believe they rationalized investment dollars and the timing of projects. Hardware and services sales comparisons also reflect large client deployments in 2010 that concluded in the second half of 2011 and were not completely replaced in 2012 by new client engagements.

Net sales in EMEA increased $65.2 million or 5%, in U.S. dollars, for the year ended December 31, 2012 compared to the year ended December 31, 2011. Excluding the effects of foreign currency movements, net sales were up 10% compared to the prior year. Net sales of hardware and services were up 23% and 17%, respectively, year over year, while net sales of software declined 4% year to year. Excluding the effects of foreign currency movements, hardware, software and services increased 25%, 2% and 23%, respectively, compared to the year ended December 31, 2011. The growth in hardware was attributable to the acquisition of Inmac in February 2012, which contributed $102.3 million in net sales during the year ended December 31, 2012, and low single digit organic growth. The increase in software sales was due to higher sales of business productivity software products. The increase in net sales of services was due primarily to higher volume and new client engagements.

Net sales in APAC decreased $4.8 million or 2% for the year ended December 31, 2012 compared to the year ended December 31, 2011. The decrease primarily resulted from a higher mix of public sector software sales that were reported on a net basis. Excluding the effects of foreign currency movements, net sales also decreased 2% compared to the prior year.

Net sales by category for North America, EMEA and APAC were as follows for the years ended December 31, 2012 and 2011:

North America EMEA APAC Sales Mix 2012 2011 2012 2011 2012 2011 Hardware 62 % 64 % 37 % 31 % 2 % 1 % Software 32 % 30 % 61 % 67 % 94 % 96 % Services 6 % 6 % 2 % 2 % 4 % 3 % 100 % 100 % 100 % 100 % 100 % 100 % 32



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Gross Profit. Gross profit increased 1% to $719.7 million for the year ended December 31, 2012 compared to the year ended December 31, 2011, with gross margin increasing to 13.6% year over year. Our gross profit and gross profit as a percent of net sales by operating segment for the years ended December 31, 2012 and 2011 were as follows (dollars in thousands):

% of Net % of Net 2012 Sales 2011 Sales North America $ 478,522 13.2 % $ 476,776 13.0 % EMEA 203,845 13.9 % 198,073 14.2 % APAC 37,309 17.6 % 34,308 15.9 % Consolidated $ 719,676 13.6 % $ 709,157 13.4 %



North America's gross profit for the year ended December 31, 2012 remained relatively flat compared to the year ended December 31, 2011, but as a percentage of net sales, gross margin increased by approximately 20 basis points year over year, due primarily to an increase in margin of 11 basis points related to agency fees for enterprise software agreements and an increase in margin of 10 basis points due to improved inventory management resulting in a decrease in the write-downs of inventories year to year.

EMEA's gross profit increased 3% in U.S. dollars for the year ended December 31, 2012 compared to the year ended December 31, 2011. Excluding the effects of foreign currency movements, gross profit was up 8% compared to the prior year. As a percentage of net sales, gross margin decreased by approximately 30 basis points year to year due primarily to a 41 basis point decline in margin from agency fees for enterprise software agreements and a 6 basis point decline in margin from services sales. The decrease in agency fees was due to program changes from our largest software partner that became effective in the fourth quarter of 2011 and were only partially offset by net new agreements and higher renewals during 2012. These decreases in gross margin were offset partially by a 22 basis point increase in product margin, which includes partner funding and freight, primarily driven by higher margin hardware sales associated with the acquisition of Inmac in February 2012.

APAC's gross profit increased 9% for the year ended December 31, 2012 compared to the year ended December 31, 2011. As a percentage of net sales, gross margin increased by approximately 170 basis points, due primarily to higher partner funding and a higher mix of netted software sales, partially offset by a decrease in services margins and a decrease in agency fees from enterprise software agreements. Excluding the effects of foreign currency movements, gross profit also increased 9% compared to the prior year.

Operating Expenses.

