INSIGHT ENTERPRISES, INC.
The following discussion and analysis of our financial condition and results of
our operations should be read in conjunction with the Consolidated Financial
Statements and notes thereto included in Part II, Item 8 of this report. Our
actual results could differ materially from those contained in forward-looking
statements due to a number of factors, including those discussed in "Risk
Factors" in Part I, Item 1A and elsewhere in this report.
Overview
Today, every business needs to be a technology business. We empower
organizations with technology, solutions and services to help our clients
maximize the value of their information technology ("IT") today and drive
(digital) transformation for tomorrow in North America ; Europe , the Middle East
and Africa ("EMEA"); and Asia-Pacific ("APAC"). As a Fortune 500-ranked global
technology provider of end-to-end secure digital transformation solutions and
services, we help clients innovate and optimize their operations to run smarter.
Our offerings in North America and certain countries in EMEA and APAC include
hardware, software and services, including cloud solutions. Our offerings in the
remainder of our EMEA and APAC segments are largely software and certain
software-related services and cloud solutions.
Full year 2021 financial and operational highlights included the following:
•We generated growth in earnings from operations of 22% on a consolidated basis with growth in each of our reporting segments. •We grew our services net sales by 13% on a consolidated basis with growth in each of our reporting segments. •We generated cash flows from operations of$163.7 million . •InJanuary 2022 our global team completed the onboarding of EMEA clients, partners and teammates onto Insight common core IT systems, tools and processes.
On a consolidated basis, for the year ended
•Net sales of$9.4 billion increased 13% compared to 2020. •Gross profit of$1.4 billion increased 11% compared to 2020, also up 10% year over year excluding the effects of fluctuating foreign currency exchange rates. •Consolidated gross margin declined approximately 30 basis points to 15.3% of net sales in 2021. This decrease primarily reflects higher product net sales at lower margins. •Earnings from operations increased to$332.1 million in 2021, up 22% compared to the prior year, which represented 3.5% of net sales. •Our effective tax rate in 2021 was 25.0%, which compares to our effective tax rate of 24.4% in 2020. •Net earnings and diluted net earnings per share were$219.3 million and$5.95 , respectively, in 2021. In 2020, we reported net earnings of$172.6 million and diluted net earnings per share of$4.87 .
The results of operations for 2021 include the following items:
•severance expenses of$6.4 million ,$5.0 million net of tax; •a restructuring gain from the sale of properties of$8.0 million ,$6.0 million net of tax; •the repurchase of approximately 497,000 shares of the Company's common stock for an aggregate of$50.0 million .
The results of operations for 2020 include the following items:
•the results of the acquisition of PCM for the full year in 2020; •the results of the acquisition of vNext, effectiveFebruary 28, 2020 ; •transaction costs totaling$2.2 million and$1.6 million net of tax, associated with the acquisition of PCM and vNext; •severance and restructuring expenses of$12.4 million ,$9.3 million net of tax; •the repurchase of approximately 445,000 shares of the Company's common stock for an aggregate of$25.0 million . 27
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Throughout the "Overview" and "Results of Operations" sections of "Management's
Discussion and Analysis of Financial Condition and Results of Operations," we
refer to changes in net sales, gross profit, selling and administrative expenses
and earnings from operations on a consolidated basis and in North America , EMEA
and APAC excluding the effects of fluctuating foreign currency exchange rates.
In computing these amounts and percentages, we compare the current period amount
as translated into U.S. dollars under the applicable accounting standards to the
prior period amount in local currency translated into U.S. dollars utilizing the
weighted average translation rate for the current period.
Net of tax amounts referenced above were computed using the statutory tax rate
for the taxing jurisdictions in the operating segment in which the related
expenses were recorded, adjusted for the effects of valuation allowances on net
operating losses in certain jurisdictions.
During 2021, we generated $163.7 million of cash from operating activities and
primarily utilized cash to repay our debt and repurchase our stock. We made net
repayments of $87.0 million under our senior secured revolving credit facility
(the "ABL facility"). We ended the year with $103.8 million of cash and cash
equivalents and $361.5 million of debt outstanding under our long-term debt
facilities.
Details about segment results of operations can be found in Note 19 to the Consolidated Financial Statements in Part II, Item 8 of this report.
Our discussion and analysis of financial condition and results of operations is intended to assist in the understanding of our consolidated financial statements, including the changes in certain key items in those consolidated financial statements from year to year and the primary factors that contributed to those changes, as well as how certain critical accounting estimates affect our consolidated financial statements.
