UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 20192020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number:  0-25092

INSIGHT ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

86-0766246

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

6820 South Harl Avenue, Tempe, Arizona 85283

(Address of principal executive offices) (Zip Code)

(480) 333-3000

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common stock, par value $0.01

 

NSIT

 

The NASDAQ Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes     

 

No     

 

Indicatebycheck markwhethertheregistrant has submitted electronicallyevery InteractiveDataFilerequired to besubmitted pursuant to Rule405 ofRegulation S-T (§232.405 ofthis chapter)duringthepreceding12months (or forsuch shorterperiod that the registrant wasrequired to submit such files).

 

Yes     

 

No     

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer            

 

 

Smaller reporting company

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes     

 

No     

 

The number of shares outstanding of the issuer’s common stock as of April 26, 2019May 1, 2020 was 35,762,268.35,050,629.

 

 


 

INSIGHT ENTERPRISES, INC.

QUARTERLY REPORT ON FORM 10-Q

Three Months Ended March 31, 20192020

 

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I -

 

Financial Information

 

 

 

 

 

 

 

Item 1 –

 

Financial Statements:

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets (unaudited) - March 31, 20192020 and December 31, 20182019

 

1

 

 

 

 

 

 

 

Consolidated Statements of Operations (unaudited) - Three Months Ended March 31, 20192020 and 20182019

 

2

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (unaudited) - Three Months Ended March 31, 20192020 and 20182019

 

3

 

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity (unaudited) – Three Months Ended March 31, 20192020 and 20182019

 

4

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) - Three Months Ended March 31, 20192020 and 20182019

 

5

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

6

 

 

 

 

 

Item 2 –

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

2124

 

 

 

 

 

Item 3 –

 

Quantitative and Qualitative Disclosures About Market Risk

 

3235

 

 

 

 

 

Item 4 –

 

Controls and Procedures

 

3235

 

 

 

 

 

PART II -

 

Other Information

 

 

 

 

 

 

 

Item 1 –

 

Legal Proceedings

 

3336

 

 

 

 

 

Item 1A –

 

Risk Factors

 

3336

 

 

 

 

 

Item 2 –

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

3337

 

 

 

 

 

Item 3 –

 

Defaults Upon Senior Securities

 

3338

 

 

 

 

 

Item 4 –

 

Mine Safety Disclosures

 

3338

 

 

 

 

 

Item 5 –

 

Other Information

 

3338

 

 

 

 

 

Item 6 –

 

Exhibits

 

3439

 

 

 

 

 

Signatures

 

3540

 

 

 

 


INSIGHT ENTERPRISES, INC.

 

Forward-Looking Information

References to “the Company,” “Insight,” “we,” “us,” “our” and other similar words refer to Insight Enterprises, Inc. and its consolidated subsidiaries, unless the context suggests otherwise.  Certain statements in this Quarterly Report on Form 10-Q, including statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this report, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements may include: expectations regardingprojections of, and matters that affect, net sales, gross profit, gross margin, operating expenses, earnings from operations, non-operating income and expenses, net earnings or cash flows, cash needs and the payment of accrued expenses and liabilities; our future responses to and the potential impact of coronavirus strain COVID-19 (“COVID-19”) on our Company; the expected effects of seasonality on our business; expectations of further consolidation and trends in the Information Technology (“IT”) industry; our business strategy and our strategic initiatives, including our efforts to grow our core business, including due to COVID-19, develop and grow our global cloud business and build scalable solutions; expectations regarding partner incentives; our expectations about future benefits of our acquisitions and our plans related thereto, including potential expansion into wider regions; our expectations regarding completion of the PCM integration; the increasing demand for big data solutions; the availability of competitive sources of products for our purchase and resale; our intentions concerning the payment of dividends; our acquisition strategy; our ability to offset the effects of inflation and manage any increase in interest rates; projections of capital expenditures; our plans to continue to evolve our IT systems, including migration of EMEA’s current system; the sufficiency of our capital resources, the availability of financing and our needs andor plans relating thereto; the estimated effecteffects of new accounting principles and expected dates of adoption; the effect of indemnification obligations; projections about the outcome of ongoing tax audits; our expectations regarding future employee termination benefits; estimates regarding future asset-retirement activities;tax rates; adequate provisions for and our positions and strategies with respect to ongoing and threatened litigation;litigation and expected outcomes; our ability to expand our client relationships; our expectations regardingthat pricing pressures in the IT industry will continue; our plans to use of cash flow from operations for working capital, to pay down debt, repurchase shares of our common stock, make capital expenditures, and fund acquisitions; our belief that our office facilities are adequate and that we will be able to extend our current leases or locate substitute facilities on satisfactory terms; our belief that we have adequate provisions for losses; our expectation that we will not incur interest payments under our inventory financing facilities; our expectations regarding stock-based compensation andthat future income will be sufficient to fully recover deferred tax expense; our compliance with leverage ratio requirements;assets; our exposure to off-balance sheet arrangements; statements of belief; and statements of assumptions underlying any of the foregoing.  Forward-looking statements are identified by such words as “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” “project,” “will,” “may” and variations of such words and similar expressions and are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified.  Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements.  There can be no assurances that results described in forward-looking statements will be achieved, and actual results could differ materially from those suggested by the forward-looking statements.  Some of the important factors that could cause our actual results to differ materially from those projected in any forward-looking statements include, but are not limited to, the following, which are discussed in “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018:2019 and in “Risk Factors” in Part II, Item 1A of this report:

