Insight Enterprises, Inc. — Fiscal 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018; fourth-quarter information is included where relevant. Insight is a global provider of IT hardware, software, cloud, data-center, digital innovation and related services across North America, EMEA and APAC. Revenue mix was approximately 76% North America, 21% EMEA and 3% APAC.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $7.080 billion | $6.704 billion | +6% |
| Gross profit | $993.7 million | $918.6 million | +8% |
| Gross margin | 14.0% | 13.7% | +30 bps |
| Earnings from operations | $233.5 million | $179.3 million | +30% |
| Operating margin | 3.3% | 2.7% | +60 bps |
| Net earnings | $163.7 million | $90.7 million | +80% |
| Diluted EPS | $4.55 | $2.50 | +82% |
| Cash flow from operations | $292.6 million | $(307.1) million | Improved materially |
| Capital expenditures | $17.3 million | $19.2 million | $(1.9) million |
- Product revenue increased 3%, while services revenue increased 25% to $830.2 million. Consolidated 2018 sales mix was approximately 61% hardware, 27% software and 12% services, compared with 58%, 32% and 10%, respectively, in 2017.
- Segment revenue increased 3% in North America, 13% in EMEA and 12% in APAC. North American software revenue declined 15%, partly reflecting public-sector timing, migration to cloud offerings and Topic 606 presentation changes.
- Cash and cash equivalents were $142.7 million at year-end, and total cash, cash equivalents and restricted cash were $144.3 million.
- Reported debt was $196.9 million, including $194.0 million under the accounts receivable securitization facility and $2.9 million of capital leases and other financing obligations. The company had no revolving-facility or Term Loan A balance at year-end.
- Separately, accounts payable under the inventory financing facility totaled $304.1 million. The company excludes this amount from reported debt because it historically has not incurred, and does not expect to incur, interest when paid within stated vendor terms.
- Working capital was $801.9 million and stockholders’ equity was $987.0 million at December 31, 2018. The fourth-quarter cash conversion cycle was 33 days, compared with 35 days in the prior-year quarter.
Material changes versus the prior comparable period
- Operating improvement reflected higher services revenue, improved product and services mix, expense control and approximately 30 basis points of consolidated gross-margin expansion.
- The effective tax rate declined to 22.8% from 43.0%, primarily because of the reduction in the U.S. federal statutory rate and other effects of the Tax Cuts and Jobs Act. This materially amplified net earnings growth.
- Insight acquired Cardinal Solutions Group on August 1, 2018 for approximately $78.8 million net of cash acquired, adding digital innovation, mobile, Internet-of-Things and cloud-enabled business-intelligence capabilities. The acquisition generated approximately $36.4 million of goodwill.
- Cash flow benefited from improved receivables collection, lower inventory investment and expense control. The 2017 operating cash flow was unusually weak because of a roughly $160 million supplier payment made in January 2017 and other working-capital timing effects.
- Insight repurchased approximately 641,000 shares for $22.1 million during 2018. No cash dividend was declared or paid, and management does not currently intend to pay dividends in the foreseeable future.
- Severance and restructuring expense declined to $3.4 million from $9.0 million; 2018 charges related mainly to North American role realignment and EMEA headcount reductions.
Accounting, unusual items and quarterly matters
- Insight adopted ASC Topic 606 using the modified retrospective method on January 1, 2018. The adoption produced a $7.2 million increase to opening retained earnings and changed the timing and gross-versus-net presentation of certain revenues, including bill-and-hold transactions, software renewals and certain security software arrangements.
- For 2018, Topic 606 reduced reported net earnings by approximately $2.1 million, or $0.06 diluted EPS, versus the company’s pre-Topic 606 presentation, while having no effect on operating, investing or financing cash flow.
- 2018 included $282,000 of acquisition-related costs, $3.4 million of severance and restructuring expense, and approximately $624,000 of debt-extinguishment expense associated with repayment of the Term Loan A.
- The company revised previously issued first- and second-quarter 2018 information for immaterial software-revenue presentation errors. The revisions increased first-half gross profit, operating earnings and net earnings by $258,000 and did not affect prior-year audited financial statements.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of December 31, 2018.
Guidance, outlook and risks
- Management expects operating cash flow and available financing to meet operating, working-capital, capital-expenditure, debt-repayment and share-repurchase needs for at least the next 12 months.
- 2019 capital expenditures were expected to be approximately $20 million to $25 million, primarily for technology upgrades and acquisition integration.
- Management planned to use excess 2019 cash flow for capital expenditures, share repurchases, debt reduction and potentially acquisitions.
- The company expects to adopt the new lease standard on January 1, 2019 and estimated that it would add approximately $70 million to $80 million each of right-of-use assets and lease liabilities, without a material effect on earnings, cash flow or liquidity.
- Key risks include intense pricing competition and structurally low margins; dependence on Microsoft and other partners for supply, rebates and incentives; rapid migration toward cloud and as-a-service models; acquisition integration; international operations, currency and Brexit exposure; cybersecurity and IT-system disruptions; customer credit and public-sector spending; variable interest rates; tax audits and uncertain tax positions; contractual, legal and intellectual-property claims; and inventory obsolescence.
- Microsoft represented approximately 26% of 2018 purchases; the top five partners represented approximately 60% of purchases. Microsoft, Dell and Cisco products represented approximately 18%, 11% and 11% of consolidated sales, respectively.
Most important facts for investors to verify
- Assess how much of earnings growth was attributable to the lower tax rate versus sustainable operating performance.
- Monitor services growth, cloud-related revenue recognition and the effect of Topic 606 on revenue comparability and gross margins.
- Reconcile reported debt with the separate $304.1 million inventory-financing payable and review covenant capacity, receivables quality and floating-rate exposure.
- Evaluate Cardinal’s contribution, integration progress and the recoverability of goodwill and acquired intangible assets.
- Track accounts receivable growth, days sales outstanding of 102 days, cash conversion and the sustainability of the $292.6 million operating cash flow.
- Review partner-funding trends, especially programs involving Microsoft, Dell, Cisco, HP and Lenovo, because changes can materially affect gross profit.
- Consider the impact of the 2019 lease-standard adoption, tax audits, unrecognized tax benefits of approximately $6.8 million and other contractual, legal and indemnification contingencies.