INSIGHT ENTERPRISES INC quarterly report, Q2 FY2022

Insight Enterprises, Inc. — Form 10-Q Summary

Reporting period: Three and six months ended June 30, 2022; filed August 4, 2022. Insight is a global provider of IT hardware, software, cloud solutions, and services operating through North America, EMEA, and APAC. The financial statements are unaudited.

Financial performance

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Net sales	$2.743 billion	$2.230 billion	$5.394 billion	$4.423 billion
Gross profit	$437.9 million	$366.7 million	$816.8 million	$698.2 million
Gross margin	16.0%	16.4%	15.1%	15.8%
Earnings from operations	$129.6 million	$88.5 million	$209.4 million	$155.5 million
Operating margin	4.7%	4.0%	3.9%	3.5%
Net earnings	$89.2 million	$58.6 million	$145.8 million	$101.7 million
Diluted EPS	$2.42	$1.58	$3.95	$2.76

Q2 net sales increased 23% year over year, or 26% excluding foreign-exchange effects. Six-month sales increased 22%.
Q2 operating earnings increased 46%; six-month operating earnings increased 35%.
North America generated Q2 sales of $2.247 billion, up 28%; EMEA sales were $426.3 million, up 2%; and APAC sales were $69.6 million, up 33%.
Q2 product sales increased 24% and services sales increased 16%. North American hardware sales increased 33%, supported by higher enterprise and corporate demand and some backlog clearance.
Gross margin declined because of a greater mix of lower-margin hardware and changes in services mix, including lower contributions from certain services and partner funding.
Effective tax rates were 25.6% for Q2 and 25.0% for the first six months, compared with 25.4% and 24.8%, respectively, in the prior-year periods.

Cash flow, liquidity, and debt

Operating activities used $442.0 million in the first six months of 2022, compared with $5.2 million provided in the prior-year period. The use of cash primarily reflected increased accounts receivable, inventory investment, growth in hardware sales, and shorter supplier payment terms.
Investing activities used $114.2 million, including $68.2 million for the acquisition of Hanu and $47.3 million of capital expenditures. Management expects full-year 2022 capital expenditures of $65 million to $70 million.
Financing activities provided $598.4 million, including $667.5 million of net borrowings under the ABL facility, partially offset by $62.1 million of net repayments under inventory financing facilities.
Cash and cash equivalents were $137.5 million at June 30, 2022; cash, cash equivalents, and restricted cash totaled $139.6 million.
Total debt, including finance leases and other financing obligations, was $1.065 billion, compared with $361.6 million at December 31, 2021. The ABL balance was $718.2 million and convertible senior notes had a $350 million principal balance.
The ABL facility had a $1.2 billion capacity at quarter-end, with $481.8 million of unused capacity based on the reported outstanding balance. On July 22, 2022, the facility was amended to increase capacity to $1.8 billion and extend maturity to July 22, 2027.
Inventory financing facilities had total capacity of $705.0 million, of which $248.3 million was outstanding.
The cash conversion cycle increased to 48 days from 33 days, reflecting lower days payable outstanding and higher inventory days, partly offset by lower receivable days.
Management stated that cash flows from operations and available financing are expected to support operations, working capital, capital expenditures, strategic acquisitions, debt repayments, and other anticipated needs over the next 12 months.

Material changes and unusual items

Insight acquired Hanu Software Solutions effective June 1, 2022, for approximately $68.2 million net of cash acquired, excluding a potential earn-out of up to $20.0 million and other holdbacks. Preliminary goodwill was approximately $69.4 million.
The company adopted ASU 2020-06 on January 1, 2022 using the modified retrospective method. The adoption eliminated the equity component and accreted debt discount accounting for the convertible notes, increased reported debt, and produced a cumulative adjustment reducing additional paid-in capital by $44.7 million and increasing retained earnings by $17.8 million.
The convertible notes exceeded their conversion-price market trigger during Q2 and were convertible at holders’ option through September 30, 2022. The principal amount was therefore classified as current. No fundamental-change or default event had occurred at June 30.
Q2 included $0.7 million of severance and restructuring expense and $1.6 million of acquisition and integration expense. Six-month charges were $2.1 million and $1.6 million, respectively.
No shares were repurchased during the first six months of 2022. Approximately $75.0 million remained available under the repurchase authorization at June 30, 2022. The company does not currently intend to pay cash dividends.

Outlook, risks, and contingencies

Management expects 2022 net sales to grow compared with 2021 and anticipates possible growth in networking and infrastructure products during the second half of the year.
Management cautioned that overall North American hardware growth could slow in the second half of 2022. Supply constraints and extended lead times could affect results into the second half of 2022 and 2023; elevated backlog remained at quarter-end.
Key risks include inflation and rising interest rates, recessionary conditions, reduced IT spending, supply-chain and labor disruptions, foreign-exchange volatility, COVID-19 developments, geopolitical effects from Russia’s invasion of Ukraine, cybersecurity incidents, partner incentives, customer credit and collections, and dependence on financing facilities.
The company had approximately $27.3 million of performance bonds outstanding and various indemnification obligations, but management considered related payments not probable and recorded no associated liabilities.
PCM-related litigation involving claims connected with the acquisition of En Pointe assets remains pending in multiple jurisdictions. The company cannot determine the outcome, but does not believe the matters are reasonably expected to have a material adverse effect.
Tax audits cover various jurisdictions and tax years 2015 through 2019. Management could not estimate a range of possible outcomes, but does not expect a significant effect on tax expense or net earnings.

Investor verification checklist

Verify whether working-capital investment, the 48-day cash conversion cycle, and negative operating cash flow normalize or continue to require substantial ABL borrowings.
Monitor gross-margin trends, particularly the mix of lower-margin hardware, services margins, partner funding, and foreign-exchange effects.
Review the July 2022 ABL amendment, interest-rate exposure, covenant compliance, and the company’s plan to reduce debt.
Assess Hanu’s post-acquisition contribution, the final purchase-price allocation, and any earn-out obligations.
Track supply constraints, backlog conversion, and the potential slowdown in North American hardware growth.
Consider the cash-settlement requirements and potential dilution associated with the convertible notes, including the conversion trigger and Call Spread Transactions.