COVID-19 and Supply Chain Constraints Update
OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 a pandemic. The pandemic has negatively impacted the global economy, disrupted global supply chains and reduced workforce participation. While we saw minimal negative impact of COVID-19 on our 2021 financial results, prolonged supply constraints stemming from shortages of chips and displays resulted in sustained elevated bookings as we exited the fourth quarter. We currently expect these supply constraints and extended lead times for certain products will benefit the first half of 2022 and we expect growth in net sales in 2022 compared to 2021. More recently, new variants of COVID-19, such as the Delta and Omicron variants, that are significantly more contagious than previous strains, have emerged. The spread of these new strains is causing many government authorities and businesses to reimplement prior restrictions in an effort to lessen the spread of COVID-19 and its variants. The ultimate extent of the impact of the COVID-19 pandemic on our business operations, financial performance, and results of operations, including our ability to execute our business strategies and initiatives in the expected time frame, is currently unknown and will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted. This includes, but is not limited to, the duration and spread of the COVID-19 pandemic and its severity; the emergence and severity of its variants; the availability and efficacy of vaccines (particularly with respect to emerging strains of the virus) and potential hesitancy to utilize them; other protective actions taken to contain the virus or treat its impact, such as restrictions on travel and transportation; general economic factors, such as increased inflation; supply chain constraints; labor supply issues; and how quickly and to what extent normal economic and operating conditions can resume. We will continue to actively monitor the situation and anticipate taking further actions as may be required by government authorities or that we determine are in the best interests of our teammates, clients and partners. It is not clear what the potential effects of any such alterations or modifications may have on our business, including the effects on our clients, teammates, and prospects, or on our financial results in 2022 and beyond. Accordingly, our current results and financial condition discussed herein may not be indicative of future operating results and trends. See "Risk Factors" in Part I, Item 1A of this report for additional risks we face due to the COVID-19 pandemic. 28
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of net
sales for the years ended
2021 2020
Net sales 100.0 % 100.0 %
Costs of goods sold 84.7 84.4
Gross profit 15.3 15.6
Operating expenses:
Selling and administrative expenses 11.8 12.1
Severance and restructuring expenses and acquisition-related expenses
- 0.2
Earnings from operations 3.5 3.3
Non-operating expense, net 0.4 0.5
Earnings before income taxes 3.1 2.8
Income tax expense 0.8 0.7
Net earnings 2.3 % 2.1 %
Our gross profit across the business and related to product versus services
sales are, and will continue to be, impacted by partner incentives, which can
change significantly in the amounts made available and the related product or
services sales being incentivized by the partner. These changes could impact our
results of operations to the extent we are unable to shift our focus and respond
to them. For a discussion of risks associated with our reliance on partners, see
"Risk Factors - Risks related to Our Business, Operations and Industry - We rely
on our partners for product availability, competitive products to sell and
marketing funds and purchasing incentives, which can change significantly in the
amounts made available and the requirements year over year," in Part I, Item 1A
of this report.
2021 Compared to 2020
Net Sales . Net sales increased 13%, or $1.1 billion , in 2021 compared to 2020.
Net sales of products (hardware and software) and net sales of services both
increased 13% in 2021 compared to 2020. Our net sales by operating segment for
2021 and 2020 were as follows (dollars in thousands):
2021 2020 % Change
North America $ 7,520,323 $ 6,615,032 14 %
EMEA 1,704,051 1,555,225 10 %
APAC 211,739 170,322 24 %
Consolidated $ 9,436,113 $ 8,340,579 13 %
Our net sales by offering category for
North America
Sales Mix 2021 2020 % Change
Hardware $ 5,163,225 $ 4,418,295 17 %
Software 1,315,412 1,260,757 4 %
Services 1,041,686 935,980 11 %
$ 7,520,323 $ 6,615,032 14 %
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Net sales in North America increased 14%, or $905.3 million , in 2021 compared to
2020. This increase reflects increases in all sales categories including
increases in hardware net sales that were negatively impacted by COVID-19 in the
prior year. Net sales of hardware, software and services increased 17%, 4% and
11%, respectively, year over year. The increases year over year were primarily
the result of the following:
•The increase in hardware net sales was due to higher volume of sales to large
enterprise and corporate clients. This was partially driven by the negative
impacts of COVID-19 on client demand experienced in the prior year.
•The increase in services net sales was primarily due to higher volume of sales
of Insight delivered services and the continued trend toward higher sales of
cloud solution offerings.
•The increase in software net sales was primarily due to a single transaction
with a large enterprise client in the current year combined with higher volume
of software net sales. The increase was partially offset by the continued trend
toward higher sales of cloud solution offerings that are recorded on a net sales
recognition basis in the services net sales category.
