TEMPE, Ariz.--(BUSINESS WIRE)--Insight Enterprises, Inc. (Nasdaq: NSIT) (the “Company”) today reported financial results for the quarter ended September 30, 2019 and compared the results to the quarter ended September 30, 2018:
Net sales increased 9% to $1.91 billion
Gross profit increased 18% to $276.2 million
Gross margin increased 100 basis points to 14.4%
Earnings from operations decreased 11% to $44.4 million
Adjusted earnings from operations increased 7% to $58.9 million
Diluted earnings per share of $0.76 decreased 15% year to year
Adjusted diluted earnings per share of $1.10 increased 10% year over year
In the third quarter of 2019, net sales increased 9%, gross profit increased 18% and gross margin increased 100 basis points compared to the third quarter of 2018. The increase in net sales is primarily the result of our acquisition of PCM, Inc. (“PCM”) on August 30, 2019. The increase in gross profit and gross margin primarily reflects an increase in higher margin services net sales, including cloud solutions, reported in the Company’s legacy business and higher margins from PCM net sales. Earnings from operations decreased 11% and diluted earnings per share decreased 15%, year to year, as a result of acquisition-related and restructuring expenses incurred in the quarter compared to the same period in the prior year.
“Our third quarter results reflect our strategy to leverage our four solution areas to optimize our business mix in higher margin categories, including cloud solutions and services, which led to a 100 basis point improvement in gross margin in the quarter. We also closed the PCM acquisition on August 30th which expands our reach into higher margin end markets which we expect will provide opportunity to scale our business and drive additional margin improvement in the future,” stated Ken Lamneck, President and Chief Executive Officer. “Our differentiated solutions and disciplined operating model combined with PCM’s reach into the middle market will position us well to drive growth and deliver on our financial commitments as we head into 2020,” stated Lamneck.
Consolidated net sales for the third quarter of 2019 of $1.91 billion increased 9% year over year compared to the third quarter of 2018, primarily as a result of our acquisition of PCM.
Net sales in North America increased 10% year over year to $1.52 billion;
Net sales in EMEA increased 3% year over year to $355.7 million; and
Net sales in APAC increased 34% year over year to $41.7 million.
Excluding the effects of fluctuating foreign currency exchange rates, consolidated net sales increased 11% year over year, with an increase in net sales in North America, EMEA and APAC of 11%, 9% and 40%, respectively, year over year.
Consolidated gross profit increased 18% to $276.2 million compared to the third quarter of 2018, with consolidated gross margin expanding 100 basis points to 14.4% of net sales.
Gross profit in North America increased 22% year over year to $218.6 million (14.4% gross margin);
Gross profit in EMEA increased 1% year over year to $47.9 million (13.5% gross margin); and
Gross profit in APAC increased 16% year over year to $9.7 million (23.2% gross margin).
Excluding the effects of fluctuating foreign currency exchange rates, consolidated gross profit increased 19% year over year, with gross profit growth in North America, EMEA and APAC of 22%, 7% and 21%, respectively, year over year.
Consolidated earnings from operations decreased 11% compared to the third quarter of 2018 to $44.4 million, or 2.3% of net sales.
Earnings from operations in North America decreased 11% year to year to $39.3 million, or 2.6% of net sales, primarily as a result of acquisition-related and restructuring expenses incurred in the quarter;
Earnings from operations in EMEA decreased 32% year to year to $3.1 million, or 0.9% of net sales; and
Earnings from operations in APAC increased 60% year over year to $2.0 million, or 4.8% of net sales.
Excluding the effects of fluctuating foreign currency exchange rates, consolidated earnings from operations decreased 10% year to year, with a decline in earnings from operations in North America and EMEA of 11% and 28%, respectively, year to year, partially offset by earnings from operations growth in APAC of 64% year over year.
Consolidated net earnings and diluted earnings per share for the third quarter of 2019 were $27.1 million and $0.76, respectively, at an effective tax rate of 27.2%.
Adjusted consolidated net earnings and Adjusted diluted earnings per share for the third quarter of 2019 were $39.6 million and $1.10, respectively.
In discussing financial results for the three months ended September 30, 2019 and 2018 in this press release, the Company refers to certain financial measures that are adjusted from the financial results prepared in accordance with United States generally accepted accounting principles (“GAAP”). When referring to non-GAAP measures, the Company refers to such measures as “Adjusted.” See “Use of Non-GAAP Financial Measures” for additional information. A tabular reconciliation of financial measures prepared in accordance with GAAP to the non-GAAP financial measures is included at the end of this press release.