 

actions of our competitors, including manufacturers and publishers of products we sell;

the widespread outbreak of an illness or other communicable disease such as COVID-19, which could result in significant disruptions of global supply chains and demand for our products and services;

our reliance 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;

actions of our competitors, including manufacturers and publishers of products we sell;

changes in the IT industry and/or rapid changes in technology;

our reliance 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 in the requirements year over year;

risks associated with the integration and operation of acquired businesses;

possible significant fluctuations in our future operating results;

the risks associated with our international operations;

general economic conditions;

increased debt and interest expense and decreased availability of funds under our financing facilities;

the security of our electronic and other confidential information;

disruptions in our IT systems and voice and data networks;

failure to comply with the terms and conditions of our commercial and public sector contracts;

legal proceedings client audits and failure to comply with laws and regulations;

accounts receivable risks, including increased credit loss experience or extended payment terms with our clients;

our reliance on independent shipping companies;

our dependence on certain key personnel;

changes in the IT industry and/or rapid changes in technology;

 

 


INSIGHT ENTERPRISES, INC.

 

 

risks associated with the integration and operation of acquired businesses, including PCM and the achievement of expected benefits;

possible significant fluctuations in our future operating results as well as seasonality and variability in customer demands;

the risks associated with our international operations;

general economic conditions, economic uncertainties and changes in geopolitical conditions;

increased debt and interest expense and decreased availability of funds under our financing facilities;

cyberattacks or breaches of data privacy and security regulations;

disruptions in our IT systems and voice and data networks;

failure to comply with the terms and conditions of our commercial and public sector contracts;

legal proceedings, including PCM related litigation, client audits and failure to comply with laws and regulations;

accounts receivable risks, including increased credit loss experience or extended payment terms with our clients;

our reliance on independent shipping companies;

our dependence on certain key personnel;

natural disasters or other adverse occurrences;

exposure to changes in, interpretations of, or enforcement trends related to tax rules and regulations; and

exposure to changes in, interpretations of, or enforcement trends related to tax rules and regulations;

intellectual property infringement claims and challenges to our registered trademarks and trade names;

intellectual property infringement claims and challenges to our registered trademarks and trade names.

our substantial amount of indebtedness;

the conditional conversion feature of the convertible notes, which if triggered, may adversely affect the Company’s financial condition and operating results;

the accounting method for convertible debt securities that may be settled in cash, such as the convertible notes, could have a material effect on the Company’s reported financial results;

future sales of the Company’s common stock or equity-linked securities in the public market could lower the market price for our common stock;

the Company is subject to counterparty risk with respect to the convertible note hedge transactions; and

risks associated with the discontinuation of LIBOR as a benchmark rate.

 

Additionally, there may be other risks that are otherwise described from time to time in the reports that we file with the Securities and Exchange Commission.Commission (the “SEC”).  Any forward-looking statements in this report are made as of the date of this filing and should be considered in light of various important factors, including the risks and uncertainties listed above, as well as others.  We assume no obligation to update, and, except as may be required by law, do not intend to update, any forward-looking statements.  We do not endorse any projections regarding future performance that may be made by third parties.

 

 

 


 

PART I - FINANCIALFINANCIAL INFORMATION

Item 1. Financial Statements.