Our net sales by offering category for EMEA for 2021 and 2020, were as follows
(dollars in thousands):
EMEA
Sales Mix 2021 2020 % Change
Hardware $ 676,815 $ 617,825 10 %
Software 825,361 760,562 9 %
Services 201,875 176,838 14 %
$ 1,704,051 $ 1,555,225 10 %
Net sales in EMEA increased 10% (increased 4% excluding the effects of
fluctuating foreign currency exchange rates), or $148.8 million , in 2021
compared to 2020. Net sales of hardware, software and services were up 10%, 9%
and 14%, respectively, year over year. The changes were primarily the result of
the following:
•The increase in software net sales was due to higher volume of software net
sales to public sector and corporate clients, partially offset by the continued
trend toward higher sales of cloud solution offerings that are recorded on a net
sales recognition basis in the services net sales category.
•The increase in hardware net sales was due primarily to higher volumes of sales
to enterprise and corporate clients.
•The increase in services net sales was due to higher volume of Insight
delivered services and net sales of cloud solution offerings that are recorded
on a net sales recognition basis in the services net sales category.
Our net sales by offering category for APAC for 2021 and 2020, were as follows (dollars in thousands):
APAC
Sales Mix 2021 2020 % Change
Hardware $ 49,470 $ 31,953 55 %
Software 89,844 82,763 9 %
Services 72,425 55,606 30 %
$ 211,739 $ 170,322 24 %
Net sales in APAC increased 24% (increased 15% excluding the effects of
fluctuating foreign currency rates), or
•The increase in hardware net sales was due to higher volume of net sales to enterprise and commercial clients.
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
•The increase in services net sales was due to higher volume of Insight
delivered services and higher volume of cloud solution offerings that are
recorded on a net sales recognition basis in the services net sales category.
•The increase in software net sales was primarily due to the benefits of foreign
currency rate movements in 2021. This was partially offset by the continued
trend toward higher sales of cloud solution offerings that are recorded on a net
sales recognition basis in the services net sales category.
Net sales by category for North America , EMEA and APAC were as follows for 2021
and 2020:
North America EMEA APAC
Sales Mix 2021 2020 2021 2020 2021 2020
Hardware 69 % 67 % 40 % 40 % 23 % 19 %
Software 17 % 19 % 48 % 49 % 43 % 48 %
Services 14 % 14 % 12 % 11 % 34 % 33 %
100 % 100 % 100 % 100 % 100 % 100 %
Gross Profit. Gross profit increased 11%, or $147.6 million , in 2021 compared to
2020, with gross margin decreasing approximately 30 basis points to 15.3% of net
sales. Our gross profit and gross profit as a percent of net sales by operating
segment for 2021 and 2020 were as follows (dollars in thousands):
% of Net % of Net
2021 Sales 2020 Sales
North America $ 1,135,450 15.1 % $ 1,021,388 15.4 %
EMEA 258,862 15.2 % 236,046 15.2 %
APAC 53,245 25.1 % 42,508 25.0 %
Consolidated $ 1,447,557 15.3 % $ 1,299,942 15.6 %
•A net decrease in product margin, which includes partner funding and freight,
of 25 basis points year to year. This decrease was primarily due to higher mix
of hardware net sales at lower margins than in the prior year.
•A decline in services margin year to year of 9 basis points was due to lower
margins on Insight delivered services of 37 basis points partially offset by
gross margin generated from increased cloud solution offerings and software
maintenance.
EMEA's gross profit increased 10% (increased 4% excluding the effects of
fluctuating foreign currency exchange rates), in 2021 compared to 2020. As a
percentage of net sales, gross margin remained flat at 15.2%, reflecting a 38
basis point reduction in product margin offset by a 39 basis point increase in
services margin.
APAC's gross profit increased 25% (increased 17% excluding the effects of
fluctuating foreign currency exchange rates), in 2021 compared to 2020. As a
percentage of net sales, gross margin increased by approximately 10 basis points
year over year. The slightly expanded gross margin for APAC in 2021 compared to
2020 was due primarily to changes in sales mix to services net sales with higher
margins than product net sales.
Our overall gross margins contracted in 2021 compared to 2020, as expected, as
our product mix returned to previous levels, including a higher mix of hardware
sales with our large enterprise clients which typically carry lower margins. We
expect this trend may continue into future periods.
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Operating Expenses.
