Insight Enterprises, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Insight Enterprises is a worldwide technology provider serving business and government clients through North America, EMEA and APAC. The filing covers the three and six months ended June 30, 2015, compared with the same periods in 2014. Results are unaudited and subject to seasonal fluctuations, with sales and profitability generally higher in the second and fourth quarters.
Financial Highlights
| Metric | Q2 2015 | Q2 2014 | 6M 2015 | 6M 2014 |
|---|---|---|---|---|
| Net sales | $1,424.0 million | $1,417.9 million | $2,643.7 million | $2,632.4 million |
| Gross profit | $191.4 million | $194.6 million | $353.2 million | $358.3 million |
| Gross margin | 13.4% | 13.7% | 13.4% | 13.6% |
| Earnings from operations | $43.0 million | $46.5 million | $63.3 million | $67.5 million |
| Net earnings | $25.5 million | $27.2 million | $36.5 million | $38.8 million |
| Diluted EPS | $0.67 | $0.66 | $0.93 | $0.93 |
| Effective tax rate | 38.1% | 38.6% | 38.2% | 38.8% |
Six-month operating cash flow was $96.3 million versus $103.7 million in the prior-year period. Capital expenditures were $6.6 million versus $5.3 million. Cash and cash equivalents increased to $175.5 million at June 30, 2015, from $164.5 million at December 31, 2014, after an $8.8 million negative foreign-currency translation effect.
At June 30, 2015, total debt was $52.7 million, consisting primarily of $16.5 million outstanding under the senior revolving facility and $34.0 million under the accounts receivable securitization facility. Inventory-financing accounts payable were $151.0 million. The company was in compliance with its debt covenants, and no ABS amortization event had occurred. Qualified receivables supported access to the full $200.0 million ABS facility, while the revolving facility had a $350.0 million maximum capacity.
Accounts receivable increased to $1.459 billion and inventories to $170.3 million from December 31, 2014, reflecting seasonal and growth-related working-capital needs. The second-quarter cash conversion cycle improved to 14 days from 21 days, although days sales outstanding increased to 93 from 85 and days inventory outstanding increased to 11 from 9.
Material Changes Versus the Prior Comparable Period
- Reported consolidated sales increased less than 1% in both the quarter and first half, but increased 7% and 6%, respectively, excluding currency effects.
- North America sales increased 10% in Q2 and 8% in the first half, while EMEA sales declined 15% and 12% and APAC sales declined 21% and 16%, respectively, in reported U.S. dollars.
- Gross profit declined 2% in Q2 and 1% in the first half. North American gross margin declined to 13.1% from 14.1% in Q2, primarily due to hardware margin compression and lower enterprise-software partner fees. EMEA margin improved to 13.9% from 12.6%.
- Operating earnings declined 7% in Q2 and 6% in the first half. Selling and administrative expenses were essentially flat in reported dollars, but increased 6% in Q2 and 5% in the first half excluding currency effects because of investments in sales, technical and services personnel.
- The 2014 comparison included a $5.2 million non-cash charge related to the Bloomingdale, Illinois property; no comparable charge was recorded in 2015.
- The company repurchased 3.1 million shares for approximately $86.0 million during the first six months, compared with $29.7 million for 1.3 million shares in the prior-year period. The remaining $5.9 million authorization was used in early July 2015. Shares were retired.
- Shares outstanding declined to 37.3 million at June 30, 2015 from 40.1 million at December 31, 2014, supporting EPS despite lower earnings.
Guidance, Outlook, Risks and Unusual Items
- Management expected the adverse effect of changes to its largest software partner’s channel incentive program to reduce 2015 software gross profit by approximately $5 million to $10 million.
- Full-year 2015 capital expenditures were expected to range from $10 million to $15 million, primarily for technology and facility upgrades.
- Management intended to use excess 2015 operating cash flow for capital expenditures and debt reduction and might fund potential acquisitions. It expected operating cash flow and available financing facilities to support requirements for at least the next 12 months.
- The company anticipated compliance with its maximum leverage ratio over the next four quarters. A material decline in adjusted earnings could reduce permitted borrowing capacity.
- Approximately $144.9 million of cash was held by foreign subsidiaries whose undistributed earnings were considered indefinitely reinvested; management did not currently intend to repatriate those earnings.
- Key risks include reliance on technology partners, partner funding and incentives; rapid technology and industry changes; competitive pressure; contract compliance; IT and cybersecurity disruptions; economic conditions; international operations and foreign exchange; tax matters; personnel dependence; variable sales and gross profit; and intellectual-property claims.
- Tax authorities were auditing certain subsidiaries for tax years 2006 through 2013. Unrecognized tax benefits were approximately $4.5 million, but management did not expect the eventual effect on earnings to be significant.
- The company reported ordinary-course legal proceedings and indemnification obligations but no pending or threatened proceeding expected to have a material adverse effect. Potential litigation outcomes remain inherently uncertain.
- ASU 2014-09 on revenue recognition could be adopted in 2017 or 2018; the company had not selected its transition method or determined the effect on its financial statements.
Important Facts for Investors to Verify
- Whether North American margin compression and the software-partner incentive changes continue to affect gross profit.
- Whether currency movements continue to obscure underlying growth in EMEA and APAC.
- The sustainability and cash-flow impact of large share repurchases and the company’s plan to reduce debt.
- Accounts-receivable collections, inventory levels and supplier-financing usage as sales growth continues.
- Compliance with leverage, fixed-charge and asset-coverage covenants, including the effect of any earnings decline on borrowing capacity.
- The ultimate outcome of tax audits, legal proceedings, indemnification claims and foreign-currency exposures.
- The company’s selected adoption method and financial impact for the new revenue-recognition standard.