Insight Enterprises, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Insight Enterprises is a global provider of IT hardware, software, cloud solutions, digital innovation, data-center transformation, connected-workforce solutions and related services. Operations are organized into North America, EMEA and APAC segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, filed August 5, 2021.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Net sales | $2.230 billion | $1.969 billion | $4.423 billion | $4.113 billion |
| Gross profit | $366.7 million | $324.4 million | $698.2 million | $649.7 million |
| Gross margin | 16.4% | 16.5% | 15.8% | 15.8% |
| Earnings from operations | $88.5 million | $74.2 million | $155.5 million | $127.1 million |
| Operating margin | 4.0% | 3.8% | 3.5% | 3.1% |
| Net earnings | $58.6 million | $46.4 million | $101.7 million | $80.3 million |
| Diluted EPS | $1.58 | $1.32 | $2.76 | $2.27 |
| Net cash from operations | Not separately provided | Not separately provided | $5.2 million | $497.5 million |
- Q2 sales increased 13% year over year; excluding foreign-exchange effects, management reported a 10% increase. Six-month sales increased 8%.
- Q2 operating earnings increased 19%, while six-month operating earnings increased 22%. Net earnings increased 26% in Q2 and 27% for the first half.
- Products generated $1.889 billion of Q2 sales and services generated $340.3 million. Services sales increased 15% year over year, supported by cloud solutions and Insight-delivered services.
- Q2 segment sales increased 14% in North America, 6% in EMEA and 40% in APAC. Foreign-exchange-adjusted EMEA sales decreased 4% and APAC sales increased 24%.
- At June 30, 2021, cash and cash equivalents were $107.8 million, compared with $128.3 million at December 31, 2020. Cash, cash equivalents and restricted cash totaled $110.1 million.
- Total debt was $483.9 million, consisting primarily of $180.0 million outstanding under the ABL facility and $302.4 million of net carrying value for convertible senior notes. Inventory financing facilities had $309.3 million outstanding against aggregate capacity of $565.0 million.
- The ABL facility had $1.2 billion of total capacity, with eligible receivables and inventory supporting access to the full amount. The Company was in compliance with its covenants.
- Accounts receivable increased to $3.045 billion and inventories increased to $214.4 million from $2.685 billion and $185.7 million, respectively, at year-end 2020.
Material Changes Versus the Prior Comparable Period
- Revenue growth was broad-based across products, services and all geographic segments, with particularly strong APAC growth and higher North American hardware, software and services volumes.
- Q2 gross margin declined approximately 10 basis points to 16.4%, reflecting lower hardware and software margins partly offset by a higher services mix. First-half gross margin was unchanged at 15.8%.
- Selling and administrative expenses rose 14% in Q2 and 7% for the first half, primarily because of higher headcount, personnel costs and variable compensation. Q2 SG&A increased approximately 10 basis points as a percentage of sales.
- Severance and restructuring expense declined to $1.1 million in Q2 from $7.0 million. First-half severance expense of approximately $2.4 million was more than offset by approximately $8.0 million of gains on property sales.
- Operating cash flow fell sharply to $5.2 million from $497.5 million, primarily because the prior year benefited from partner payment deferrals, a significant customer advance payment and COVID-19-related tax deferrals. Working-capital investment also increased.
- The cash conversion cycle increased to 34 days from 22 days, principally because days payable outstanding declined by 13 days.
- The Company repurchased and retired 497,243 shares for approximately $50.0 million during the first six months, versus $25.0 million in the prior-year period. The May 2021 authorization increased the total repurchase authorization to $125.0 million, with approximately $75.0 million remaining at June 30.
- The Company completed sales of four properties for net proceeds of approximately $27.2 million and plans to use the proceeds to prepare its Chandler, Arizona property as global headquarters.
Guidance, Outlook, Risks and Unusual Items
- Management expected supply constraints related to chips and displays to begin easing by the end of 2021 and expected second-half 2021 sales growth versus the prior-year period. The filing does not provide formal full-year revenue or earnings guidance.
- Management expects full-year 2021 capital expenditures of $65 million to $75 million, primarily for the new headquarters and technology-related projects.
- Management expects operating cash flow and available financing to support anticipated operating and working-capital requirements for the next 12 months. Excess cash is intended to fund operations and reduce ABL and inventory-financing balances.
- COVID-19 did not have a significant effect on Q2 results, but its future effects remain uncertain. Supply-chain disruptions, extended lead times, inflation, changing customer demand and partner availability remain material considerations.
- The convertible notes exceeded the applicable market-price trigger during Q2 and became convertible at holders’ option through maturity, although no holders had converted as of June 30. The notes have $350 million principal, mature February 15, 2025 and could result in substantial dilution; the maximum potential shares stated in the filing are 6,788,208.
- Adoption of ASU 2020-06 is expected on January 1, 2022 and is expected to significantly affect the balance sheet and statements of operations by eliminating accreted interest presentation and recording the full principal value of the convertible notes as debt.
- Risks include supply constraints, COVID-19 and other macroeconomic conditions, partner incentives and product availability, credit and accounts-receivable exposure, cybersecurity and IT disruption, international operations, acquisitions and PCM integration, debt and interest-rate exposure, convertible-note dilution, tax audits, litigation and loss of key personnel.
- PCM-related litigation involving disputes associated with the En Pointe asset acquisition is pending in multiple courts and arbitration forums. The Company cannot determine the ultimate cost or outcome, but does not currently believe the matters are reasonably expected to have a material adverse effect.
- The Company has never paid a cash dividend and does not intend to pay dividends in the foreseeable future.
Important Facts for Investors to Verify
- Whether supply constraints and extended product lead times eased as projected and whether elevated bookings converted into reported sales.
- The sustainability of gross margins amid hardware and software pricing pressure, partner-incentive changes and migration toward cloud offerings.
- Accounts-receivable growth, working-capital requirements, the 34-day cash conversion cycle and the recovery of operating cash flow.
- Utilization and repayment of the ABL and inventory-financing facilities, covenant compliance and exposure to higher interest rates or LIBOR replacement terms.
- The potential dilution, settlement obligations and accounting effects associated with the convertible notes now eligible for holder conversion.
- Progress and spending related to the Chandler headquarters and the stated $65 million to $75 million capital-expenditure plan.
- Developments in PCM-related litigation, tax audits and other contingencies for which the filing does not provide a clear reasonably possible loss range.