Selling and Administrative Expenses. Selling and administrative expenses increased$103.4 million in 2021 compared to 2020. Selling and administrative expenses decreased approximately 30 basis points as a percentage of net sales in 2021 compared to 2020. The overall net increase in expenses reflects a$113.8 million increase in personnel costs, including teammate benefits expenses primarily related to increases in overall teammate headcount and increases in variable compensation in the current year. Professional fees incurred for one-time projects also increased by$5.7 million , year over year. These increases were partially offset by decreases in depreciation and amortization, travel and entertainment costs, marketing and facility expenses of$10.1 million ,$2.8 million ,$2.1 million and$1.9 million , respectively, year to year. The decreases in depreciation and amortization expense were driven by intangible assets that were fully amortized in 2021. The decreases in travel and entertainment and marketing costs reflect cost control measures taken in response to COVID-19 part way through 2020 that were largely maintained in 2021. Severance and Restructuring Expenses. During 2021, we recorded gains on sale of properties due to restructuring of$8.0 million . These gains were partially offset in 2021, as we recorded severance expense, net of adjustments, totaling$6.4 million . During 2020, we recorded severance expense, net of adjustments, totaling$12.4 million . The charges in all three operating segments primarily related to a realignment of certain roles and responsibilities and forNorth America and EMEA in the prior year due to the acquisition of PCM.
Acquisition-related Expenses. During 2021, we did not incur any
acquisition-related expenses. In 2020 we incurred
Earnings from Operations. Earnings from operations increased 22%, or$60.5 million , year over year, in 2021 compared to 2020. Our earnings from operations and earnings from operations as a percentage of net sales by operating segment were as follows for 2021 and 2020 (dollars in thousands): % of Net % of Net 2021 Sales 2020 Sales North America$ 268,813 3.6 %$ 219,198 3.3 % EMEA 46,918 2.8 % 40,368 2.6 % APAC 16,330 7.7 % 12,009 7.1 % Consolidated$ 332,061 3.5 %$ 271,575 3.3 %North America's earnings from operations increased 23%, or$49.6 million , year over year, in 2021 compared to 2020. As a percentage of net sales, earnings from operations increased by approximately 30 basis points to 3.6%. The increase in earnings from operations was primarily driven by an increase in gross profit in excess of increases in selling and administrative expenses and severance and restructuring expenses. There were also no acquisition-related expenses in 2021 compared to$2.0 million in 2020. EMEA's earnings from operations increased 16% (increased 10% excluding the effects of fluctuating foreign currency exchange rates) or$6.6 million , year over year, in 2021 compared to 2020. As a percentage of net sales, earnings from operations increased by approximately 20 basis points to 2.8%. The increase in earnings from operations was primarily driven by an increase in gross profit, partially offset by the increase in selling and administrative expenses and severance and restructuring expenses in 2021 compared to 2020. APAC's earnings from operations increased 36% (increased 27% excluding the effects of fluctuating foreign currency exchange rates) or$4.3 million , year over year, in 2021 compared to 2020. As a percentage of net sales, earnings from operations increased by approximately 60 basis points to 7.7%. The increase in earnings from operations reflects an increase in gross profit, partially offset by an increase in selling and administrative expenses in 2021 compared to 2020. 32
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Non-Operating (Income) Expense.
Interest Expense, net. Interest expense, net primarily relates to borrowings under our financing facilities and imputed interest under our inventory financing facilities and the Notes, partially offset by interest income generated from interest earned on cash and cash equivalent bank balances. Interest expense decreased 3%, or$1.1 million , in 2021 compared to 2020 due primarily to lower average daily balances under our ABL facility during the first half of the year and lower borrowing rates under our ABL facility. This was partially offset by increased imputed interest under our inventory financing facilities and the Notes. Imputed interest under the Notes was$10.7 million in 2021 compared to$10.2 million in 2020. Imputed interest under our inventory financing facilities increased$2.2 million due to higher average daily balances in 2021 compared to 2020. The increases were a result of expanded use of the inventory financing facilities. For a description of our various financing facilities, see Notes 7 and 8 to our Consolidated Financial Statements in Part II, Item 8 of this report. Other (Income) Expense, Net. Other (income) expense, net, consists primarily of foreign currency exchange gains and losses. Foreign currency exchange gains and losses result from foreign currency transactions, including foreign currency derivative contracts and intercompany balances that are not considered long-term in nature. The change in net foreign currency exchange gains/losses is due primarily to the underlying changes in the applicable exchange rates, partially