Insight Enterprises, Inc. 2017 Form 10-K Summary
Business Context and Reporting Period
Insight Enterprises, Inc. is a global IT solutions provider serving commercial, government, education and healthcare clients across North America, EMEA and APAC. The filing covers the fiscal year ended December 31, 2017; quarterly data is provided for the fourth quarter ended December 31, 2017.
- 2017 net sales mix was approximately 58% hardware, 32% software and 10% services.
- Geographic sales mix was approximately 77% North America, 20% EMEA and 3% APAC.
- 2017 acquisitions included Datalink, acquired January 6, 2017, and Caase.com, acquired September 26, 2017.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $6.704 billion | $5.486 billion | 22% |
| Gross profit | $918.6 million | $743.1 million | 24% |
| Gross margin | 13.7% | 13.5% | Up approximately 20 bps |
| Earnings from operations | $179.3 million | $148.8 million | 20% |
| Operating margin | 2.7% | 2.7% | Flat |
| Net earnings | $90.7 million | $84.7 million | 7% |
| Diluted EPS | $2.50 | $2.32 | 8% |
| Cash flow from operations | $(305.4) million | $96.1 million | Material decline |
| Capital expenditures | $19.2 million | $12.3 million | 57% |
| Cash and cash equivalents | $105.8 million | $202.9 million | Down $97.1 million |
| Total long-term debt, including current portion | $313.2 million | $40.7 million | Material increase |
Interest expense increased to $19.2 million from $8.6 million, primarily because of acquisition-related borrowing, higher borrowing rates and higher average debt balances. The effective tax rate rose to 43.0% from 39.3%, including a $13.4 million charge related to the 2017 U.S. federal tax reform.
At December 31, 2017, working capital was $804.4 million, accounts receivable were $1.815 billion and inventories were $231.5 million, including $37.0 million not available for sale. Stockholders’ equity was $843.5 million.
Fourth-Quarter Results
| Metric | Q4 2017 | Q4 2016 |
|---|---|---|
| Net sales | $1.784 billion | $1.468 billion |
| Gross profit | $232.9 million | $191.0 million |
| Earnings from operations | $45.5 million | $40.7 million |
| Net earnings | $14.2 million | $21.1 million |
| Diluted EPS | $0.39 | $0.59 |
Fourth-quarter net earnings declined despite higher sales and operating earnings, principally reflecting higher income tax expense. The fourth-quarter cash conversion cycle increased to 35 days from 14 days, driven by higher accounts receivable and inventory balances.
Material Changes Versus the Prior Comparable Period
- North America sales increased 30% to $5.182 billion, supported by 17% core-business growth and $524.3 million of Datalink sales.
- EMEA sales increased 1% to $1.355 billion; services sales increased 15%, while software sales declined 7%.
- APAC sales declined 5% to $166.5 million, primarily because a significant public-sector software agreement shifted into the first quarter of 2018.
- Services sales increased 36% and represented approximately 10% of consolidated sales for the first time.
- Selling and administrative expenses increased 24% to $723.3 million, slightly increasing to 10.8% of sales.
- Debt increased substantially to fund the Datalink acquisition. At year-end, borrowings included $117.5 million under the revolving facility, $166.3 million under Term Loan A and $25.0 million under the accounts receivable securitization facility.
- Operating cash flow was adversely affected by working-capital investment, higher receivables and inventory, a supplier payment timing effect of approximately $160 million, and increased use of the inventory financing facility.
- The company sold its Russia operations and recorded a $3.6 million loss, including a $2.9 million cumulative foreign-currency translation adjustment.
- No open-market share repurchases occurred in 2017. The board authorized a new repurchase program of up to $50 million on February 13, 2018.
Guidance, Outlook, Risks and Unusual Items
- Management expects cash, operating cash flow and available financing to support operating requirements and strategic investments for at least the next 12 months.
- 2018 capital expenditures were expected to be between $15 million and $20 million, primarily for technology upgrades and acquisition integration.
- Management expected working-capital trends to normalize in 2018 and identified actions to improve cash-flow efficiency.
- Management expected continued debt repayment, share repurchases and potential acquisitions, subject to cash generation and business conditions.
- The company was in compliance with its debt covenants at year-end. The maximum leverage covenant was 3.50 times trailing twelve-month adjusted earnings and was expected to decrease to 3.25 times in 2018.
- Major risks include intense price competition, reliance on technology partners and partner incentives, rapid changes in cloud and IT delivery models, acquisition integration, international and foreign-currency exposure, cybersecurity and systems disruption, accounts receivable collection, variable-rate debt and public-sector contract compliance.
- The 2017 effective tax rate and net earnings were affected by provisional Tax Cuts and Jobs Act charges. Management had not completed its accounting for all related tax effects at filing.
- The company adopted new share-based payment guidance in 2017, producing a $2.5 million tax benefit and approximately $0.07 of diluted EPS benefit.
- The company planned to adopt the new revenue recognition standard on January 1, 2018 using the modified retrospective method. Management estimated the cumulative pretax retained-earnings adjustment would be less than $10 million, but the analysis was not finalized.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Investor Verification Points
- Verify the sustainability of North America growth and the expected synergies and margins from Datalink.
- Monitor accounts receivable, inventory, cash conversion cycle and operating cash flow normalization.
- Assess debt repayment capacity, floating-rate exposure, Term Loan A amortization and covenant headroom.
- Evaluate whether services and cloud growth can offset product pricing pressure and dependence on partner funding.
- Review the final accounting effects of the Tax Cuts and Jobs Act and the 2018 revenue-recognition adoption.
- Track APAC’s delayed public-sector transaction and the performance of EMEA after the Caase.com acquisition.
- Review the company’s exposure to Microsoft and other concentrated partners, cybersecurity incidents, litigation, tax audits and unrecognized tax benefits.