Insight Enterprises, Inc. — Q1 2018 Form 10-Q Summary
Business Context and Reporting Period
Insight Enterprises is a global IT solutions provider offering hardware, software and services to enterprise, public-sector, and small and medium-sized clients. The company reports three geographic segments: North America, EMEA, and APAC. This unaudited filing covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $1.763 billion | $1.478 billion | +19% |
| Gross profit | $240.0 million | $208.2 million | +15% |
| Gross margin | 13.6% | 14.1% | Down 50 basis points |
| Earnings from operations | $50.2 million | $23.0 million | +119% |
| Net earnings | $32.7 million | $13.8 million | +136% |
| Diluted EPS | $0.90 | $0.38 | +137% |
| Operating cash flow | $150.7 million | $(152.1) million | Improved by $302.8 million |
| Capital expenditures | $5.0 million | $10.1 million | Down 50% |
Products generated $1.582 billion of sales and services generated $180.7 million. Segment sales were $1.307 billion in North America, $400.4 million in EMEA, and $55.1 million in APAC. Operating margins were approximately 2.8% in 2018 versus 1.6% in 2017.
Cash, cash equivalents and restricted cash totaled $101.9 million at March 31, 2018, including $100.2 million of cash and cash equivalents. Total debt was $261.9 million, consisting primarily of $163.0 million under Term Loan A, $94.0 million under the accounts receivable securitization facility, and $2.0 million under the senior revolving facility. Inventory financing outstanding was $228.1 million.
Material Changes Versus the Prior Comparable Period
- Sales increased across all segments: North America +18%, EMEA +21%, and APAC +52%. Excluding foreign exchange, consolidated sales increased 16%.
- Growth reflected a device refresh cycle, higher data-center sales, increased software maintenance and cloud offerings, public-sector demand, and the addition of Caase.com in EMEA.
- Gross margin declined to 13.6%, primarily because of a lower mix of enterprise-agreement fees and professional services. Changes in partner programs accelerated approximately $5.0 million of incentives into the first quarter.
- Selling and administrative expenses increased 6% to $188.2 million, but declined as a percentage of sales to 10.7% from 12.0%.
- Severance and restructuring expense declined to $1.6 million from $4.7 million. Q1 2017 also included $2.9 million of Datalink acquisition-related expenses; no comparable expense was recorded in Q1 2018.
- Interest expense increased 53% to $6.0 million due to higher rates and higher average debt balances used to fund working capital.
- The company generated operating cash flow of $150.7 million, compared with a use of $152.1 million in Q1 2017. The prior-year result was affected by a significant supplier payment of approximately $160 million.
- The cash conversion cycle increased to 35 days from 29 days, driven by higher days sales outstanding and inventory days and slightly lower days payable outstanding.
Accounting, Outlook, Risks and Unusual Items
- The company adopted ASC Topic 606, Revenue from Contracts with Customers, on January 1, 2018 using the modified retrospective method. The cumulative adjustment reduced opening retained earnings by $7.2 million.
- ASC 606 affected the timing and presentation of certain bill-and-hold transactions, software renewals, extended-payment contracts, service contracts, and sales commissions. For Q1 2018, reported revenue was $11.5 million higher and net earnings were $0.8 million higher than under the prior standard; operating cash flow was unchanged.
- Remaining performance obligations expected to be recognized after March 31, 2018 totaled $158.8 million, primarily services.
- Management expects operating cash flow and available financing facilities to support anticipated operating needs and strategic investments over the next 12 months. Expected 2018 capital expenditures are $15 million to $20 million, primarily for technology upgrades.
- Management intends to use excess 2018 cash flow for working capital, debt reduction, share repurchases, capital expenditures, and potentially acquisitions. The company does not currently intend to pay cash dividends.
- The Board authorized up to $50 million of share repurchases. During the quarter, the company repurchased and retired 221,256 shares for $7.7 million at an average price of $34.71.
- The inventory financing facility availability increased from $325 million to $400 million and matures June 23, 2021. The company’s principal credit facilities include a maximum leverage covenant of 3.25 times adjusted earnings.
- The company was in compliance with its debt covenants at March 31, 2018, and management expects compliance over the next four quarters. No ABS facility amortization event had occurred.
- Key risks include partner funding and product availability, technology changes, acquisition integration, international and foreign-currency exposure, economic conditions, debt and liquidity requirements, cybersecurity and IT disruptions, receivable collections, legal and tax matters, and dependence on key personnel.
- The company had approximately $4.3 million of unrecognized tax benefits and subsidiaries under audit for tax years 2012 through 2015. Management could not estimate the range of possible audit outcomes, but did not expect a significant effect on earnings.
- The company reported approximately $1.96 million of performance bonds and stated that no pending or threatened legal proceedings were expected to have a material adverse effect.
- Results are seasonal, with generally stronger sales and profitability expected in the second and fourth quarters; interim results may not be indicative of full-year performance.
Important Facts for Investors to Verify
- Whether the approximately $5.0 million of accelerated partner incentives is recurring, repeatable, or primarily a timing benefit.
- Whether the lower consolidated gross margin persists as hardware and lower-margin enterprise sales remain a larger portion of the mix.
- The sustainability of operating cash flow after considering working-capital requirements, the 35-day cash conversion cycle, and inventory financing repayments.
- Debt reduction progress, interest-rate exposure, facility availability, and continued compliance with the 3.25-times leverage covenant.
- The effect of ASC 606 on future revenue timing, receivables, deferred revenue, contract assets, and comparability with prior periods.
- Execution of the planned $15 million to $20 million of 2018 capital expenditures and the balance between debt repayment, acquisitions, and share repurchases.
- Segment-level performance, particularly whether APAC’s strong growth and EMEA’s margin improvement continue.