Business Context and Reporting Period
Insight Enterprises, Inc. filed this Form 10-K for the fiscal year ended December 31, 2014. The company provides integrated hardware, software, cloud and IT services to business and government clients through three geographic segments: North America, EMEA and APAC. Consolidated 2014 sales mix was 52% hardware, 43% software and 5% services.
- North America represented 67% of sales, EMEA 29% and APAC 4%.
- The company operated in 22 countries and served clients in more than 200 countries and territories.
- The filing includes unaudited fourth-quarter information; it is not a standalone quarterly filing.
Key Financial Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $5.316 billion | $5.144 billion | Up 3% |
| Gross profit | $712.4 million | $698.9 million | Up 2% |
| Gross margin | 13.4% | 13.6% | Down approximately 20 bps |
| Earnings from operations | $131.0 million | $121.2 million | Up 8% |
| Operating margin | 2.5% | 2.4% | Up approximately 10 bps |
| Net earnings | $75.7 million | $71.0 million | Up 7% |
| Diluted EPS | $1.83 | $1.64 | Up 12% |
| Cash flow from operations | $110.3 million | $76.1 million | Up 45% |
| Capital expenditures | $10.0 million | $19.0 million | Down 48% |
| Cash and cash equivalents | $164.5 million | $126.8 million | Up $37.7 million |
| Long-term debt | $62.5 million | $66.9 million | Down $4.4 million |
| Working capital | $578.9 million | $542.9 million | Up $36.1 million |
Fourth-quarter 2014 net sales were $1.446 billion, gross profit was $182.2 million, operating earnings were $35.2 million and net earnings were $19.5 million, compared with fourth-quarter 2013 net sales of $1.395 billion, gross profit of $181.2 million, operating earnings of $35.9 million and net earnings of $20.4 million.
- 2014 segment sales were $3.563 billion in North America, $1.540 billion in EMEA and $213.5 million in APAC.
- Operating earnings were $103.5 million in North America, $17.7 million in EMEA and $9.7 million in APAC.
- The fourth-quarter cash conversion cycle improved to 24 days from 27 days in the comparable 2013 quarter.
Material Changes Versus the Prior Comparable Period
- Sales increased in all three segments and across hardware, software and services. EMEA showed a strong recovery, with improved sales execution and productivity, particularly in the United Kingdom, Netherlands and Italy.
- The company reported approximately $14 million less gross profit from its largest software partner in 2014 than in 2013 because of channel incentive program changes. The impact was concentrated primarily in North America.
- Gross margin declined because of lower enterprise software agency fees, partly offset by higher-margin services, improved product margin and a $4.1 million reduction in cost of goods sold related to disputed sales tax recoveries.
- Selling and administrative expenses increased $12.1 million, primarily from investments in sales and services personnel, higher healthcare costs and a $5.2 million non-cash charge related to Bloomingdale, Illinois real estate.
- Severance and restructuring expense declined to $4.4 million from $12.7 million, reflecting lower restructuring activity despite continuing actions in EMEA.
- Operating cash flow increased substantially, although accounts receivable and inventory increased by $108.0 million and $35.7 million, respectively, during the year.
- The company repurchased approximately 2.1 million shares for $50.4 million in 2014, compared with approximately 3.0 million shares for $57.8 million in 2013. Shares were retired.
Liquidity, Debt and Capital Allocation
- At December 31, 2014, $61.0 million was outstanding under the $200.0 million accounts receivable securitization facility and nothing was outstanding under the $350.0 million revolving credit facility.
- Qualified receivables supported access to the full $200.0 million securitization facility. Based on leverage covenants, aggregate borrowing capacity under the revolving and ABS facilities was effectively $497.4 million.
- The company was in compliance with its debt covenants and reported no amortization event under the ABS facility.
- Inventory financing obligations of $122.8 million were classified as accounts payable and excluded from reported total debt; the filing states that interest is generally not incurred if paid within vendor terms.
- Management expects operating cash flow and available financing to support working capital, operations and strategic investments for at least the next 12 months.
- Expected 2015 capital expenditures are $10 million to $15 million, primarily for technology and facility upgrades.
- The company does not pay cash dividends and does not currently intend to pay them in the foreseeable future.
- In February 2015, the board authorized an additional $75 million share repurchase program, in addition to approximately $16.8 million remaining under prior authorizations at December 31, 2014.
Guidance, Outlook, Risks and Unusual Items
- Management expects the adverse effect of the largest software partner’s incentive program changes to reduce 2015 software-category gross profit by approximately $5 million to $10 million.
- Strategic priorities are to grow the core business and profitability, build a scalable services business and expand global cloud offerings.
- The company expects services growth to support profitability, but services represented only 5% of consolidated 2014 sales.
- Unusual 2014 items included $4.4 million of severance and restructuring expense, $5.2 million of non-cash real estate impairment and accelerated depreciation, a $4.1 million sales-tax-related cost reduction and an $895,000 gain on a related-party real estate sale.
- The company completed its annual goodwill impairment test with no impairment recorded. Goodwill was $26.3 million, all attributable to North America.
- Foreign currency translation reduced accumulated other comprehensive income by $27.3 million in 2014 and reduced cash balances by $16.6 million.
- Key risks include dependence on Microsoft and other partners, reductions in partner funding, intense price competition, rapid technology and cloud-market changes, low gross margins, IT-system disruptions, cybersecurity attacks, international operations and currency exposure, tax audits, public-sector contract compliance and litigation or intellectual-property claims.
- The company reported increasing information-security attacks at year-end 2014 but stated that it did not believe sensitive data was misappropriated.
- Unrecognized tax benefits were approximately $4.3 million, and several subsidiaries were under tax examination. Management did not expect the resolution to have a significant effect, but the timing and ultimate outcomes were uncertain.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the anticipated $5 million to $10 million 2015 reduction in software-partner incentives is offset by sales growth, services expansion or cost controls.
- The sustainability of the 2014 operating-margin improvement despite the decline in gross margin.
- Accounts receivable, inventory and accounts payable trends, including the effect of the 24-day cash conversion cycle and supplier payment timing.
- Liquidity and covenant headroom under the ABS and revolving credit facilities, including the separate $122.8 million inventory financing obligation.
- The returns and execution risk associated with planned share repurchases and 2015 capital expenditures.
- Progress in expanding higher-margin services and cloud offerings, particularly outside North America.
- Exposure to Microsoft and other major partners, whose products and incentives represented significant portions of purchases and sales.
- Developments in tax audits, unrecognized tax benefits, cybersecurity matters, litigation and the sale of the Bloomingdale property.