Insight Enterprises, Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
Insight is a global provider of IT hardware, software, cloud solutions and services, operating across North America, EMEA and APAC. This unaudited report covers the three months ended March 31, 2022, compared primarily with the three months ended March 31, 2021.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $2.651 billion | $2.193 billion | +21% |
| Gross profit | $378.9 million | $331.5 million | +14% |
| Gross margin | 14.3% | 15.1% | Down 80 bps |
| Earnings from operations | $79.8 million | $67.0 million | +19% |
| Operating margin | 3.0% | 3.1% | Down 10 bps |
| Net earnings | $56.6 million | $43.2 million | +31% |
| Diluted EPS | $1.53 | $1.18 | +$0.35 |
| Cash flow from operations | $(284.2) million | $42.7 million | Declined materially |
Revenue growth was broad-based, led by North America at $2.065 billion, up 25%, and EMEA at $531.4 million, up 11%. APAC revenue declined 8% to $54.9 million. North American hardware revenue increased 31%, while consolidated services revenue increased 14% to $340.6 million.
At March 31, 2022, cash and cash equivalents were $114.8 million. Accounts receivable were $3.026 billion and inventories were $383.4 million. Total assets were $4.850 billion, compared with $4.689 billion at December 31, 2021.
Total debt, including finance leases and other financing obligations, was $717.9 million, consisting primarily of $373.0 million outstanding under the ABL facility and $344.9 million of convertible senior notes classified as current. The ABL facility had $1.2 billion of total capacity, with $827.0 million available based on outstanding borrowings. Inventory financing facilities had $705.0 million of capacity, of which $318.4 million was outstanding.
Cash increased by $10.9 million during the quarter to $116.9 million, including restricted cash. Financing activities provided $320.0 million, primarily from net ABL borrowings, offsetting operating and investing cash uses. The cash conversion cycle increased to 41 days from 33 days.
Material changes versus the prior comparable period
- Sales increased 21%, primarily from higher North American device and hardware volumes, higher software licensing and growth in delivered services.
- Gross margin contracted because of a greater mix of lower-margin hardware and weaker margins in certain services categories.
- Selling and administrative expenses increased 10%, driven mainly by higher personnel costs, professional fees and travel expenses, but declined as a percentage of sales.
- Q1 2021 included approximately $27.2 million of proceeds from property sales and an approximately $8.0 million gain; there was no comparable activity in Q1 2022.
- Operating cash flow turned negative primarily because of increased accounts receivable, inventory investment and lower accounts payable, reflecting higher hardware sales and changes in partner mix.
- The company adopted ASU 2020-06 for convertible debt accounting on January 1, 2022. The adoption increased retained earnings by $17.8 million and reduced additional paid-in capital by $44.7 million. Management stated that the adoption increased Q1 2022 diluted EPS by approximately $0.05.
Guidance, outlook, risks and unusual items
Management expects 2022 sales to grow compared with 2021 and believes North American hardware growth could continue into the second half of 2022. However, supply constraints and extended product lead times may affect results into the second half of the year. Management expects full-year 2022 capital expenditures of approximately $65 million to $70 million, including completion of the global headquarters.
Management expects operating cash flows and available financing facilities to support operations, working capital and strategic investments over the next 12 months. It intends to use excess cash flow to reduce ABL and inventory-financing debt. No share repurchases occurred during the quarter, although approximately $75 million remained available under the repurchase authorization. The company does not currently intend to pay cash dividends in the foreseeable future.
- COVID-19, new variants, supply-chain disruption, inflation, labor availability and geopolitical or economic conditions remain significant uncertainties.
- The convertible notes exceeded the market-price conversion trigger and were convertible at the holders’ option through June 30, 2022. The company elected to settle principal in cash; the notes’ principal amount was therefore classified as current.
- The company was in compliance with its ABL covenants at March 31, 2022, and reported no debt defaults.
- Performance bonds totaled approximately $27.3 million and were not accrued because management considered payments unlikely.
- PCM-related litigation and other ordinary-course legal matters remain unresolved, but management does not expect them to have a material adverse effect based on current information.
- Tax audits for 2015–2019 remain ongoing. The filing states that the potential range of outcomes cannot currently be estimated and that a significant effect is not expected.
Important facts for investors to verify
- Whether supply constraints, extended lead times and inflation affect second-half 2022 revenue, margins or working capital.
- Whether the negative operating cash flow and higher 41-day cash conversion cycle reverse as receivables, inventory and payables normalize.
- The company’s ability to repay the $320 million of Q1 ABL net borrowings while managing the $344.9 million current portion of convertible notes.
- Whether lower-margin hardware growth and changes in services mix continue to pressure gross margin.
- The effect of the convertible notes’ cash-settlement requirement, potential conversion and related liquidity needs.
- Progress toward the stated $65 million–$70 million capital-expenditure plan and completion of the global headquarters.