Selling and Administrative Expenses. Selling and administrative expenses increased $8.5 million or 2% for the year ended December 31, 2012 compared to the year ended December 31, 2011. Selling and administrative expenses increased 20 basis points as a percentage of net sales for the year ended December 31, 2012 compared to the year ended December 31, 2011. Selling and administrative expenses as a percent of net sales by operating segment for the years ended December 31, 2012 and 2011 were as follows (dollars in thousands):

% of Net % of Net 2012 Sales 2011 Sales North America $ 359,634 9.9 % $ 366,811 10.0 % EMEA 179,979 12.3 % 165,262 11.8 % APAC 25,593 12.1 % 24,616 11.4 % Consolidated $ 565,206 10.7 % $ 556,689 10.5 %



North America's selling and administrative expenses decreased 2%, or $7.2 million, for the year ended December 31, 2012 compared to the year ended December 31, 2011, and as a percentage of net sales, selling and administrative expenses decreased approximately 10 basis points to 9.9% of net sales for the year ended December 31, 2012. During the year ended December 31, 2012, we continued our focus on control of selling and administrative expenses and also recognized a $2.0 million reduction in legal expenses associated with the recovery of legal fees incurred in previous periods (see further discussion under "Legal Proceedings" in Note 16 to the Consolidated Financial Statements in Part II, Item 8 of this report) and a gain of $1.2 million on the sale of a portfolio of non-core service contracts during the year ended December 31, 2012.

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EMEA's selling and administrative expenses increased 9%, or $14.7 million, for the year ended December 31, 2012 compared to the year ended December 31, 2011, and, as a percentage of net sales, selling and administrative expenses increased 50 basis points to 12.3% of net sales for the year ended December 31, 2012. Excluding the effects of foreign currency movements, selling and administrative expenses increased 14% compared to the prior year. The year over year increase in selling and administrative expenses is attributable to increases in salaries and benefits due to investments in headcount to support the roll-out of our hardware sales capability in the Netherlands and France and the acquisition of Inmac in February 2012.

APAC's selling and administrative expenses increased 4%, or $977,000, for the year ended December 31, 2012 compared to the year ended December 31, 2011 and as a percentage of net sales, selling and administrative expenses increased 70 basis points to 12.1% of net sales for the year ended December 31, 2012. Excluding the effects of foreign currency movements, selling and administrative expenses also increased 4% compared to the prior year. The year over year increase in selling and administrative expenses is primarily driven by increases in salaries and benefits due to investments in headcount associated with specialty sales and professional services positions.

Severance and Restructuring Expenses. During the year ended December 31, 2012, North America and EMEA recorded severance expense, net of adjustments, totaling $2.8 million and $3.5 million, respectively, related to restructuring activities. These charges were associated with severance costs for the elimination of certain positions based on a re-alignment of roles and responsibilities. In North America and EMEA, $3.0 million and $4.0 million, respectively, in new severance costs were offset by $188,000 and $490,000, respectively, of adjustments to prior severance accruals due to changes in estimates during 2012. During the year ended December 31, 2011, North America and EMEA recorded severance expense of $2.4 million and $2.7 million, respectively. See Note 8 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of severance and restructuring activities.

Non-Operating (Income) Expense.

Interest Income. Interest income for the years ended December 31, 2012 and 2011 was generated through short-term investments. The decrease in interest income year over year is primarily due to lower interest rates.

Interest Expense.Interest expense primarily relates to borrowings under our financing facilities and our capital lease obligation and imputed interest under our inventory financing facility. Interest expense declined 12% for the year ended December 31, 2012 compared to the year ended December 30, 2011 due primarily to lower average borrowing rates and lower average daily debt balances year to year. Imputed interest under our inventory financing facility was $1.8 million for the year ended December 31, 2012, compared to $2.0 million for the year ended December 31, 2011. The decrease was due to lower average balances outstanding under the facility during 2012 compared to 2011.

Gain on Bargain Purchase. Our EMEA operating segment reported a non-operating gain on bargain purchase of $2.0 million in 2012 as the fair value of the Inmac net assets we acquired exceeded the purchase price.

Net Foreign Currency Exchange Gains/Losses. These gains/losses result from foreign currency transactions, including foreign currency derivative contracts and intercompany balances that are not considered long-term in nature. The change in net foreign currency exchange gains/losses is due primarily to the underlying changes in the applicable exchange rates, mitigated by our use of foreign exchange forward contracts to hedge certain non-functional currency assets and liabilities against changes in exchange rate movements.

Other Expense, Net. Other expense, net, consists primarily of bank fees associated with our cash management activities.

Income Tax Expense. Our effective tax rate for the year ended December 31, 2012 was 35.9% compared to 29.3% for the year ended December 31, 2011. The effective tax rate in 2012 was slightly higher than the federal statutory rate of 35.0% primarily due to state taxes in the U.S. and to increases in the liability associated with unrecognized tax benefits, partially offset by lower taxes on earnings in foreign jurisdictions. The effective tax rate in 2011 was less than the federal statutory rate of 35.0% primarily due to the reorganization of certain of our foreign operations during the fourth quarter that resulted in the recognition of foreign tax credits. See Note 10 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of income tax expense.

