Insight Enterprises, Inc. — Q1 2021 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 across North America, EMEA, and APAC. This unaudited quarterly report covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $2.193 billion | $2.144 billion | 2% |
| Gross profit | $331.5 million | $325.3 million | 2% |
| Gross margin | 15.1% | 15.2% | Down 10 basis points |
| Earnings from operations | $67.0 million | $52.9 million | 27% |
| Operating margin | 3.1% | 2.5% | Up 60 basis points |
| Net earnings | $43.2 million | $34.0 million | 27% |
| Diluted EPS | $1.18 | $0.95 | 24% |
| Cash provided by operating activities | $42.7 million | $93.1 million | Down $50.4 million |
Products generated $1.893 billion of sales and services generated $300.0 million. Segment sales were $1.655 billion in North America, $478.8 million in EMEA, and $59.5 million in APAC. EMEA and APAC sales increased 14% and 17%, respectively, while North America declined 1%.
March 31, 2021 cash and cash equivalents were $138.8 million, compared with $128.3 million at December 31, 2020. Cash, cash equivalents, and restricted cash totaled $140.9 million at quarter-end. Accounts receivable were $2.584 billion and inventories were $253.3 million. The cash conversion cycle improved to 31 days from 38 days in the prior-year quarter.
Total debt was $417.2 million, including $116.0 million outstanding under the ABL revolving credit facility, $299.4 million carrying value of convertible senior notes due 2025, and $1.8 million of finance leases and other obligations. The ABL facility has maximum capacity of $1.2 billion, with eligible collateral sufficient to access the full amount at March 31, 2021. Inventory financing facilities had aggregate capacity of $540.0 million, of which $309.1 million was outstanding. The Company reported compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by software and services, EMEA and APAC expansion, and foreign-exchange effects. Excluding foreign currency effects, consolidated sales were approximately flat.
- North America was constrained by shortages of chips and displays and extended lead times, resulting in lower hardware volume and difficulty clearing backlog.
- Gross margin declined because of lower hardware and software margins, partly offset by a greater contribution from higher-margin services and cloud solutions.
- Operating earnings benefited from higher gross profit, lower severance and restructuring costs, no acquisition and integration costs, and approximately $8.0 million of gains on property sales.
- Interest expense declined 16% to $10.0 million, primarily because of lower ABL balances and borrowing rates, partly offset by higher imputed interest on inventory financing and convertible notes.
- Operating cash flow declined because of increased working-capital requirements, including inventory investments for client programs and short-term demand. Accounts receivable decreased by $93.5 million during the quarter, while inventories increased by $67.9 million.
- The Company received $27.2 million from property sales and spent $7.8 million on capital expenditures. There were no share repurchases in Q1 2021, compared with $25.0 million in Q1 2020.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management expects supply constraints and extended product lead times to begin easing by the end of 2021 and indicated that sales trends may continue into the second and third quarters. Full-year 2021 capital expenditures are expected to be $75 million to $85 million, primarily for preparation of the global headquarters in Chandler, Arizona, and technology projects.
Management expects operating cash flow and available financing capacity to support anticipated operating and working-capital needs over the next 12 months. Excess cash is expected to be used to repay the ABL and inventory financing facilities. The Company does not intend to pay cash dividends in the foreseeable future.
COVID-19 effects remain uncertain, including potential impacts from variants, restrictions, vaccine availability, economic conditions, and workforce or supply-chain disruptions. Other principal risks include dependence on technology partners for product availability and incentives, semiconductor and device shortages, pricing pressure, client credit risk, cybersecurity and IT-system disruptions, international operations, acquisitions and PCM-related litigation, tax audits, convertible-note conversion and dilution risk, interest-rate and LIBOR-transition risk, and increased debt or financing costs.
The Company completed the sale of four properties during Q1 2021 and intends to use the proceeds to prepare its Chandler headquarters. It recorded net severance expense of approximately $1.3 million, offset by property-sale gains. The Company adopted ASU 2019-12 without a material effect and expects the future adoption of ASU 2020-06 to significantly affect reported debt and interest accounting for the convertible notes.
Important Facts for Investors to Verify
- Whether chip, display, and other supply constraints ease as expected and whether North American backlog converts to revenue.
- The sustainability of operating-margin improvement after excluding the property-sale gains and lower acquisition-related costs.
- Working-capital requirements, inventory levels, receivable collections, and the resulting operating cash flow.
- Progress in repaying ABL and inventory-financing balances and continued compliance with debt covenants.
- The effect of ASU 2020-06 on convertible-note carrying value, interest expense, diluted EPS, and potential share dilution.
- Developments in COVID-19 conditions, PCM-related litigation, tax audits, partner incentives, and international operations.
- Execution of the $75 million to $85 million capital-expenditure plan and the Chandler headquarters project.
- The status and timing of the newly authorized $125 million share-repurchase program announced May 6, 2021.