Insight Enterprises, Inc. — FY2021 Form 10-K Summary
Business context and reporting period
Insight Enterprises is a global provider of IT hardware, software, cloud solutions, cybersecurity, digital transformation and related services. Operations are reported across North America, EMEA and APAC, representing approximately 80%, 18% and 2% of 2021 consolidated net sales, respectively. The filing covers the fiscal year ended December 31, 2021; it is an annual filing rather than a standalone fourth-quarter filing.
Consolidated 2021 sales mix was approximately 62% hardware, 24% software and 14% services. The Company employed 11,624 teammates at year-end. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $9.436 billion | $8.341 billion | +13% |
| Gross profit | $1.448 billion | $1.300 billion | +11% |
| Gross margin | 15.3% | 15.6% | Down approximately 30 bps |
| Earnings from operations | $332.1 million | $271.6 million | +22% |
| Operating margin | 3.5% | 3.3% | Up approximately 20 bps |
| Net earnings | $219.3 million | $172.6 million | +27% |
| Diluted EPS | $5.95 | $4.87 | +22% |
| Effective tax rate | 25.0% | 24.4% | Up 60 bps |
| Cash flow from operations | $163.7 million | $355.6 million | Down $191.9 million |
- Segment sales were $7.520 billion in North America, $1.704 billion in EMEA and $211.7 million in APAC. Segment operating margins were 3.6%, 2.8% and 7.7%, respectively.
- Cash and cash equivalents were $103.8 million at December 31, 2021; cash, cash equivalents and restricted cash totaled $106.0 million.
- Accounts receivable increased to $2.937 billion from $2.685 billion, while inventories increased to $328.1 million from $185.7 million, primarily reflecting supply-chain actions.
- Total long-term debt was $361.6 million, including $53.0 million under the ABL facility and $308.5 million carrying value of convertible senior notes. Inventory financing obligations were an additional $311.9 million.
- The ABL facility had a $1.2 billion maximum borrowing amount, with full borrowing availability supported by eligible receivables and inventory at year-end. The Company was in compliance with its debt covenants.
- Capital expenditures were $52.1 million, compared with $24.2 million in 2020. The Company received $31.0 million from asset sales.
Material changes versus the prior comparable period
- Sales growth was broad-based. North America increased 14%, EMEA increased 10% as reported and 4% excluding foreign exchange, and APAC increased 24% as reported and 15% excluding foreign exchange.
- Services sales increased 13% overall, supported by Insight-delivered services and cloud offerings. Hardware sales increased 16% overall, while software sales increased 6%.
- Gross margin contracted because of a higher mix of lower-margin hardware sales, particularly to large enterprise and corporate clients. North America margin declined to 15.1%; EMEA remained at 15.2%; APAC increased to 25.1%.
- Operating profitability improved despite higher personnel costs and professional fees. Selling and administrative expense declined to 11.8% of sales from 12.1%.
- 2021 included $6.4 million of severance expense and an $8.0 million restructuring gain from property sales. There were no acquisition-related expenses, compared with $2.2 million in 2020.
- Operating cash flow declined sharply because of increases in accounts receivable and inventory. The cash conversion cycle remained 30 days, with days inventory outstanding rising to 13 from 8.
- The Company repurchased approximately 497,000 shares for $50.0 million, compared with approximately 445,000 shares for $25.0 million in 2020. Approximately $75.0 million remained available under the repurchase authorization at year-end.
- Management completed the United Kingdom migration to common global IT systems during 2021; the remaining European migration was completed in January 2022.
Guidance, outlook, commentary and risks
- Management expected supply constraints and extended lead times for chips, displays and other products to continue into 2022. Elevated bookings and backlog exiting 2021 were expected to benefit the first half of 2022, and management expected 2022 net sales growth versus 2021.
- The majority of product backlog consists of open, cancellable purchase orders; management cautioned that backlog is not necessarily predictive of future results.
- Management expected 2022 capital expenditures of approximately $75 million to $80 million, including completion of the global headquarters in Chandler, Arizona.
- Management intended to use excess 2022 operating cash flow to repay the ABL and inventory financing facilities. It believed operating cash flow and available financing would support operations, working capital, capital expenditures, strategic acquisitions, share repurchases and debt repayments over the next 12 months and beyond.
- The convertible notes’ market-price conversion trigger was met in the fourth quarter, making the notes convertible at holders’ option through March 31, 2022. No holders had converted as of the filing. The $350.0 million principal amount matures in February 2025.
- Key risks include prolonged supply-chain disruption, COVID-19 variants, inflation, labor shortages, aggressive competition and pricing pressure, dependence on technology partners and partner funding, customer credit and collection risk, cybersecurity and IT-system disruptions, foreign exchange exposure, variable interest rates and the integration of acquisitions.
- Outstanding litigation and audits include disputes assumed from PCM’s acquisition of En Pointe Technologies and tax audits covering various jurisdictions and tax years. Management stated that no pending matter was expected to have a material adverse effect, but the PCM litigation outcome cannot be determined with certainty.
- The Company does not pay cash dividends and does not currently intend to do so. Debt agreements restrict dividends and contain financial and reporting covenants.
- Effective January 1, 2022, the Company adopted ASU 2020-06 for convertible instruments on a modified retrospective basis, increasing retained earnings by approximately $18 million. The filing does not provide a complete quantified 2022 earnings impact beyond the accounting changes described.
Most important facts for investors to verify
- Whether supply constraints, elevated bookings and backlog convert into recognized revenue and sustainable growth during 2022.
- Whether the lower-margin hardware mix and partner-funding changes continue to pressure gross margin.
- Working-capital requirements, particularly the sharp increase in receivables and inventory and the resulting reduction in operating cash flow.
- Liquidity implications if holders convert the notes, including potential cash settlement of the $350 million principal and current classification of the notes.
- Debt repayment progress, ABL availability, inventory-financing balances and compliance with financing covenants.
- Execution of the planned $75 million to $80 million of 2022 capital expenditures and completion of the global headquarters.
- Potential financial effects of cybersecurity incidents, partner disruptions, customer defaults, tax audits and the unresolved PCM-related litigation.