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The following table sets forth for the periods presented certain consolidated cash flow information for the years ended December 31, 2013, 2012 and 2011 (in thousands):

2013 2012 2011 Net cash provided by operating activities $ 76,066$ 67,442$ 115,725 Net cash used in investing activities (19,024 ) (33,983 ) (40,862 ) Net cash used in financing activities (75,711 ) (14,575 ) (68,027 ) Foreign currency exchange effect on cash balances (6,633 ) 4,899 (2,263 ) (Decrease) increase in cash and cash equivalents (25,302 ) 23,783 4,573



Cash and cash equivalents at beginning of year 152,119 128,336 123,763

Cash and cash equivalents at end of year $ 126,817$ 152,119$ 128,336



Cash and Cash Flow

Our primary uses of cash during 2013 were to fund working capital requirements, to repurchase shares of our common stock and to fund capital expenditures. Operating activities provided $76.1 million in cash for the year ended December 31, 2013, a 13% increase from the year ended December 31, 2012. We had net combined repayments on our long-term debt facilities of $13.5 million during 2013. Capital expenditures were $19.0 million in 2013, a 37% decrease from 2012, as our larger IT system upgrade projects were completed during 2013. Cash balances in 2013 were negatively affected by $6.6 million as a result of foreign currency exchange rates, compared to a positive effect of $4.9 million in 2012.

Net cash provided by operating activities.Cash flows from operating activities for the year ended December 31, 2013 reflect our net earnings, adjusted for non-cash items such as depreciation, amortization, stock-based compensation expense and write-offs and write-downs of assets, as well as changes in accounts receivable, other current assets and accounts payable. In 2013, the decreases in accounts receivable and accounts payable reflect the effect of a single significant sale transacted with a public sector client late in December 2012. The increase in other current assets in 2013 was primarily a result of our deferral of costs for certain payments made or payable to partners at December 31, 2013, in advance of our being able to recognize the related revenue.

Cash flows from operating activities for the year ended December 31, 2012 reflect our net earnings, adjusted for non-cash items such as depreciation, amortization, stock-based compensation expense, gain on bargain purchase and write-offs and write-downs of assets, as well as changes in accounts receivable, inventories, accounts payable, deferred revenue and accrued expenses and other liabilities. In 2012, the increases in accounts receivable and accounts payable also reflect the effect of the single significant sale transacted with a public sector client late in December 2012 (discussed above). The decrease in inventories in 2012 was primarily a result of inventory management initiatives undertaken in our North America segment, and the decrease in accrued expenses and other liabilities in 2012 was primarily due to the relative timing of VAT and sales tax payments year over year.

Cash flows from operating activities for the year ended December 31, 2011 reflect our net earnings, adjusted for non-cash items such as depreciation, amortization, stock-based compensation expense and write-offs and write-downs of assets, as well as changes in accounts receivable, other current assets, other assets, accounts payable and deferred revenue. In 2011, the increases in accounts receivable and accounts payable reflect increased sales and associated costs of goods sold, respectively, in 2011 compared to 2010. The decreases in other current assets and deferred revenue in 2011 were primarily due to a large project for which we deferred revenue recognition and the related costs as of December 31, 2010 until we received client acceptance during 2011 of the work performed. The increase in other assets in 2011 was primarily due to an increase in multi-year contracts resulting in increased long-term accounts receivable and deferred costs compared to the prior year.

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Our consolidated cash flow operating metrics for the quarters ended December 31, 2013, 2012 and 2011 are as follows:

2013 2012 2011



Days sales outstanding in ending accounts receivable ("DSOs")(a)

83 94 82



Days inventory outstanding (excluding inventories not available for sale) (b)

8 8 9



Days purchases outstanding in ending accounts payable ("DPOs")(c)

(64 ) (78 ) (69 ) Cash conversion cycle (days) (d) 27 24 22



(a) Calculated as the balance of accounts receivable, net at the end of the

period divided by daily net sales. Daily net sales is calculated as net sales

for the quarter divided by 92 days.

(b) Calculated as average inventories divided by daily costs of goods sold.

Average inventories is calculated as the sum of the balances of inventories at the beginning of the period plus inventories at the end of the period divided by two. Daily costs of goods sold is calculated as costs of goods sold for the quarter divided by 92 days.