In some instances the Company refers to changes in net sales, gross profit and earnings from operations on a consolidated basis and in North America, EMEA and APAC excluding the effects of fluctuating foreign currency exchange rates. In computing these changes and percentages, the Company compares the current year amount as translated into U.S. dollars under the applicable accounting standards to the prior year amount in local currency translated into U.S. dollars utilizing the weighted average translation rate for the current period.
The tax effect of Adjusted amounts referenced herein were computed using the statutory tax rate for the taxing jurisdictions in the operating segment in which the related expenses were recorded, adjusted for the effects of valuation allowances on net operating losses in certain jurisdictions.
For the full year 2019, the Company expects to deliver net sales growth between 9% and 11% compared to 2018, reflecting the acquisition of PCM for the last four months of the year. The Company’s Adjusted diluted earnings per share outlook for the full year of 2019 is between $5.45 and $5.50.
This outlook assumes:
an effective tax rate of 25% to 26% for Q4 2019;
capital expenditures of $70 to $75 million for the full year, including the planned purchase of real estate in the fourth quarter of approximately $48 million; and
an average share count for the full year of approximately 36.0 million shares.
This outlook does not reflect the repurchase of any further shares of the Company’s common stock, excludes acquisition-related expenses, excludes severance and restructuring expenses incurred, excludes amortization of intangible assets, and excludes amortization of convertible debt discount and issuance costs during the first nine months of 2019 and those that may be incurred during the balance of 2019. Due to the inherent difficulty of forecasting all of these types of expenses, which impact net earnings and diluted earnings per share, the Company is unable to reasonably estimate the impact of such expenses, if any, to net earnings and diluted earnings per share. Accordingly, the Company is unable to provide a reconciliation of GAAP to non-GAAP diluted earnings per share for the full year 2019 forecast.
CONFERENCE CALL AND WEBCAST
The Company will host a conference call and live web cast today at 9:00 a.m. ET to discuss third quarter 2019 results of operations. A live web cast of the conference call (in listen-only mode) will be available on the Company’s web site at http://investor.insight.com/, and a replay of the web cast will be available on the Company’s web site for a limited time following the call. To listen to the live web cast by telephone, call 1-877-524-8416 if located in the U.S., 412-902-1028 for international callers, and enter the access code 13695651.
USE OF NON-GAAP FINANCIAL MEASURES
The non-GAAP financial measures are referred to as “Adjusted.” Adjusted consolidated earnings from operations, Adjusted consolidated net earnings and Adjusted diluted earnings per share exclude (i) severance and restructuring expenses, (ii) certain acquisition-related expenses, (iii) amortization of intangible assets, and (iv) the tax effects of each of these items, as applicable. Adjusted consolidated net earnings and Adjusted diluted earnings per share also exclude amortization of debt discount and issuance costs associated with the issuance of the Company’s convertible senior notes due 2025. The Company excludes these items when internally evaluating earnings from operations, tax expense, net earnings and diluted earnings per share for the Company and earnings from operations for each of the Company’s operating segments. Adjusted free cash flow is the Company’s net cash provided or used by operating activities adjusted for (i) purchases of property and equipment and (ii) the net borrowings or repayments under the inventory financing facilities. Adjusted return on invested capital (“ROIC”) excludes (i) severance and restructuring expenses, (ii) certain acquisition-related expenses, and (iii) the tax effects of each of these items, as applicable.
Insight has incurred amortization of intangible assets, included in its GAAP financial statements, related to various acquisitions Insight has made. The amount of an acquisition’s purchase price allocated to intangible assets and term of its related amortization can vary significantly and are unique to each acquisition; therefore Insight is excluding amortization of acquired intangible assets from its non-GAAP financial measures, as indicated above, to provide investors with a more consistent basis for comparing pre- and post-acquisition operating results.
These non-GAAP measures are used to evaluate financial performance against budgeted amounts, to calculate incentive compensation, to assist in forecasting future performance and to compare the Company’s results to those of the Company’s competitors. The Company believes that these non-GAAP financial measures are useful to investors because they allow for greater transparency, facilitate comparisons to prior periods and the Company’s competitors’ results and assist in forecasting performance for future periods. These non-GAAP financial measures are not prepared in accordance with GAAP and may be different from non-GAAP financial measures presented by other companies. Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP.