mitigated by our use of foreign exchange forward contracts to offset the effects of fluctuations in foreign currencies on certain of our non-functional currency assets and liabilities. Income Tax Expense. Our effective tax rate for 2021 was 25.0% compared to 24.4% in 2020. The increase in the tax rate from 2020 to 2021 was primarily due to nonrecurring benefits in 2020 related to the remeasurement of certain state deferred tax liabilities as well as acquired net operating losses to be carried back to higher tax rate years under the Coronavirus Aid, Relief, and Economic Security Act, partially offset by increased research and development tax credit benefits. The effective tax rate in 2021 was higher than the federal statutory rate of 21.0% primarily due to state income taxes and higher taxes on earnings in foreign jurisdictions. These increases to the federal statutory rate in 2021 were offset partially by the recognition of tax benefits, net of reserves, related to research and development activities. See Note 11 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of income tax expense. 2020 Compared to 2019 For a comparison of our results of operations for the fiscal years endedDecember 31, 2020 and 2019, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 filed with theSEC onFebruary 17, 2021 . 33
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources
The following table sets forth certain consolidated cash flow information for
2021 and 2020(in thousands):
2021 2020
Net cash provided by operating activities $ 163,711 $ 355,582
Net cash (used in) provided by investing activities (21,074) 9,706
Net cash (used in) provided by financing activities (161,385) (361,791)
Foreign currency exchange effect on cash and cash equivalent and restricted cash balances
(5,857) 10,788
(Decrease) increase in cash, cash equivalents and restricted cash
(24,605) 14,285
Cash and cash equivalents and restricted cash at beginning of year
130,582 116,297
Cash and cash equivalents and restricted cash at end of year
$ 130,582 Cash and Cash Flow •Our primary uses of cash during 2021 were to pay down our debt balance, to repurchase shares of our common stock and to purchase property and equipment. •Operating activities generated$163.7 million in cash in 2021, compared to$355.6 million in 2020. •We received proceeds from the sale of assets, including our properties held for sale, of$31.0 million in 2021. •We had net repayments under our inventory financing facilities of$14.4 million in 2021 compared to net borrowings of$103.3 million in 2020. •Net repayments under our ABL facility were$87.0 million in 2021. Net repayments under our ABL facility were$431.4 million in 2020. •Capital expenditures were$52.1 million in 2021 compared to$24.2 million in 2020. •During 2021, we repurchased an aggregate of$50.0 million of our common stock, pursuant to a repurchase program approved inFebruary 2020 which was subsequently increased inMay 2021 . This compares to$25.0 million repurchased during 2020. We anticipate that cash flows from operations, together with the funds available under our financing facilities, will be adequate to support our cash and working capital requirements for operations as well as other strategic investments over the next 12 months and beyond. We expect existing cash and cash flows from operations to continue to be sufficient to fund our operating cash activities and cash commitments for investing and financing activities, such as capital expenditures, strategic acquisitions, repurchases of our common stock, debt repayments and repayment of our inventory financing facilities. We currently expect to fund known cash commitments beyond the next twelve months through operating cash activities or other available financing resources.
Net cash provided by operating activities.
•Cash flow from operating activities in 2021 was$163.7 million , a significant decrease in cash generation compared to 2020. The decrease in cash flow from operating activities was primarily driven by increases in accounts receivable and inventory, partially offset by an increase in accounts payable compared to prior year. These changes reflect strategic responses to supply constraints. 34
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Our consolidated cash flow operating metrics for the quarters ended
2021 2020
Days sales outstanding in ending accounts
receivable ("DSOs") (a) 105 108
Days inventory outstanding ("DIOs") (b) 13 8
Days purchases outstanding in ending accounts
payable ("DPOs") (c) (88) (86)
Cash conversion cycle (days) (d) 30 30
(a)Calculated as the balance of accounts receivable, net at the end of the period divided by daily net sales. Daily net sales is calculated as net sales for the quarter divided by 92 days.
(b)Calculated as average inventories divided by daily costs of goods sold. Average inventories is calculated as the sum of the balances of inventories at the beginning of the period plus inventories at the end of the period divided by two. Daily costs of goods sold is calculated as costs of goods sold for the quarter divided by 92 days.
(c)Calculated as the sum of the balances of accounts payable - trade and accounts payable - inventory financing facilities at the end of the period divided by daily costs of goods sold. Daily costs of goods sold is calculated as costs of goods sold for the quarter divided by 92 days.
(d)Calculated as DSOs plus DIOs, less DPOs.