(c) Calculated as the balances of accounts payable, which includes the inventory

financing facility, at the end of the period divided by daily costs of goods sold. Daily costs of goods sold is calculated as costs of goods sold for the quarter divided by 92 days.



(d) Calculated as DSOs plus days inventory outstanding, less DPOs.

Our cash conversion cycle was 27 days in the fourth quarter ended December 31, 2013, up three days from the fourth quarter of 2012, due primarily to lower DPOs in North America driven by the timing of payments to suppliers during the quarter ended December 31, 2013. The year to year decreases in both DSOs and DPOs reflect the effect of a single significant sale transacted with a public sector client late in December 2012.

Our cash conversion cycle was 24 days in the fourth quarter ended December 31, 2012, up two days from the fourth quarter of 2011, due primarily to higher accounts receivable in North America, despite lower sales recorded during the fourth quarter of 2012 compared to the fourth quarter of 2011. The year over year increases (2012 vs. 2011) in both DSOs and DPOs also reflect the effect of the single significant sale transacted with a public sector client late in December 2012 (discussed above).

Our cash conversion cycle was 22 days in the fourth quarter ended December 31, 2011, up four days from the fourth quarter of 2010 due to increases in DSO period to period, primarily in our foreign operations, and due to a higher mix of transactions booked late in the 2011 fourth quarter.

We expect that cash flow from operations will be used, at least partially, to fund working capital as we typically pay our partners on average terms that are shorter than the average terms granted to our clients in order to take advantage of supplier discounts. We intend to use cash generated in 2014 in excess of working capital needs to pay down our outstanding debt balances, repurchase shares of our common stock and support our capital expenditures for the year. We also may use cash to fund potential small acquisitions to add select capabilities.

Net cash used in investing activities. Capital expenditures of $19.0 million, $30.2 million and $27.1 million for the years ended December 31, 2013, 2012 and 2011, respectively, were primarily related to investments in our IT systems. We expect total capital expenditures in 2014 to be between $15.0 million and $20.0 million, primarily for our IT systems upgrade projects and other facility and technology related upgrade projects.

During the year ended December 31, 2012, we acquired Inmac for $3.8 million, net of cash acquired. During the year ended December 31, 2011, we acquired Ensynch for $13.8 million, net of cash acquired.

Net cash used in financing activities. During the year ended December 31, 2013, we had net combined repayments on our revolving credit facility and our accounts receivable securitization facility of $13.5 million and had net repayments under our inventory financing facility, which is included in accounts payable, of $1.6 million. In 2013, we also funded $57.8 million of repurchases of our common stock. During the year ended December 31, 2012, we had net combined repayments on our revolving credit facility and our accounts receivable securitization facility of $35.0 million and had net borrowings under our inventory financing facility, which is included in accounts payable, of $22.9 million. During the year ended December 31, 2011, we had net borrowings under our revolving credit facility of $25.0 million and made net repayments under our inventory financing facility, which is included in accounts payable, of $41.2 million. In 2011, we also funded $50.0 million of repurchases of our common stock.

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As of December 31, 2013, our long-term debt balance consisted of $16.5 million outstanding under our $350.0 million senior revolving credit facility ("revolving facility") and $50.0 million outstanding under our $200.0 million accounts receivable securitization financing facility ("ABS facility"). As of December 31, 2013, the current portion of our long-term debt relates solely to our capital lease obligation. Our objective is to pay our debt balances down while retaining adequate cash balances to meet overall business objectives.

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, 2013, qualified receivables were sufficient to permit access to the full $200.0 million, of which $50.0 million was outstanding at December 31, 2013.

Our consolidated debt balance that can be outstanding at the end of any fiscal quarter under our revolving facility and our ABS facility is limited by certain financial covenants, particularly a maximum leverage ratio. The maximum leverage ratio is calculated as aggregate debt outstanding divided by the sum of the Company's 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 and (iv) non-cash stock-based compensation ("adjusted earnings"). The maximum leverage ratio permitted under the agreements is 2.75 times trailing twelve-month adjusted earnings. We anticipate that we will be in compliance with our maximum leverage ratio requirements over the next four quarters. However, a significant drop in the Company's adjusted earnings would limit the amount of indebtedness that could be outstanding at the end of any fiscal quarter to a level that would be below the Company's consolidated maximum facility amounts. Based on the maximum permitted leverage ratio as of December 31, 2013, the Company's debt balance that could have been outstanding under our revolving facility and our ABS facility was reduced from the maximum borrowing capacity of $550.0 million to $457.6 million, of which $66.5 million was outstanding at December 31, 2013.


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