INSIGHT ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)

 

 

March 31,

2019

 

 

December 31,

2018

 

 

March 31,

2020

 

 

December 31,

2019

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

124,831

 

 

$

142,655

 

 

$

62,660

 

 

$

114,668

 

Accounts receivable, net of allowance for doubtful accounts

of $10,903 and $10,462, respectively

 

 

1,723,817

 

 

 

1,931,736

 

Accounts receivable, net of allowance for doubtful accounts

of $12,610 and $10,762, respectively

 

 

2,464,377

 

 

 

2,511,383

 

Inventories

 

 

187,146

 

 

 

148,503

 

 

 

236,414

 

 

 

190,833

 

Other current assets

 

 

117,199

 

 

 

115,683

 

 

 

202,706

 

 

 

231,148

 

Total current assets

 

 

2,152,993

 

 

 

2,338,577

 

 

 

2,966,157

 

 

 

3,048,032

 

Property and equipment, net of accumulated depreciation and

amortization of $273,379 and $331,700, respectively

 

 

74,038

 

 

 

72,954

 

Property and equipment, net of accumulated depreciation and

amortization of $238,766 and $236,330, respectively

 

 

128,689

 

 

 

130,907

 

Goodwill

 

 

166,073

 

 

 

166,841

 

 

 

413,665

 

 

 

415,149

 

Intangible assets, net of accumulated amortization of

$56,255 and $52,942, respectively

 

 

108,856

 

 

 

112,179

 

Deferred income taxes

 

 

7,345

 

 

 

7,967

 

Intangible assets, net of accumulated amortization of

$83,187 and $73,492, respectively

 

 

271,533

 

 

 

278,584

 

Other assets

 

 

247,162

 

 

 

77,429

 

 

 

276,974

 

 

 

305,507

 

 

$

2,756,467

 

 

$

2,775,947

 

 

$

4,057,018

 

 

$

4,178,179

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable—trade

 

$

897,609

 

 

$

978,104

 

 

$

1,283,801

 

 

$

1,275,957

 

Accounts payable—inventory financing facility

 

 

260,160

 

 

 

304,130

 

Accounts payable—inventory financing facilities

 

 

252,912

 

 

 

253,676

 

Accrued expenses and other current liabilities

 

 

183,678

 

 

 

190,733

 

 

 

358,182

 

 

 

352,204

 

Current portion of long-term debt

 

 

1,161

 

 

 

1,395

 

 

 

1,700

 

 

 

1,691

 

Deferred revenue

 

 

66,646

 

 

 

62,300

 

Total current liabilities

 

 

1,409,254

 

 

 

1,536,662

 

 

 

1,896,595

 

 

 

1,883,528

 

Long-term debt

 

 

113,227

 

 

 

195,525

 

 

 

749,547

 

 

 

857,673

 

Deferred income taxes

 

 

604

 

 

 

683

 

 

 

44,489

 

 

 

44,633

 

Other liabilities

 

 

207,164

 

 

 

56,088

 

 

 

215,818

 

 

 

232,027

 

 

 

1,730,249

 

 

 

1,788,958

 

 

 

2,906,449

 

 

 

3,017,861

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 3,000 shares authorized;

no shares issued

 

 

 

 

 

 

Common stock, $0.01 par value, 100,000 shares authorized;

35,762 shares at March 31, 2019 and 35,482 shares at

December 31, 2018 issued and outstanding

 

 

358

 

 

 

355

 

Preferred stock, $0.01 par value, 3,000 shares authorized;

0 shares issued

 

 

 

 

 

 

Common stock, $0.01 par value, 100,000 shares authorized;

35,049 shares at March 31, 2020 and 35,263 shares at

December 31, 2019 issued and outstanding

 

 

350

 

 

 

353

 

Additional paid-in capital

 

 

321,606

 

 

 

323,622

 

 

 

351,648

 

 

 

357,032

 

Retained earnings

 

 

743,992

 

 

 

704,665

 

 

 

854,566

 

 

 

841,097

 

Accumulated other comprehensive loss – foreign currency

translation adjustments

 

 

(39,738

)

 

 

(41,653

)

 

 

(55,995

)

 

 

(38,164

)

Total stockholders’ equity

 

 

1,026,218

 

 

 

986,989

 

 

 

1,150,569

 

 

 

1,160,318

 

 

$

2,756,467

 

 

$

2,775,947

 

 

$

4,057,018

 

 

$

4,178,179

 

 

See accompanying notes to consolidated financial statements.


