Insight Enterprises, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Insight Enterprises is a global provider of IT hardware, software, cloud, data-center, connected-workforce, digital innovation and supply-chain solutions. Operations are reported through North America, EMEA and APAC. This unaudited report covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019. Results include PCM from its August 30, 2019 acquisition and vNext from its February 28, 2020 acquisition.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $2.144 billion | $1.685 billion | +27% |
| Gross profit | $325.3 million | $248.5 million | +31% |
| Gross margin | 15.2% | 14.7% | +50 basis points |
| Earnings from operations | $52.9 million | $57.0 million | -7% |
| Net earnings | $34.0 million | $39.3 million | -14% |
| Diluted EPS | $0.95 | $1.09 | -13% |
| Net cash from operating activities | $93.1 million | $121.9 million | -$28.8 million |
- Product revenue was $1.848 billion and services revenue was $295.7 million. North America revenue increased 35%, EMEA increased 7%, and APAC declined 4% on a reported-dollar basis.
- Selling and administrative expense increased 41% to $268.9 million, primarily from PCM-related headcount and expenses, higher variable compensation, depreciation and amortization, facilities and other costs.
- Interest expense more than doubled to $11.8 million, primarily because of higher average ABL borrowings and interest associated with the convertible notes.
- The effective tax rate was 20.3%, compared with 23.5% in the prior-year quarter, including an approximately $1.7 million discrete CARES Act tax benefit.
- Cash, cash equivalents and restricted cash ended the quarter at $64.5 million, compared with $126.5 million at March 31, 2019. Cash and cash equivalents alone were $62.7 million at March 31, 2020.
- Total debt, including finance leases and other financing obligations, was $751.2 million. The ABL facility had $460.1 million outstanding against stated capacity of up to $1.2 billion; eligible receivables and inventory supported access to the full facility amount.
- Inventory financing facilities had total capacity of $490.0 million, with $252.9 million outstanding.
- The company reported compliance with its debt covenants and stated that operating cash flow and available financing should support anticipated operating and working-capital needs over the next 12 months.
- Capital expenditures were $7.4 million, and full-year 2020 capital expenditures were expected to be $40 million to $45 million, including approximately $20 million for the new global headquarters.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by the PCM acquisition, higher hardware demand and increased services revenue. North American hardware revenue increased 51%, while North American software revenue declined 5% due partly to a significant prior-year transaction without a current-year comparable.
- Work-from-home and collaboration demand supported hardware sales, although chip-manufacturer supply constraints delayed some orders.
- Gross margin improved because of higher hardware margins and a greater contribution from Insight-delivered services, partially offset by lower margins on certain PCM services.
- Operating earnings and net earnings declined despite sales and gross-profit growth because of higher operating costs, increased amortization from PCM-related intangible assets, higher severance and restructuring costs, and increased interest expense.
- The cash conversion cycle increased to 38 days from 30 days. Days sales outstanding increased to 104 days from 92 days, reflecting aged receivables, COVID-19-related client circumstances and PCM working-capital requirements.
- The company repurchased and retired 444,813 shares for approximately $25.0 million, at an average price of $56.20 per share. A new $50 million authorization was approved in February 2020.
- Net debt repayments under the ABL facility were approximately $110.2 million during the quarter.
Guidance, outlook, risks and unusual items
- Management reported limited COVID-19 impact on first-quarter results but expected a significant decline in second-quarter demand. April booking trends had already decreased significantly year over year.
- Management planned to accelerate PCM integration and reduce discretionary spending, including certain benefits, variable compensation and travel expenses. The ultimate COVID-19 impact remained unknown and no full-year revenue or earnings guidance was provided in the filing.
- Key COVID-19 risks include weaker client demand, supply-chain and shipping disruptions, client payment difficulties, employee and facility limitations, financing availability, foreign-exchange and interest-rate volatility, and potential goodwill or intangible-asset impairment.
- Seasonality typically results in stronger sales and profitability in the second and fourth quarters; first-quarter results are not necessarily indicative of full-year performance.
- The company entered into an April 23, 2020 agreement to sell properties in Tempe, Arizona, and El Segundo and Santa Monica, California, for approximately $86 million, subject to buyer due diligence and termination rights. Proceeds were intended to prepare the Chandler, Arizona headquarters.
- PCM-related litigation includes disputes concerning earnout payments and post-closing support obligations across multiple jurisdictions. The company could not determine the outcome or costs with certainty but did not believe the matters were reasonably expected to have a material adverse effect.
- The PCM purchase-price allocation remained preliminary, and management was still integrating PCM into the company’s control environment. PCM represented approximately 19% of total assets and 21% of first-quarter net sales.
- The company adopted expected-credit-loss accounting on January 1, 2020 without a material financial-statement effect. It has never paid cash dividends and did not intend to do so in the foreseeable future.
Important facts for investors to verify
- Whether COVID-19-related booking declines and supply-chain constraints materially reduced second-quarter and full-year revenue, margins and cash flow.
- Accounts-receivable aging, credit losses and the sustainability of the 104-day DSO and 38-day cash conversion cycle.
- ABL availability, covenant compliance, interest expense and the company’s ability to continue reducing debt while funding working capital.
- PCM integration progress, incremental cost savings, intangible-asset amortization and any goodwill or impairment developments.
- Status and closing conditions of the approximately $86 million property sale and use of proceeds.
- Developments in PCM-related litigation, tax audits and other contingencies, including potential effects not currently accrued.
- Whether the $40 million to $45 million capital-expenditure expectation and stated liquidity outlook remain achievable under changed market conditions.