Certain statements in this release and the related conference call and web cast are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, including the Company’s expected 2019 financial results, sales growth and Adjusted diluted earnings per share for the full year 2019, and the assumptions relating thereto, as well as the Company’s anticipated effective tax rate, capital expenditures and plans concerning repurchases of the Company’s common stock, the Company’s expectations regarding cash flow, and the Company’s expectations about future benefits relating to the PCM acquisition, are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. There can be no assurances that the results discussed by the forward-looking statements will be achieved, and actual results may differ materially from those set forth in the forward-looking statements. Some of the important factors that could cause the Company’s actual results to differ materially from those projected in any forward-looking statements, include, but are not limited to, the following, which are discussed in “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, in “Cautionary Note Regarding Forward-looking Statements” in the Company’s Current Report on Form 8-K filed on June 24, 2019, and in the Company’s subsequent filings with the Securities and Exchange Commission:
actions of our competitors, including manufacturers and publishers of products we sell;
our reliance on our partners for product availability, competitive products to sell and marketing funds and purchasing incentives, which can change significantly in the amounts made available and the requirements year over year;
changes in the IT industry and/or rapid changes in technology;
risks associated with the integration and operation of acquired businesses, including PCM;
possible significant fluctuations in our future operating results as well as seasonality and variability of customer demands;
the risks associated with our international operations;
general economic conditions, economic uncertainties and changes in geopolitical conditions;
increased debt and interest expense and decreased availability of funds under our financing facilities;
the security of our electronic and other confidential information;
disruptions in our IT systems and voice and data networks;
failure to comply with the terms and conditions of our commercial and public sector contracts;
legal proceedings, including PCM related litigation, client audits and failure to comply with laws and regulations;
accounts receivable risks, including increased credit loss experience or extended payment terms with our clients;
our reliance on independent shipping companies;
our dependence on certain key personnel;
natural disasters or other adverse occurrences;
exposure to changes in, interpretations of, or enforcement trends related to tax rules and regulations;
intellectual property infringement claims and challenges to our registered trademarks and trade names;
unexpected costs or liabilities in connection with the acquisition of PCM;
the Company’s inability to achieve expected synergies and operating efficiencies as a result of the acquisition of PCM, whether within the expected time frames, without undue difficulty, cost or expense, or at all;
the Company’s ability to successfully integrate PCM’s operations into its own, whether within expected time frames, without undue difficulty, cost or expense, or at all;
the level of revenues following the acquisition of PCM, which may be lower than expected;
operating costs, customer loss and business disruptions arising from the acquisition of PCM (including, without limitation, difficulties in maintaining relationships with employees, customers, clients or suppliers), which may be greater than expected;
cyber attacks or breaches of data privacy and security regulations;
uncertainties surrounding the acquisition of PCM;
the outcome of any legal proceedings related to the acquisition of PCM;
other adverse economic, business, and/or competitive factors;
risks that the acquisition of PCM distracts management of the Company or PCM or disrupts current plans and operations;
the Company’s ability to retain key PCM and Company employees;
the senior convertible notes (the “notes”) are effectively subordinated to the Company’s secured debt and are structurally subordinated to any liabilities of our subsidiaries, other than the subsidiary guarantor;
the debt may restrict the Company’s future operations and impair its ability to meet business obligations under the notes;
the conditional conversion feature of the notes, if triggered, may adversely affect the Company’s financial condition and operating results;
the accounting method for convertible debt securities that may be settled in cash, such as the notes, could have a material effect on the Company’s reported financial results;
future sales of the Company’s common stock or equity-linked securities in the public market could lower the market price for our common stock and adversely impact the trading price of the notes; and
the Company is subject to counterparty risk with respect to the convertible note hedge transactions.
Additionally, there may be other risks that are otherwise described from time to time in the reports that the Company files with the Securities and Exchange Commission. Any forward-looking statements in this release should be considered in light of various important factors, including the risks and uncertainties listed above, as well as others. The Company assumes no obligation to update, and, except as may be required by law, does not intend to update, any forward-looking statements. The Company does not endorse any projections regarding future performance that may be made by third parties.
Chief Financial Officer
Senior VP, Finance