INSIGHT ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

 

Three Months Ended

March 31,

 

 

Three Months Ended

March 31,

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

1,466,672

 

 

$

1,557,792

 

 

$

1,848,316

 

 

$

1,466,672

 

Services

 

 

218,794

 

 

 

184,702

 

 

 

295,735

 

 

 

218,794

 

Total net sales

 

 

1,685,466

 

 

 

1,742,494

 

 

 

2,144,051

 

 

 

1,685,466

 

Costs of goods sold:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

1,337,308

 

 

 

1,414,986

 

 

 

1,670,238

 

 

 

1,337,308

 

Services

 

 

99,686

 

 

 

87,245

 

 

 

148,477

 

 

 

99,686

 

Total costs of goods sold

 

 

1,436,994

 

 

 

1,502,231

 

 

 

1,818,715

 

 

 

1,436,994

 

Gross profit

 

 

248,472

 

 

 

240,263

 

 

 

325,336

 

 

 

248,472

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses

 

 

191,063

 

 

 

188,180

 

 

 

268,863

 

 

 

191,063

 

Severance and restructuring expenses

 

 

370

 

 

 

1,644

 

Severance and restructuring expenses, net

 

 

2,144

 

 

 

370

 

Acquisition and integration related expenses

 

 

1,466

 

 

 

 

Earnings from operations

 

 

57,039

 

 

 

50,439

 

 

 

52,863

 

 

 

57,039

 

Non-operating (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

(271

)

 

 

(153

)

Interest expense

 

 

4,823

 

 

 

6,015

 

Net foreign currency exchange loss (gain)

 

 

711

 

 

 

(245

)

Other expense, net

 

 

339

 

 

 

302

 

Interest expense, net

 

 

11,826

 

 

 

4,552

 

Other (income) expense, net

 

 

(1,563

)

 

 

1,050

 

Earnings before income taxes

 

 

51,437

 

 

 

44,520

 

 

 

42,600

 

 

 

51,437

 

Income tax expense

 

 

12,110

 

 

 

11,517

 

 

 

8,639

 

 

 

12,110

 

Net earnings

 

$

39,327

 

 

$

33,003

 

 

$

33,961

 

 

$

39,327

 

Net earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.10

 

 

$

0.92

 

 

$

0.96

 

 

$

1.10

 

Diluted

 

$

1.09

 

 

$

0.91

 

 

$

0.95

 

 

$

1.09

 

Shares used in per share calculations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

35,609

 

 

 

35,913

 

 

 

35,233

 

 

 

35,609

 

Diluted

 

 

36,103

 

 

 

36,263

 

 

 

35,646

 

 

 

36,103

 

 

See accompanying notes to consolidated financial statements.


INSIGHT ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

 

Three Months Ended

March 31,

 

 

Three Months Ended

March 31,

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Net earnings

 

$

39,327

 

 

$

33,003

 

 

$

33,961

 

 

$

39,327

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

1,915

 

 

 

4,591

 

 

 

(17,831

)

 

 

1,915

 

Total comprehensive income

 

$

41,242

 

 

$

37,594

 

 

$

16,130

 

 

$

41,242

 

 

See accompanying notes to consolidated financial statements.

 



INSIGHT ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

 

 

Common Stock

 

 

Treasury Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Retained

 

 

Total

Stockholders'

 

 

Common Stock

 

 

Treasury Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Retained

 

 

Total

Stockholders'

 

 

Shares

 

 

Par Value

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Earnings

 

 

Equity

 

 

Shares

 

 

Par Value

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Earnings

 

 

Equity

 

Balances at December 31, 2018

 

 

35,482

 

 

 

355

 

 

 

 

 

 

 

 

 

323,622

 

 

 

(41,653

)

 

 

704,665

 

 

 

986,989

 

Issuance of common stock under employee stock plans, net of shares withheld for payroll taxes

 

 

279

 

 

 

3

 

 

 

 

 

 

 

 

 

(6,131

)

 

 

 

 

 

 

 

 

(6,128

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,115

 

 

 

 

 

 

 

 

 

4,115

 

Foreign currency translation adjustments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,915

 

 

 

 

 

 

1,915

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39,327

 

 

 

39,327

 

Balances at March 31, 2019

 

 

35,761

 

 

$

358

 

 

 

 

 

$

 

 

$

321,606

 

 

$

(39,738

)

 

$

743,992

 

 

$

1,026,218

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2017

 

 

35,829

 

 

 

358

 

 

 

 

 

 

 

 

 

317,155

 

 

 

(24,264

)

 

