Insight Enterprises, Inc. 2013 Form 10-K Summary
Business context and reporting period
Insight Enterprises, Inc. is a global provider of IT hardware, software and services to commercial and public-sector clients. Operations are reported through North America, EMEA and APAC segments. The filing covers the fiscal year ended December 31, 2013; fourth-quarter information is also presented. Consolidated 2013 sales mix was approximately 51% hardware, 44% software and 5% services.
| 2013 segment | Net sales | Share of consolidated sales |
|---|
| North America | $3.471 billion | 67% |
| EMEA | $1.469 billion | 29% |
| APAC | $204.4 million | 4% |
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|
| Net sales | $5.144 billion | $5.301 billion | Down 3% |
| Gross profit | $698.9 million | $719.7 million | Down 3% |
| Gross margin | 13.6% | 13.6% | Flat |
| Earnings from operations | $121.2 million | $148.2 million | Down 18% |
| Operating margin | 2.4% | 2.8% | Down 40 basis points |
| Net earnings | $71.0 million | $92.8 million | Down 23% |
| Diluted EPS | $1.64 | $2.07 | Down 21% |
| Effective tax rate | 38.0% | 35.9% | Up 210 basis points |
- Hardware sales declined 5% for the year, while software product sales grew but reported software revenue declined slightly because of a higher mix of maintenance sales recognized on a net basis.
- Services sales increased 3% year over year and carried higher gross margins than in 2012.
- Selling and administrative expense was essentially flat at $564.9 million, but increased to 11.0% of sales from 10.7% because of lower revenue.
- Severance and restructuring expense increased to $12.7 million from $6.3 million, primarily reflecting restructuring in the United Kingdom and Germany.
Fourth quarter: Net sales were $1.395 billion versus $1.347 billion in the prior-year quarter. Gross profit was $181.2 million versus $180.4 million, while operating earnings were $35.9 million versus $36.6 million and net earnings were $20.4 million versus $20.8 million. Diluted EPS was $0.48 versus $0.46.
Cash flow, liquidity and debt
| Metric | 2013 | 2012 |
|---|
| Cash flow from operations | $76.1 million | $67.4 million |
| Capital expenditures | $19.0 million | $30.2 million |
| Cash and cash equivalents at year-end | $126.8 million | $152.1 million |
| Working capital | $542.9 million | $519.4 million |
| Debt under revolving and ABS facilities | $66.5 million | $80.0 million |
- The company repurchased approximately 3.0 million shares for $57.8 million during 2013, including $50.0 million under one authorization and approximately $7.8 million under a new authorization.
- The $350 million revolving facility had $333.5 million of stated availability, and the $200 million accounts receivable securitization facility had $150 million of unused capacity at year-end, subject to qualifying receivables.
- Debt facilities were subject to a maximum leverage ratio of 2.75 times adjusted earnings. The company reported compliance with all debt covenants and expected compliance over the following four quarters.
- The cash conversion cycle was 27 days in the fourth quarter, compared with 24 days in the prior-year quarter.
- Contractual obligations totaled $260.8 million, including $115.3 million under the inventory financing facility, $58.3 million of operating leases and $66.5 million of facility debt.
Material changes versus the prior comparable period
- Revenue declined 3%, driven primarily by lower North American hardware demand from large enterprise clients and lower hardware volume in EMEA.
- North America revenue declined 4%, EMEA was approximately flat in U.S. dollars, and APAC declined 3%.
- Consolidated gross margin was maintained at 13.6%, but EMEA gross margin declined from 13.9% to 13.0% because of lower hardware margins and reduced partner funding.
- Operating profit fell more sharply than gross profit because restructuring charges increased and selling and administrative expense did not decline proportionately with revenue.
- Foreign losses increased the valuation allowance for deferred tax assets, contributing to the higher effective tax rate.
- Cash flow from operations improved despite lower earnings, primarily reflecting a favorable change in accounts receivable, partially offset by lower accounts payable and higher other current assets.
- The company completed deployment of a new IT platform across EMEA and planned to migrate APAC operations to the North American platform in 2014.
Guidance, outlook, management commentary and risks
- Management stated that 2013 results did not meet expectations, although performance improved sequentially from the second quarter through year-end.
- Changes to the largest software partner’s channel incentive program were expected to reduce 2014 incentives by $15 million to $20 million. Management identified new business and cost-reduction actions intended to offset the impact.
- Management expected 2014 capital expenditures of $15 million to $20 million, primarily for IT systems and facility or technology upgrades.
- Strategic priorities include growing traditional products and services, expanding cloud and SaaS offerings, increasing services capabilities and maintaining operational discipline.
- Management expected operating cash flow and available financing to support working capital, capital expenditures and strategic investments for at least the next 12 months. It intended to use excess cash for debt repayment, share repurchases and potential small acquisitions.
- Key risks include dependence on Microsoft and other partners, reductions in partner incentives, aggressive industry pricing, technology and cloud-model disruption, IT-system integration, cybersecurity, client credit risk, international operations and foreign exchange, tax audits, public-sector contract compliance, litigation and personnel retention.
- Microsoft represented approximately 30% of 2013 purchases; the top five partners represented approximately 63% of purchases. Microsoft, HP and Cisco products represented approximately 30%, 14% and 11% of consolidated sales, respectively.
- Sales to the U.S. federal government represented approximately 10% of 2013 sales, although no individual client exceeded 3% of consolidated sales.
- The company disclosed an ongoing qui tam and Department of Justice-related matter involving its Calence subsidiary. The company’s motion to dismiss was granted, proceedings were stayed pending appeal, and the possible loss could not be estimated.
- Unrecognized tax benefits totaled approximately $4.5 million, and several subsidiaries were under tax examination. Management did not expect a material adverse outcome, but could not estimate the range of possible audit outcomes.
Most important facts for an investor to verify
- Whether the expected $15 million to $20 million reduction in 2014 software-partner incentives was fully offset by pricing, growth and cost actions.
- Whether services, cloud and SaaS growth can offset continuing hardware declines and pressure on software revenue recognition.
- Whether EMEA restructuring improves operating margins and whether APAC IT-system migration is completed without disruption.
- Cash conversion, accounts receivable collections and the availability of receivables-based financing.
- Compliance with the 2.75-times leverage covenant and the refinancing or repayment of the ABS facility maturing in April 2015.
- The effect of share repurchases on per-share earnings versus the use of cash for debt reduction and investment.
- Developments in the Calence litigation, tax audits and other contractual, indemnification and regulatory contingencies.
