Business Context and Reporting Period
Insight Enterprises, Inc. is an information technology provider serving business and public-sector clients across North America, EMEA and APAC. The unaudited Form 10-Q covers the three and nine months ended September 30, 2011, with comparisons to the same periods of 2010. Results are seasonal, with generally stronger sales and profitability in the second and fourth quarters.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $1,238.0 million | $1,169.2 million | $3,926.9 million | $3,470.7 million |
| Gross profit | $163.5 million | $154.6 million | $530.2 million | $473.5 million |
| Gross margin | 13.2% | 13.2% | 13.5% | 13.6% |
| Earnings from operations | $27.9 million | $24.8 million | $105.2 million | $86.8 million |
| Operating margin | 2.3% | 2.1% | 2.7% | 2.5% |
| Net earnings | $17.2 million | $14.4 million | $65.6 million | $50.5 million |
| Diluted EPS | $0.38 | $0.31 | $1.41 | $1.08 |
| Cash flow from operations | Not separately provided | Not separately provided | $10.1 million | $37.5 million |
All dollar amounts are based on the filing’s stated units; financial statements are presented in thousands except per-share data.
Balance Sheet, Debt and Liquidity
- September 30, 2011 cash and cash equivalents were $98.7 million, compared with $123.8 million at December 31, 2010.
- Total assets were $1.501 billion and stockholders’ equity was $562.3 million at September 30, 2011.
- Total debt, including the capital lease obligation, was $157.4 million, compared with $92.6 million at December 31, 2010. Senior revolving credit borrowings were $155.5 million.
- The senior revolving credit facility has $300 million of capacity and matures April 1, 2013. The accounts receivable securitization facility has $150 million of stated capacity and also matures April 1, 2013; it was undrawn at September 30, 2011.
- Available borrowing capacity under the facilities was $450 million, subject to receivable availability and covenants. The company was in compliance with all debt covenants at September 30, 2011.
- Management stated that operating cash flows and available financing are expected to support operating and working-capital requirements for the next 12 months.
- Accounts payable included $101.9 million related to the inventory financing facility.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased 6%; nine-month sales increased 13%. Growth was 5% and 13% in North America, 8% and 9% in EMEA, and 17% and 46% in APAC, respectively.
- Third-quarter operating earnings increased 12%, while net earnings increased 19%. Nine-month operating earnings increased 21% and net earnings increased 30%.
- Operating margin expanded from 2.1% to 2.3% in the quarter and from 2.5% to 2.7% for the nine months, reflecting operating leverage and expense management.
- Gross margin was unchanged in the quarter but declined 10 basis points for the nine months. North America experienced lower agency-fee and services margins, while EMEA benefited from a more favorable commercial-business mix.
- Selling and administrative expense increased 4% in the quarter and 9% for the nine months, but declined as a percentage of sales to 10.9% from 11.1% in the quarter and to 10.7% from 11.1% year to date.
- Operating cash flow declined to $10.1 million from $37.5 million, primarily because of higher working-capital needs associated with increased sales and payments of accrued liabilities.
- Capital expenditures increased to $16.9 million from $12.6 million, primarily for information-technology systems.
- The company borrowed $65.5 million net under revolving credit facilities, repaid $33.2 million under the inventory financing facility, and repurchased 2.9 million shares for $50.0 million. Repurchased shares were retired.
- The cash conversion cycle increased to 28 days from 25 days, driven primarily by higher days sales outstanding and timing of supplier payments.
Guidance, Outlook, Risks and Unusual Items
- Management described the IT market as moderating from prior double-digit post-recession growth but stated that third-quarter results exceeded expectations through solid sales and disciplined cost management.
- Full-year 2011 capital expenditures were expected to range from $22 million to $27 million, largely for North American and EMEA IT-system integration and upgrades.
- Management expected to remain in compliance with the maximum leverage covenant over the following four quarters and intended to use excess cash generated during the remainder of 2011 to reduce debt and fund capital expenditures.
- Severance and restructuring expense was $529,000 in the quarter and $4.5 million for the nine months, compared with $298,000 and $1.7 million in the prior-year periods.
- The company recorded a $1.4 million non-cash write-off of computer software development costs related to its North American IT integration project.
- Effective October 1, 2011, the company acquired Ensynch, a Microsoft-focused professional-services firm. Ensynch reported 2010 services revenue of $16.2 million; purchase-accounting valuation was not complete at the filing date.
- Several subsidiaries were under tax audit for 2002–2009. The company reported $4.7 million of unrecognized tax benefits and could not estimate the reasonably possible range of outcomes.
- Pending matters include appeals in shareholder class-action and derivative litigation related to the historical financial-statement restatement, a DOJ/FCC OIG investigation involving the E-Rate program, and a qui tam lawsuit alleging Trade Agreements Act and False Claims Act violations. The company could not estimate potential losses for these matters.
- Other risks include partner dependence, competition, IT-system disruption and integration, economic conditions and customer credit, international operations and foreign exchange, tax developments, cybersecurity, intellectual-property claims, key personnel, and compliance with public-sector contracts.
- The company has never paid a cash dividend and stated that it does not intend to pay dividends in the foreseeable future.
Investor Verification Checklist
- Verify whether sales growth and operating leverage continued after the third quarter, particularly amid the stated moderation in IT demand.
- Monitor operating cash conversion, accounts receivable collections, the 28-day cash conversion cycle, and working-capital funding requirements.
- Reconcile the increase in debt with cash balances, inventory-financing obligations, share repurchases and planned capital expenditures.
- Track compliance with the 2.50-times maximum leverage covenant and the April 2013 facility maturities.
- Assess the execution, cost and benefits of the North American and EMEA IT-system projects, including any further software write-offs.
- Review the financial impact and purchase-accounting completion of the Ensynch acquisition.
- Follow developments in the tax audits, shareholder litigation, DOJ/FCC investigation and qui tam proceeding, for which potential losses were not estimable.