 

550,220

 

 

 

843,469

 

Cumulative effect of accounting change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,176

 

 

 

7,176

 

Balances at December 31, 2019

 

 

35,263

 

 

$

353

 

 

 

 

 

$

 

 

$

357,032

 

 

$

(38,164

)

 

$

841,097

 

 

$

1,160,318

 

Issuance of common stock under employee stock plans, net of shares withheld for payroll taxes

 

 

240

 

 

 

2

 

 

 

 

 

 

 

 

 

(2,887

)

 

 

 

 

 

 

 

 

(2,885

)

 

 

231

 

 

 

2

 

 

 

 

 

 

 

 

 

(5,289

)

 

 

 

 

 

(1

)

 

 

(5,288

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,184

 

 

 

 

 

 

 

 

 

3,184

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,409

 

 

 

 

 

 

 

 

 

4,409

 

Repurchase of treasury stock

 

 

 

 

 

 

 

 

(221

)

 

 

(7,679

)

 

 

 

 

 

 

 

 

 

 

 

(7,679

)

 

 

 

 

 

 

 

 

(445

)

 

 

(25,000

)

 

 

 

 

 

 

 

 

 

 

 

 

(25,000

)

Retirement of treasury stock

 

 

(221

)

 

 

(2

)

 

 

221

 

 

 

7,679

 

 

 

(1,959

)

 

 

 

 

 

(5,718

)

 

 

 

 

 

(445

)

 

 

(5

)

 

 

445

 

 

 

25,000

 

 

 

(4,504

)

 

 

 

 

 

(20,491

)

 

 

 

Foreign currency translation adjustments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,591

 

 

 

 

 

 

4,591

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,831

)

 

 

 

 

 

(17,831

)

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,003

 

 

 

33,003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,961

 

 

 

33,961

 

Balances at March 31, 2018

 

 

35,848

 

 

$

358

 

 

 

 

 

$

 

 

$

315,493

 

 

$

(19,673

)

 

$

584,681

 

 

$

880,859

 

Balances at March 31, 2020

 

 

35,049

 

 

$

350

 

 

 

 

 

$

 

 

$

351,648

 

 

$

(55,995

)

 

$

854,566

 

 

$

1,150,569

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Retained

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Par Value

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Earnings

 

 

Equity

 

Balances at December 31, 2018

 

 

35,482

 

 

$

355

 

 

 

 

 

$

 

 

$

323,622

 

 

$

(41,653

)

 

$

704,665

 

 

$

986,989

 

Issuance of common stock under employee stock plans, net of shares withheld for payroll   taxes

 

 

279

 

 

 

3

 

 

 

 

 

 

 

 

 

(6,131

)

 

 

 

 

 

 

 

 

(6,128

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,115

 

 

 

 

 

 

 

 

 

4,115

 

Foreign currency translation adjustments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,915

 

 

 

 

 

 

1,915

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39,327

 

 

 

39,327

 

Balances at March 31, 2019

 

 

35,761

 

 

$

358

 

 

 

 

 

$

 

 

$

321,606

 

 

$

(39,738

)

 

$

743,992

 

 

$

1,026,218

 

See accompanying notes to consolidated financial statements.


INSIGHT ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

33,961

 

 

$

39,327

 

Adjustments to reconcile net earnings to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

17,397

 

 

 

8,867

 

Provision for losses on accounts receivable

 

 

3,136

 

 

 

1,413

 

Non-cash stock-based compensation

 

 

4,409

 

 

 

4,115

 

Deferred income taxes

 

 

(509

)

 

 

547

 

Other adjustments

 

 

5,262

 

 

 

1,408

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Decrease in accounts receivable

 

 

22,648

 

 

 

210,691

 

Increase in inventories

 

 

(48,332

)

 

 

(39,658

)

Decrease (increase) in other assets

 

 

57,241

 

 

 

(107,314

)

Increase (decrease) in accounts payable

 

 

23,277

 

 

 

(82,246

)

(Decrease) increase in accrued expenses and other liabilities

 

 

(25,364

)

 

 

84,763

 

Net cash provided by operating activities

 

 

93,126

 

 

 

121,913

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Proceeds from sale of assets held for sale

 

 

14,218

 

 

 

 

Purchases of property and equipment

 

 

(7,382

)

 

 

(5,352

)

Acquisitions, net of cash and cash equivalents acquired

 

 

(6,406

)

 

 

(762

)

Net cash provided by (used in) investing activities

 

