Insight Enterprises, Inc. 2021 Q3 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 reported through North America, EMEA and APAC segments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared primarily with the corresponding 2020 periods. The filing was signed November 4, 2021.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $2.448 billion | $1.936 billion | $6.870 billion | $6.049 billion |
| Gross profit | $364.5 million | $307.6 million | $1.063 billion | $957.3 million |
| Gross margin | 14.9% | 15.9% | 15.5% | 15.8% |
| Earnings from operations | $83.2 million | $61.5 million | $238.6 million | $188.5 million |
| Operating margin | 3.4% | 3.1% | 3.5% | 3.1% |
| Net earnings | $55.5 million | $38.9 million | $157.2 million | $119.3 million |
| Diluted EPS | $1.51 | $1.10 | $4.27 | $3.37 |
| Operating cash flow | Not separately provided | Not separately provided | $(117.8) million | $462.1 million |
Q3 net sales increased 26%, gross profit increased 19%, operating earnings increased 35%, and net earnings increased 43% year over year. For the first nine months, sales increased 14%, operating earnings increased 27%, and net earnings increased 32%.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $107.4 million at September 30, 2021, compared with $128.3 million at December 31, 2020. Cash, cash equivalents and restricted cash totaled $109.5 million at quarter-end.
- Accounts receivable were $2.754 billion and inventories were $269.5 million, up from $2.685 billion and $185.7 million, respectively, at year-end 2020.
- Total debt was $527.5 million, including $222.0 million outstanding under the ABL facility and $305.5 million net carrying value of convertible senior notes due 2025. Total debt was $438.7 million at December 31, 2020.
- The ABL facility has $1.2 billion of aggregate capacity, matures August 30, 2024, and had $222.0 million outstanding. The company stated that eligible collateral supported access to the full facility amount and that all covenants were satisfied.
- Inventory financing facilities had $620.0 million of aggregate capacity, of which $403.1 million was outstanding at September 30, 2021.
- Management expects operating cash flows and available financing capacity to meet operating and working-capital needs for the next 12 months and intends to use excess cash to reduce ABL and inventory-financing borrowings.
Cash Flow and Capital Allocation
- Operating activities used $117.8 million in the first nine months of 2021, versus $462.1 million provided in the prior-year period. The change primarily reflected higher working-capital needs, increased receivables and inventories, partner payment timing and the absence of prior-year payment deferrals and customer advances.
- Investing activities provided $1.2 million, including $29.2 million of asset-sale proceeds, offset by $28.0 million of capital expenditures.
- Financing activities provided $99.1 million, including $82.0 million of net ABL borrowings, $76.4 million of net inventory-financing borrowings and $50.0 million of share repurchases.
- Management expects full-year 2021 capital expenditures of $65 million to $75 million, primarily for the global headquarters and technology-related projects.
- The company repurchased 497,243 shares for approximately $50.0 million during the first nine months. Approximately $75.0 million remained available under the repurchase authorization at September 30, 2021. The company does not currently intend to pay cash dividends.
Material Changes Versus the Prior Comparable Period
- North America led growth, with Q3 sales up 30%; EMEA sales rose 12% and APAC sales rose 25%. Nine-month sales increased 14% in North America, 11% in EMEA and 26% in APAC.
- Q3 product sales increased 28% and services sales increased 18%. Growth was driven particularly by hardware, including devices, networking and storage, as well as cloud solutions and delivered services.
- Gross margin contracted approximately 100 basis points in Q3 and 30 basis points for the first nine months. Management attributed the decline primarily to greater sales of lower-margin products, product and service mix, lower product margins and reduced referral fees.
- Selling and administrative expense increased 14% in Q3 and 9% for the first nine months, primarily because of higher headcount, personnel costs and variable compensation. Expense ratios nevertheless declined because sales grew faster.
- Q3 interest expense increased 13% because of higher average ABL borrowings and increased imputed interest. Nine-month interest expense decreased 4% because of lower first-half ABL balances and borrowing rates.
- The effective tax rate increased to 25.4% in Q3 and 25.0% for the first nine months, versus 23.8% in both 2020 periods, primarily because prior-year tax benefits did not recur.
- The company sold properties for approximately $27.2 million of net proceeds during the first nine months and recorded approximately $8.0 million of gains on property sales, which offset severance charges in the period.
Guidance, Outlook, Risks and Unusual Items
- Management expected Q4 2021 sales to increase year over year and expected supply constraints and extended lead times for certain products to begin easing in 2022.
- Chip and display shortages continued to create supply constraints and elevated bookings entering Q4. The company also identified inflation, labor availability, logistics and broader supply-chain disruption as uncertainties.
- COVID-19 and variants, including Delta, could affect operations, customer demand, workforce participation, supply chains and financial results; the ultimate impact remained uncertain.
- Results are subject to seasonality, with higher sales and profitability generally expected in the second and fourth quarters.
- Gross profit depends significantly on partner incentives, which may change in amount and eligibility requirements. The company also faces pricing pressure, competition, technology changes, foreign-exchange exposure, credit and receivables risk, cybersecurity risk and reliance on suppliers and shipping providers.
- The convertible notes exceeded the market-price conversion trigger during Q3 and were convertible at holders’ option through December 31, 2021. No holders had exercised as of September 30, 2021. The notes had a $350.0 million principal amount and a 0.75% coupon, maturing February 15, 2025.
- The company expects adoption of ASU 2020-06 on January 1, 2022 to materially affect the balance sheet and income statement by eliminating accreted interest accounting and presenting the full principal amount of the convertible notes as debt.
- PCM-related litigation and other ordinary-course claims remain unresolved. Management believes adequate provisions exist for probable and estimable losses but cannot determine the outcome or costs of the PCM matters with certainty.
- Tax audits for years 2013 through 2018 are ongoing. The company reported $11.6 million of unrecognized tax benefits and stated that a material impact from likely resolutions is not expected, although a range of outcomes could not be estimated.
Investor Verification Items
- Verify whether supply constraints, product lead times, inflation and labor shortages eased as projected and how they affected Q4 2021 and subsequent gross margins.
- Reconcile the sharp year-over-year deterioration in operating cash flow with reported earnings, particularly changes in receivables, inventories, payables and partner payment terms.
- Monitor ABL and inventory-financing utilization, covenant compliance, interest costs and the company’s stated plan to reduce borrowings.
- Assess the effect of lower-margin hardware growth, partner incentives, cloud migration and service mix on future gross margins.
- Review the January 1, 2022 adoption effects of ASU 2020-06 and the potential dilution or cash-settlement consequences of convertible notes that became convertible.
- Track the status and potential exposure from PCM litigation, tax audits, indemnifications and other contingencies.