•Our cash conversion cycle was 30 days in the quarter endedDecember 31, 2021 , flat when compared to the fourth quarter of 2020. •The changes in our cash conversion cycle compared to the same period in the prior year resulted from the net effect of a three day decrease in DSOs combined with a two day increase in DPOs offset by a five day increase in DIOs. •The changes in our cash conversion cycle year over year were primarily the result of: •the benefit to DSOs of improved collections; •the benefit to DPOs of our ability to defer payments to certain vendors; and •the impact to DIOs of our strategic responses to supply constraints. •We expect that cash flow from operations will be used, at least partially, to fund working capital as we typically pay our partners on average terms that are shorter than the average terms we grant to our clients in order to take advantage of supplier discounts. •We intend to use cash generated in 2022 in excess of working capital needs, given current market conditions, to pay down our ABL facility and our inventory financing facilities. •We expect that in 2022 our cash flows from operations will continue to normalize as we anticipate sequential growth and given the fact that our business mix has returned to previous levels. Net cash (used in) provided by investing activities. •We received proceeds from the sale of assets, including our properties held for sale, of$31.0 million and$40.3 million in 2021 and 2020, respectively. •Capital expenditures of$52.1 million in 2021 were used primarily for the buildout of our new global corporate headquarters and for technology-related upgrade projects. Capital expenditures of$24.2 million in 2020, were used primarily for technology-related upgrade projects. •We expect total capital expenditures in 2022 to be in the range of$75.0 to$80.0 million , including final completion of our global corporate headquarters. Net cash (used in) provided by financing activities. •During 2021, we had net repayments on our long-term debt under our ABL facility of$87.0 million and had net repayments under our inventory financing facilities of$14.4 million . •In 2021, we also funded$50.0 million of repurchases of our common stock, compared to$25.0 million purchased during 2020. •During 2020, we had net repayments on our long-term debt under our ABL facility of$431.4 million and had net borrowings under our inventory financing facilities of$103.3 million . 35
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
2020 Compared to 2019
For a comparison of our cash flows for the fiscal years endedDecember 31, 2020 and 2019, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 filed with theSEC onFebruary 17, 2021 .
Financing Facilities
As ofDecember 31, 2021 , our long-term debt balance includes$53.0 million outstanding under our$1.2 billion ABL facility. As ofDecember 31, 2021 , the current portion of our long-term debt relates to our finance leases and other financing obligations. •Our objective is to pay our debt balances down while retaining adequate cash balances to meet overall business objectives. •Our convertible senior notes are subject to certain events of default and certain acceleration clauses. As ofDecember 31, 2021 , no such events have occurred. •Our ABL facility contains various covenants customary for transactions of this type, including complying with a minimum receivable and inventory requirement and meeting monthly, quarterly and annual reporting requirements. •The credit agreement contains customary affirmative and negative covenants and events of default. •AtDecember 31, 2021 , we were in compliance with all such covenants. •While the ABL facility has a stated maximum amount, the actual availability under the ABL facility is limited by a minimum accounts receivable and inventory requirement. As ofDecember 31, 2021 , eligible accounts receivables and inventory were sufficient to permit access to the full$1.2 billion under the ABL facility. We also have agreements with financial intermediaries to facilitate the purchase of inventory from certain suppliers under certain terms and conditions. These amounts are classified separately as accounts payable - inventory financing facilities in our consolidated balance sheets. Notes 7 and 8 to the Consolidated Financial Statements in Part II, Item 8 of this report also include: a description of our financing facilities; amounts outstanding; amounts available and weighted average borrowings and interest rates during the year.
Cash Requirements From Contractual Obligations
AtDecember 31, 2021 , our contractual obligations for continuing operations primarily consist of$311.9 million under our inventory financing facilities due in 2022 and payments of$86.7 million under operating leases primarily due in 2022 through 2024. Our ABL facility matures in 2024 and the$350.0 million principal amount due on the Notes mature in 2025.
Undistributed Foreign Earnings
Cash and cash equivalents held by foreign subsidiaries may be subject toU.S. income taxation upon repatriation tothe United States . Certain of our foreign earnings were deemed distributed as a result of the Tax Cuts and Jobs Act of 2017; however, for years subsequent to 2017, we continue to assert indefinite reinvestment of foreign earnings for certain of our foreign subsidiaries. As ofDecember 31, 2021 , we had approximately$83.5 million in cash and cash equivalents in our foreign subsidiaries, the majority of which reside inCanada ,the Netherlands andAustralia . Certain of these cash balances will be remitted to theU.S. by paying down intercompany payables generated in the ordinary course of business or through actual dividend distributions.
Off-Balance Sheet Arrangements
We have entered into off-balance sheet arrangements, which include guarantees
and indemnifications. These arrangements are discussed in Note 16 to the
Consolidated Financial Statements in Part II, Item 8 of this report. We believe
that none of our off-balance sheet arrangements have, or are reasonably likely
to have, a material current or future effect on our financial condition, sales
or expenses, results of operations, liquidity, capital expenditures or capital
resources.
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Acquisitions
Our strategy includes the possible acquisition of or investments in other businesses to expand or complement our operations or to add certain services capabilities. The magnitude, timing and nature of any future acquisitions or investments will depend on a number of factors, including the availability of suitable candidates, the negotiation of acceptable terms, our financial capabilities and general economic and business conditions. Financing for future transactions would result in the utilization of cash, incurrence of additional debt, issuance of stock or some combination of the three. See Note 20 to the Consolidated Financial Statements in Part II, Item 8 of this report for a discussion of our acquisition of PCM onAugust 30, 2019 .
