Insight Enterprises, Inc. 2019 Form 10-K Summary
Business context and reporting period
Insight Enterprises is a global provider of information technology hardware, software, cloud, data-center, digital innovation, connected-workforce and supply-chain solutions. Operations are reported through North America, EMEA and APAC segments, representing approximately 78%, 20% and 2% of 2019 consolidated sales, respectively. This filing covers the fiscal year ended December 31, 2019; fourth-quarter information is included but the filing is an annual report.
Insight completed its acquisition of PCM, Inc. on August 30, 2019. PCM contributed approximately $733.8 million of 2019 sales and $106.0 million of gross profit after acquisition.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $7.731 billion | $7.080 billion | Up 9% |
| Gross profit | $1.138 billion | $993.7 million | Up 15% |
| Gross margin | 14.7% | 14.0% | Up approximately 70 bps |
| Earnings from operations | $240.6 million | $233.5 million | Up 3% |
| Operating margin | 3.1% | 3.3% | Down 20 bps |
| Net earnings | $159.4 million | $163.7 million | Down 3% |
| Diluted EPS | $4.43 | $4.55 | Down 3% |
| Effective tax rate | 24.7% | 22.8% | Up 190 bps |
| Cash flow from operations | $127.9 million | $292.6 million | Down $164.8 million |
- Product sales were $6.732 billion and services sales were $999.1 million. Services sales increased 20% year over year and represented approximately 13% of consolidated sales.
- North America sales increased 12% to $6.024 billion, including $716.1 million of PCM sales; core North America sales declined $51.3 million. EMEA sales were approximately flat at $1.527 billion, while APAC sales declined 4% to $180.2 million.
- Selling and administrative expenses increased 16% to $880.7 million, or 11.4% of sales, primarily because of PCM, higher personnel costs and increased depreciation and amortization.
- 2019 included $11.3 million of PCM acquisition-related expenses and $5.4 million of severance and restructuring costs.
- Cash and cash equivalents were $114.7 million at year-end. Working capital was $1.165 billion and total assets were $4.178 billion.
- Cash conversion cycle was 38 days at December 31, 2019 versus 33 days a year earlier, primarily due to lower days payable outstanding following the PCM acquisition and payment timing.
Debt and liquidity
- Total long-term debt under GAAP was approximately $859.4 million at December 31, 2019, excluding $253.7 million outstanding under inventory financing facilities.
- The company had $570.7 million outstanding under its $1.2 billion asset-based revolving credit facility, which matures in August 2024. Eligible receivables and inventory supported access to the full facility amount at year-end.
- Insight issued $350.0 million principal amount of 0.75% convertible senior notes due February 2025. The notes had a $284.8 million carrying value after debt discount and issuance costs.
- 2019 financing proceeds included $341.3 million from the convertible notes and net borrowings of $356.0 million under long-term debt facilities. The company paid $66.3 million for a convertible note hedge and received $34.4 million from related warrants.
- Management stated that cash flows from operations and available financing capacity should be adequate for operating and strategic requirements for at least the next 12 months. The company intends to use excess 2020 cash flow to fund capital expenditures and reduce debt, while retaining flexibility for acquisitions.
- Capital expenditures were $69.1 million in 2019. Management expects 2020 capital expenditures of approximately $55 million to $60 million, including approximately $35 million for the new global headquarters.
Material changes versus the prior comparable period
- PCM materially increased consolidated scale, particularly in North America, but also increased operating expenses, debt and integration requirements.
- Gross margin improved because of higher services contribution, improved product margins, partner funding and PCM's impact, but operating margin declined as selling and administrative costs grew faster than sales.
- Net earnings declined despite higher operating earnings, primarily reflecting higher interest expense and a higher effective tax rate. Interest expense increased 30% to $28.5 million.
- Operating cash flow declined substantially, reflecting the timing of accounts payable payments, increased accounts receivable and other working-capital movements.
- Goodwill increased to $415.1 million from $166.8 million and intangible assets increased to $278.6 million from $112.2 million, primarily because of PCM. The PCM acquisition included $248.9 million of goodwill and a $175.5 million customer-relationship intangible asset.
- The company adopted the lease standard in 2019, recording operating lease right-of-use assets of $65.9 million and lease liabilities of $70.5 million at adoption, without a material earnings or cash-flow impact.
Guidance, outlook, commentary and risks
- Management expects PCM systems and back-office integration to be completed in 2020 and plans to migrate EMEA operations to the IT platform used in North America and APAC.
- Management highlighted continued growth opportunities in cloud, digital innovation, data-center transformation, connected workforce and services, while noting persistent IT-industry pricing pressure and low gross margins.
- Key risks include intense competition, dependence on manufacturer and publisher partner funding and product availability, rapid technology changes, cloud and as-a-service disintermediation, acquisition integration, international operations and foreign-exchange exposure.
- Additional risks include substantial leverage, variable interest rates, LIBOR transition, convertible-note conversion or dilution, cybersecurity and data-privacy incidents, IT-system disruptions, accounts-receivable losses, tax audits, litigation and public-sector contract compliance.
- The filing specifically identifies disputes assumed in connection with PCM involving the acquisition of certain En Pointe Technologies assets. The company cannot determine the ultimate outcome but does not currently believe the matters are reasonably expected to have a material adverse effect.
- The company had no cash dividend history and did not intend to pay dividends in the foreseeable future. It repurchased approximately 541,000 shares for $27.9 million in 2019.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The assessment excluded PCM, which represented approximately 17.8% of total assets and 9.5% of 2019 net sales, pending integration of PCM controls.
Important facts for investors to verify
- Whether PCM integration produces the expected revenue, cost and synergy benefits without further restructuring or control issues.
- The sustainability of the 14.7% gross margin and whether services growth can offset product pricing pressure and changes in partner incentives.
- Operating cash flow, accounts-receivable collection, payable timing and the 38-day cash conversion cycle.
- Debt reduction progress, ABL availability, interest-rate exposure and the potential cash, share-count and liquidity effects of the convertible notes.
- The timing and cost of the new headquarters and other 2020 capital expenditures.
- Developments in PCM-related litigation, tax examinations and other contingencies, for which the filing does not provide a reliable estimate of ultimate exposure.
- Whether PCM's excluded internal controls are fully integrated by the end of 2020 and whether any material weaknesses emerge.