Insight Enterprises, Inc. — Fiscal 2020 Form 10-K Summary
Business context and reporting period
Insight Enterprises is a global provider of IT hardware, software, cloud, digital innovation, data-center transformation, connected-workforce and managed services. Operations are organized into North America, EMEA and APAC, representing approximately 79%, 19% and 2% of 2020 consolidated net sales, respectively. The filing covers the fiscal year ended December 31, 2020, with comparisons primarily to fiscal 2019.
Insight acquired French digital consulting and managed-services provider vNext on February 28, 2020. The Company also reported its first full year of PCM operations following the August 2019 acquisition and completed PCM systems integration during 2020.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $8.341 billion | $7.731 billion | +8% |
| Gross profit | $1.300 billion | $1.138 billion | +14% |
| Gross margin | 15.6% | 14.7% | +90 basis points |
| Earnings from operations | $271.6 million | $240.6 million | +13% |
| Operating margin | 3.3% | 3.1% | +20 basis points |
| Net earnings | $172.6 million | $159.4 million | +8% |
| Diluted EPS | $4.87 | $4.43 | +10% |
| Effective tax rate | 24.4% | 24.7% | Down 30 basis points |
| Cash flow from operations | $355.6 million | $127.9 million | Substantial increase |
Services sales increased 17% and product sales increased 7%. Consolidated 2020 sales mix was approximately 61% hardware, 25% software and 14% services, compared with 60%, 27% and 13%, respectively, in 2019. Services growth reflected higher cloud offerings and Insight-delivered services, while software sales were affected by migration toward cloud-based offerings.
North America sales increased 10% to $6.615 billion, EMEA sales increased 2% to $1.555 billion, and APAC sales decreased 6% to $170.3 million. Operating earnings increased in each segment: North America to $219.2 million, EMEA to $40.4 million and APAC to $12.0 million.
Selling and administrative expenses rose to $1.014 billion from $880.7 million, primarily due to the full-year inclusion of PCM, higher personnel costs, additional amortization and facility expenses. Severance and restructuring expense was $12.4 million, compared with $5.4 million in 2019. Acquisition-related expense declined to $2.2 million from $11.3 million.
Cash flow, liquidity and debt
- Operating cash flow was $355.6 million. Investing activities provided $9.7 million, including $40.3 million of property-sale proceeds, offset by $24.2 million of capital expenditures and $6.4 million for the vNext acquisition.
- Cash used in financing activities was $361.8 million, primarily reflecting $431.4 million of net ABL repayments, partly offset by $103.3 million of net borrowings under inventory-financing facilities.
- Cash and cash equivalents were $128.3 million at December 31, 2020; cash, cash equivalents and restricted cash totaled $130.6 million.
- Total long-term debt, including finance leases and other financing obligations, was $438.7 million, consisting primarily of $140.0 million outstanding under the ABL facility and $296.4 million carrying value of convertible senior notes.
- Inventory-financing obligations were $356.9 million and are presented separately from debt. The facilities had total capacity of $500.0 million.
- The ABL facility had a $1.2 billion maximum borrowing amount, with $1.1 billion available at year-end. The Company stated that eligible receivables and inventory supported access to the full facility amount.
- Management expected operating cash flow and available financing capacity to fund operations, working capital, capital expenditures, share repurchases and debt repayments for at least the next 12 months. The Company intended to use excess 2021 cash flow to reduce ABL and inventory-financing balances.
- Capital expenditures were expected to be $75 million to $85 million in 2021, including approximately $60 million for preparing the Chandler, Arizona global headquarters.
Material changes versus the prior comparable period
- Revenue, gross profit, operating earnings and net earnings increased despite COVID-19-related demand and supply-chain disruption.
- Gross margin improved primarily because of greater services and cloud contribution, improved product margins and favorable sales mix. Management cautioned that future margin expansion may be muted as the mix returns toward lower-margin hardware sales.
- Interest expense increased 46% to $41.6 million, driven by the PCM-related financing, convertible-note accounting and higher inventory-financing balances.
- Accounts receivable increased to $2.685 billion from $2.511 billion, while accounts payable-trade increased to $1.461 billion from $1.276 billion.
- Working capital declined to $949.0 million from $1.165 billion, although the Company reported a stronger cash-conversion cycle of 30 days versus 38 days in the fourth quarter of 2019.
- The Company repurchased approximately 445,000 shares for $25.0 million in 2020. No cash dividends have been paid, and management did not intend to pay dividends in the foreseeable future.
- Goodwill increased to $429.4 million from $415.1 million, principally from vNext and foreign-currency effects. The annual impairment review found no impairment charge was required.
Outlook, commentary, risks and unusual items
Management reported that COVID-19 adversely affected 2020 results and could continue to affect demand, supply chains, shipping, employee availability, client liquidity and financing costs in 2021. Hardware bookings declined in the first half of 2020 but were slightly elevated entering the first quarter of 2021; management cautioned that continued pandemic effects and supply challenges could reduce the benefit.
The Company reduced discretionary spending, accelerated PCM integration and temporarily suspended U.S. retirement-plan matching contributions. It continued investing in sales coverage and technical talent and expected the IT market to begin recovering in 2021. The filing does not provide formal revenue or earnings guidance.
Key risks include intense competition and pricing pressure; reliance on Microsoft and other partners for supply, incentives and rebates; low operating margins; accounts-receivable and client-credit risk; international operations and foreign-currency exposure; cybersecurity and IT-system disruptions; acquisition integration; legal and government-contract matters; tax examinations; and substantial indebtedness.
The $350.0 million convertible senior notes bear a 0.75% coupon, mature in February 2025 and had a $296.4 million net carrying amount at year-end. Conversion, redemption, cash-settlement and potential dilution provisions could affect liquidity, reported earnings and share count. The Company also has variable-rate debt exposure and disclosed risks related to the transition away from LIBOR.
Unusual or non-recurring items included $12.4 million of severance and restructuring costs, $2.2 million of acquisition-related costs, $25.0 million of share repurchases, $40.3 million of property-sale proceeds and a $1.7 million CARES Act-related tax benefit. In January 2021, the Company sold properties in Tempe, Arizona and Woodbridge, Illinois for approximately $27.2 million net, with proceeds intended for the Chandler headquarters.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Revenue recognition was identified as the critical audit matter.
Most important facts for investors to verify
- Whether COVID-19 effects, device supply constraints and the shift toward cloud offerings change 2021 revenue growth and the unusually favorable 2020 gross-margin mix.
- The sustainability of operating cash flow, particularly given the increase in accounts receivable and reliance on extended supplier payment terms and inventory financing.
- Debt reduction progress, ABL availability, covenant compliance and the refinancing or settlement strategy for the convertible notes due 2025.
- The amount and durability of partner funding and incentives, especially those associated with Microsoft, Dell, Cisco, HP and Lenovo.
- Execution of the EMEA IT-system migration and the operational benefits expected from PCM and vNext integration.
- Potential dilution, cash-settlement exposure and accounting effects from the convertible notes, note hedge and warrants.
- Developments in PCM-related litigation, tax audits, unrecognized tax benefits and other contractual contingencies.
- The timing and cost of the Chandler headquarters buildout and the use of proceeds from property sales.