Insight Enterprises, Inc. — 2011 Q2 Form 10-Q Summary
Business Context and Reporting Period
Insight Enterprises provides information technology hardware, software and services to businesses and public-sector institutions across North America, EMEA and APAC. This unaudited Form 10-Q covers the three and six months ended June 30, 2011, compared with the same periods in 2010. Results are seasonal, with sales and profitability generally higher in the second and fourth quarters.
Key Financial Metrics
| Metric | Q2 2011 | Q2 2010 | Six Months 2011 | Six Months 2010 |
|---|---|---|---|---|
| Net sales | $1.469 billion | $1.267 billion | $2.689 billion | $2.302 billion |
| Gross profit | $204.2 million | $173.8 million | $366.7 million | $318.9 million |
| Gross margin | 13.9% | 13.7% | 13.6% | 13.9% |
| Earnings from operations | $54.4 million | $44.7 million | $77.2 million | $61.9 million |
| Operating margin | 3.7% | 3.5% | 2.9% | 2.7% |
| Net earnings | $35.3 million | $26.9 million | $48.4 million | $36.1 million |
| Diluted EPS | $0.75 | $0.58 | $1.03 | $0.77 |
| Effective tax rate | 33.9% | 36.4% | 35.4% | 36.5% |
At June 30, 2011, cash and cash equivalents were $115.2 million, accounts receivable were $1.256 billion, and total assets were $1.888 billion. Total debt, including the capital lease obligation, was $143.1 million, consisting primarily of $141.0 million outstanding under the senior revolving credit facility. Accounts payable included $97.1 million associated with the inventory financing facility.
Six-month operating cash flow was negative $3.4 million, compared with positive $129.0 million in the prior-year period. Investing cash flow was negative $10.4 million, primarily from $10.4 million of capital expenditures. Financing cash flow was negative $2.6 million. Cash declined by $8.6 million to $115.2 million, including a positive $7.8 million foreign-currency translation effect.
Material Changes Versus the Prior Comparable Period
- Q2 net sales increased 16%; six-month sales increased 17%. North America grew 14% in Q2 and 18% year to date, EMEA grew 12% and 9%, and APAC grew 82% and 58%, respectively, in reported U.S. dollars.
- Q2 gross profit increased 17% and gross margin improved 20 basis points. Six-month gross profit increased 15%, while gross margin declined 30 basis points.
- Net earnings increased 31% in Q2 and 34% for the six-month period. Diluted EPS increased from $0.58 to $0.75 in Q2 and from $0.77 to $1.03 year to date.
- Selling and administrative expenses increased 15% in Q2 and 12% year to date, but declined as a percentage of sales to 10.0% from 10.1% in Q2 and to 10.6% from 11.1% year to date.
- Severance and restructuring expense increased to $3.4 million in Q2 from $1.3 million and to $3.9 million for six months from $1.4 million. The company also recorded a $1.4 million non-cash write-off of computer software development costs during the first six months.
- The cash conversion cycle increased to 23 days from 12 days, driven by higher days sales outstanding, higher inventory levels and timing of supplier payments. Accounts receivable increased by $120.1 million from year-end 2010.
- Debt increased from $92.6 million at December 31, 2010 to $143.1 million at June 30, 2011, primarily due to higher revolving-credit borrowings. The company also repurchased 873,261 shares for $14.1 million and retired those shares.
Guidance, Outlook, Risks and Unusual Items
- Management cited continued momentum in IT spending and reported double-digit sales growth for the fifth consecutive quarter. No full-year revenue or earnings guidance was provided in the filing.
- Expected 2011 capital expenditures are $20 million to $25 million, primarily for North American IT-system integration, EMEA systems upgrades and facility and technology projects.
- Management expects operating cash flow and available financing facilities to support anticipated operating and working-capital needs over the next 12 months. The company expects to remain compliant with its maximum leverage covenant over the next four quarters.
- The senior revolving credit facility and accounts receivable securitization facility provide aggregate maximum capacity of $450 million and mature April 1, 2013. The company was in compliance with all debt covenants at June 30, 2011.
- Approximately $95.0 million of cash was held by foreign subsidiaries whose earnings management considers permanently reinvested. Repatriation may create U.S. tax consequences.
- Key risks include reliance on suppliers and vendor funding, IT-system disruptions and integration costs, customer credit and collections, competitive and technology changes, international operations and foreign exchange, tax audits, contract compliance, cybersecurity, key personnel and intellectual-property claims.
- Several subsidiaries are under tax audit for 2002–2009 tax years. Unrecognized tax benefits were $6.2 million, and the company could not estimate the range of potential outcomes.
- Pending matters include appeals related to shareholder litigation and a DOJ/FCC OIG investigation concerning the E-Rate program involving Calence. The company cannot estimate potential losses for these matters, although it is pursuing contractual indemnification rights in the Calence matter.
- The company authorized up to $50 million for share repurchases and had $35.9 million remaining under the authorization at June 30, 2011. It has never paid a cash dividend and does not intend to pay one in the foreseeable future.
Most Important Facts for Investors to Verify
- Whether strong reported sales growth, particularly in APAC and public-sector engagements, is sustainable and how much reflects foreign-currency movements.
- Whether working-capital pressure, the 23-day cash conversion cycle and negative first-half operating cash flow normalize in the second half.
- Progress, cost and execution risk related to North American and EMEA IT-system integration projects.
- Debt levels, covenant compliance and refinancing requirements before the April 2013 facility maturities.
- Potential financial effects of the tax audits, shareholder litigation appeals and the DOJ/FCC OIG E-Rate investigation.
- The effect of severance, restructuring, software write-offs, inventory write-downs and other unusual items on underlying profitability.