Insight Enterprises, Inc. — Form 10-Q Summary
Business context and reporting period
Insight Enterprises is a global provider of IT hardware, software, cloud, data-center transformation, connected-workforce, digital innovation and supply-chain optimization solutions. The company reports three geographic segments: North America, EMEA and APAC. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the same periods in 2019. Results include PCM from its August 30, 2019 acquisition and vNext from its February 28, 2020 acquisition.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $1.936 billion | $1.913 billion | $6.049 billion | $5.434 billion |
| Gross profit | $307.6 million | $276.2 million | $957.3 million | $800.1 million |
| Gross margin | 15.9% | 14.4% | 15.8% | 14.7% |
| Earnings from operations | $61.5 million | $44.4 million | $188.5 million | $173.6 million |
| Net earnings | $38.9 million | $27.1 million | $119.3 million | $116.5 million |
| Diluted EPS | $1.10 | $0.76 | $3.37 | $3.23 |
| Operating cash flow | Not separately provided | Not separately provided | $462.1 million | $168.6 million |
Q3 operating margin was 3.2%, compared with 2.3% in the prior-year quarter. Nine-month operating margin was 3.1%, compared with 3.2% in the prior-year period. The effective tax rate was 23.8% for both the quarter and nine-month period, versus 27.2% and 25.4%, respectively, in the comparable 2019 periods.
- At September 30, 2020, cash and cash equivalents were $75.2 million, compared with $114.7 million at December 31, 2019.
- Total debt, including finance leases and other financing obligations, was $296.1 million, compared with $859.4 million at year-end 2019. Long-term debt consisted primarily of $293.5 million of net carrying value on the 2025 convertible senior notes.
- The $1.2 billion ABL facility had no outstanding balance at September 30, 2020, and the company stated that the full facility was available based on eligible receivables and inventory. The facility matures August 30, 2024.
- Inventory financing facilities had $500.0 million of aggregate capacity, of which $368.0 million was outstanding.
- Cash conversion cycle improved to 25 days from 42 days in the prior-year quarter, reflecting lower days sales outstanding and inventory days and higher days payable outstanding.
- Capital expenditures were $20.7 million in the first nine months of 2020. The company repurchased $25.0 million of common stock and had $25.0 million remaining under its repurchase authorization.
Material changes versus the prior comparable period
- Q3 sales increased 1%, primarily because of PCM; management stated that core-business sales would have declined without PCM because of COVID-19. Excluding foreign-currency effects, consolidated sales were flat.
- Nine-month sales increased 11%, led by North America, where sales rose 15%. EMEA sales rose 2% for the nine months but declined 4% in Q3; APAC sales declined 14% for the nine months and 11% in Q3.
- Services revenue increased 13% in Q3 and 23% in the first nine months, while product revenue was approximately flat in Q3 and increased 10% for the nine months. Growth in cloud and delivered services contributed to the services increase.
- Gross profit increased 11% in Q3 and 20% for the nine months. Margin expansion reflected a higher mix of services, improved hardware margins and partner funding.
- Operating earnings increased 38% in Q3 and 9% for the nine months. Q3 benefited from lower acquisition and integration expenses, partially offset by higher personnel costs, amortization and other expenses associated with PCM.
- Interest expense increased 18% in Q3 and 88% for the nine months, primarily because of higher average ABL balances earlier in the year and imputed interest on the convertible notes.
- Operating cash flow increased substantially, partly because a $107.0 million payment to a partner was deferred from Q3 to Q4 2020 in response to COVID-19. Management expects this non-recurring benefit to reverse in Q4.
Guidance, outlook, commentary and risks
- Management expects COVID-19 to continue affecting demand in Q4 2020 and stated that the decline in bookings that began in April could continue, although no year-over-year decline in October bookings had been observed as of the filing.
- The company expects the IT market to begin recovering in 2021 and plans to continue investing in sales coverage and technical talent. It also accelerated PCM integration and reduced discretionary expenses, including travel and certain benefits and variable compensation.
- Management expects operating cash flow and available financing capacity to support cash and working-capital requirements for the next 12 months. For the remainder of 2020, it planned to defer discretionary investments and use excess cash to reduce inventory financing balances.
- Full-year 2020 capital expenditures were expected to be up to $25.0 million, including approximately $1.0 million for the global headquarters. Headquarters buildout was deferred until early 2021.
- Principal risks include the duration and severity of COVID-19, client demand and credit losses, supply-chain and device availability constraints, partner incentives, pricing pressure, technology changes, cybersecurity and IT-system disruptions, foreign exchange and interest-rate exposure, acquisition integration and PCM-related litigation.
- PCM-related disputes involving the En Pointe Technologies acquisition are pending in multiple courts and arbitration forums. The company cannot determine the costs or outcome but does not believe the matters are reasonably expected to have a material adverse effect.
- Tax subsidiaries are under audit for 2013–2018 periods. Management could not estimate a range of outcomes, but does not expect a significant effect on tax expense or net earnings.
Most important facts for investors to verify
- Whether COVID-19-related demand weakness and the deferred $107.0 million partner payment materially affect fourth-quarter sales, cash flow and working capital.
- The sustainability of gross-margin expansion, particularly the contribution from services, cloud offerings, partner incentives and hardware margins.
- PCM integration progress, incremental personnel and amortization costs, and whether expected synergies are realized.
- Outstanding inventory financing of $368.0 million, related interest terms and the company’s ability to reduce those balances while maintaining liquidity.
- Availability and covenant compliance under the $1.2 billion ABL facility, including the impact of eligible receivables and inventory.
- Potential dilution, conversion conditions and refinancing or settlement requirements associated with the $350.0 million principal amount of 0.75% convertible senior notes due 2025.
- Developments in PCM-related litigation, tax audits and other contingencies, for which the filing does not provide a clear quantified exposure.