Inflation
We have historically not been adversely affected by inflation, as technological
advances and competition within the IT industry have generally caused the prices
of the products we sell to decline and product life cycles tend to be short.
This requires our growth in unit sales to exceed the decline in prices in order
to increase our net sales. We believe that most price increases could be passed
on to our clients, as prices charged by us are not set by long-term contracts;
however, as a result of competitive pressure, there can be no assurance that the
full effect of any such price increases could be passed on to our clients.
Critical Accounting Estimates
General
Our consolidated financial statements have been prepared in accordance with
GAAP. For a summary of significant accounting policies, see Note 1 to the
Consolidated Financial Statements in Part II, Item 8 of this report. The
preparation of these consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, net sales and expenses. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results, however, may differ from
our estimates. Members of our senior management have discussed the critical
accounting estimates and related disclosures with the Audit Committee of our
Board of Directors.
We consider the following to be our critical accounting estimates used in the preparation of our consolidated financial statements:
Sales Recognition
Description
For each of our product and services offerings, the determination needs to be made as to whether we are the principal or the agent in the transaction. This determination leads to how the revenue for each offering is recognized, either gross, where we are the principal in the transaction, or net, where we are the agent in the transaction. This determination is made by assessing whether or not we control the product or service prior to delivery to the client.
Judgments and Uncertainties
If we take control of the product or service prior to delivery to the client,
then we are the principal in the transaction. If we do not take control of the
product or service prior to delivery to the client, we are the agent in the
transaction. The determination of whether we take control of products or
services prior to delivery to the client can be judgmental and depends upon the
specific facts and circumstances for each transaction. Key assumptions used in
our estimates for transactions where we have determined we are the agent are the
consistency of transactions with multiple performance obligations and
consistency of transactions involving security software. Based on our current
methodology to recognize net sales, the amount of reported net sales is not
highly sensitive to changes in these key assumptions. For example, a 5% change
in one of our key assumptions would not materially affect our reported net
sales.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Effect if actual results differ from assumptions
We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to recognize net sales. However, if actual results are not consistent with our estimates or assumptions, it could have a material effect on our reported net sales, timing of revenue recognition and our results of operations. We have not made any material changes in accounting methodology or key assumptions used to recognize net sales during the past three fiscal years. We have not made any material adjustments to our financial statements as a result of actual results not being consistent with our estimates in the past three fiscal years.
See Note 1 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of our accounting policies related to sales recognition and for a detailed description of our product and services offerings.
Partner Funding Description We receive payments and credits from partners, including consideration pursuant to volume sales incentive programs, volume purchase incentive programs and shared marketing expense programs. Partner funding received pursuant to volume sales incentive programs is recognized as it is earned as a reduction to costs of goods sold. Partner funding received pursuant to volume purchase incentive programs is allocated as a reduction to inventories based on the applicable incentives earned from each partner and is recorded in costs of goods sold as the related inventory is sold. Partner funding received pursuant to shared marketing expense programs is recorded as it is earned as a reduction of the related selling and administrative expenses in the period the program takes place if the consideration represents a reimbursement of specific, incremental, identifiable costs. Partner funding received pursuant to certain services delivered is recorded as services net sales. Consideration that exceeds the specific, incremental, identifiable costs is classified as a reduction of costs of goods sold. Judgements and Uncertainties We make period-end estimates about the anticipated achievement levels under the various partner programs in order to accrue amounts earned. These estimates and assumptions primarily include whether we have met key net sales targets under the various partner programs. Based on our current methodology to recognize partner funding, the amount of reported net sales and gross profit is not highly sensitive to changes in key assumptions around achievement levels. For example, a revised assessment of the achievement level for any individual partner program would not materially affect our reported net sales or gross profit.
Effect if actual results differ from assumptions
We have not made any material changes in the methodology or key assumptions used to evaluate estimates of anticipated achievement levels under individual partner programs during the past three fiscal years. We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to recognize partner funding. However, if our actual results are not consistent with our assumptions it could have a material effect on our results of operations and our cash flows. We have not made any material adjustments to our financial statements as a result of actual results for partner funding not being consistent with our estimates in the past three fiscal years.
See Note 1 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of our accounting policies related to partner funding.
Goodwill Description We perform an annual review of our goodwill in the fourth quarter of every year. We continually assess if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value and assess whether any indicators of impairment exist. Events or circumstances that could trigger an impairment review include a significant adverse change in legal factors or in the business climate, unanticipated competition, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, 38
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
significant declines in our stock price for a sustained period or significant
underperformance relative to expected historical or projected future cash flows
or results of operations. Any adverse change in these factors, among others,
could have a significant effect on the recoverability of goodwill and could have
a material effect on our consolidated financial statements.
Judgements and Uncertainties
We may first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform a quantitative goodwill impairment test. Otherwise, the goodwill impairment test is not required. In completing a quantitative test for a potential impairment of goodwill, we compare the estimated fair value of each reporting unit in which the goodwill resides to its book value, including goodwill. Our reporting units are our operating segments. Management must apply judgment in determining the reporting units and in estimating the fair value of our reporting units. Multiple valuation techniques can be used to assess the fair value of the reporting unit, including the market and income approaches. All of these techniques include the use of estimates and assumptions that are inherently uncertain. Changes in these estimates and assumptions could materially impact the determination of fair value or goodwill impairment, or both. These estimates and assumptions primarily include, but are not limited to, an appropriate control premium in excess of the market capitalization of the Company, future market growth, forecasted sales and costs and appropriate discount rates. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates. Management evaluates the merits of each significant assumption, both individually and in the aggregate, used to determine the fair value of the reporting units. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If the carrying amount of the reporting unit exceeds its fair value, then an impairment charge is recognized for the amount by which the carrying value exceeds the fair value. To ensure the reasonableness of the estimated fair values of our reporting units, we perform a reconciliation of our total market capitalization to the estimated fair value of all of our reporting units. Based on qualitative assessments performed in most recent years a quantitative assessment has not been determined to be necessary for any of our reporting units. As such, the amount of reported goodwill is not sensitive to changes in key assumptions.
Effect if Actual Results Differ from Assumptions
We have not made any material changes in the methodology or key assumptions used to evaluate impairment of goodwill during the past three fiscal years. Our assessments in the past three fiscal years have been qualitative assessments and no quantitative assessments have been deemed necessary. Additionally, during the three years endedDecember 31, 2021 , 2020 and 2019 we analyzed each of our reporting units and determined that no impairment charge was necessary.
See Note 1 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of our accounting policies related to goodwill.
Income Taxes Description We record a provision for income taxes which reflects a mix of earnings in the jurisdictions in which we operate. Our provision for income taxes primarily reflects a combination of income earned and taxed in the various US federal and state, as well as foreign, jurisdictions. Our annual effective tax rate is based on our income, the jurisdiction(s) in which the income is earned and subjected to taxation, the tax laws in those various jurisdictions and any tax law changes which may occur, increases or decreases in permanent differences between book and tax items, and accruals or adjustments of accruals for unrecognized tax benefits or valuation allowances. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. If we were to determine that it is more likely than not that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period such determination is made.
We record liabilities for potentially unfavorable outcomes associated with uncertain tax positions taken on specific tax matters using a two-step process, which include recognition and measurement. These liabilities are based on management's assessment of whether a tax benefit is more likely than not to be
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
sustained upon examination by tax authorities. There may be differences between
the anticipated and actual outcomes of these matters that may result in
subsequent recognition or derecognition of a tax position based on all the
available information at the time. If material adjustments are warranted, it
could affect our effective tax rate.
Judgements and Uncertainties
The determination of our provision and evaluation of our tax positions requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. Changes in tax laws and rates could affect recorded assets and liabilities in the future. Changes in projected earnings could affect the recorded valuation allowances in the future. Our calculations related to income taxes contain uncertainties due to judgment used to calculate tax liabilities in the application of complex tax regulations across the tax jurisdictions where we operate. Our analysis of unrecognized tax benefits contains uncertainties based on judgment used to apply the more likely than not recognition and measurement thresholds. Based on our current methodology to record valuation allowances and reserve for uncertain tax positions, the amount of reported income tax expense is not sensitive to changes in any individual key assumption.
Effect if Actual Results Differ from Assumptions
We have not made any material changes in accounting methodology or key assumptions used to recognize income taxes and related reserves during the past three fiscal years. We do not believe there is a reasonable likelihood there will be a material change in the tax related balances or valuation allowances. However, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. To the extent we prevail in matters for which unrecognized tax benefit liabilities have been established or are required to pay amounts in excess of recorded unrecognized tax benefit liabilities, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would require use of our cash and generally result in an increase in our effective tax rate in the period of resolution. A favorable tax settlement would generally be recognized as a reduction in our effective tax rate in the period of resolution. Additional information about the valuation allowance and uncertain tax positions can be found in Note 11 to the Consolidated Financial Statements in Part II, Item 8 of this report.
Recently Issued Accounting Standards
The information contained in Note 1 to the Consolidated Financial Statements in Part II, Item 8 of this report concerning a description of recent accounting pronouncements, including our expected dates of adoption and the estimated effects on our results of operations and financial condition, is incorporated by reference herein.
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