 

430

 

 

 

(6,114

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings on senior revolving credit facility

 

 

 

 

 

49,936

 

Repayments on senior revolving credit facility

 

 

 

 

 

(49,936

)

Borrowings on ABL revolving credit facility, net of initial lender fees

 

 

678,197

 

 

 

 

Repayments on ABL revolving credit facility

 

 

(788,443

)

 

 

 

Borrowings on accounts receivable securitization financing facility

 

 

 

 

 

1,010,500

 

Repayments on accounts receivable securitization financing facility

 

 

 

 

 

(1,092,500

)

Net repayments under inventory financing facilities

 

 

(764

)

 

 

(43,970

)

Repurchases of common stock

 

 

(25,000

)

 

 

 

Other payments

 

 

(5,756

)

 

 

(6,670

)

Net cash used in financing activities

 

 

(141,766

)

 

 

(132,640

)

Foreign currency exchange effect on cash, cash equivalents and

   restricted cash balances

 

 

(3,615

)

 

 

(986

)

Decrease in cash, cash equivalents and restricted cash

 

 

(51,825

)

 

 

(17,827

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

116,297

 

 

 

144,293

 

Cash, cash equivalents and restricted cash at end of period

 

$

64,472

 

 

$

126,466

 

 

See accompanying notes to consolidated financial statements.

 


5


INSIGHT ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

39,327

 

 

$

33,003

 

Adjustments to reconcile net earnings to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization of property and equipment

 

 

5,044

 

 

 

5,433

 

Amortization of intangible assets

 

 

3,823

 

 

 

3,611

 

Provision for losses on accounts receivable

 

 

1,413

 

 

 

346

 

Write-downs of inventories

 

 

1,408

 

 

 

629

 

Write-off of property and equipment

 

 

 

 

 

303

 

Non-cash stock-based compensation

 

 

4,115

 

 

 

3,184

 

Deferred income taxes

 

 

547

 

 

 

979

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Decrease in accounts receivable

 

 

210,691

 

 

 

184,877

 

(Increase) Decrease in inventories

 

 

(39,658

)

 

 

4,444

 

Increase in other assets

 

 

(107,314

)

 

 

(25,514

)

Decrease in accounts payable

 

 

(82,246

)

 

 

(97,104

)

Increase in deferred revenue

 

 

7,117

 

 

 

16,177

 

Increase in accrued expenses and other liabilities

 

 

77,646

 

 

 

20,377

 

Net cash provided by operating activities

 

 

121,913

 

 

 

150,745

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(5,352

)

 

 

(5,044

)

Acquisitions, net of cash and cash equivalents acquired

 

 

(762

)

 

 

 

Net cash used in investing activities

 

 

(6,114

)

 

 

(5,044

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings on senior revolving credit facility

 

 

49,936

 

 

 

276,684

 

Repayments on senior revolving credit facility

 

 

(49,936

)

 

 

(392,184

)

Borrowings on accounts receivable securitization financing facility

 

 

1,010,500

 

 

 

1,024,000

 

Repayments on accounts receivable securitization financing facility

 

 

(1,092,500

)

 

 

(955,000

)

Repayments under Term Loan A

 

 

 

 

 

(3,281

)

Repayments under other financing agreements

 

 

 

 

 

(1,234

)

Payments on finance lease obligations

 

 

(542

)

 

 

(288

)

Net repayments under inventory financing facility

 

 

(43,970

)

 

 

(91,366

)

Payment of payroll taxes on stock-based compensation

   through shares withheld

 

 

(6,128

)

 

 

(2,884

)

Repurchases of common stock

 

 

 

 

 

(7,679

)

Net cash used in financing activities

 

 

(132,640

)

 

 

(153,232

)

Foreign currency exchange effect on cash, cash equivalents and

   restricted cash balances

 

 

(986

)

 

 

1,937

 

Decrease in cash, cash equivalents and restricted cash

 

 

(17,827

)

 

 

(5,594

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

144,293

 

 

 

107,445

 

Cash, cash equivalents and restricted cash at end of period

 

$

126,466

 

 

$

101,851

 

See accompanying notes to consolidated financial statements.


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1.Basis of Presentation and Recently Issued Accounting Standards

Basis of Presentation and Recently Issued Accounting Standards

We empower organizations of all sizes with Insight Intelligent Technology SolutionsTM and services to maximize the business value of ITInformation Technology (“IT”) in North America; Europe, the Middle East and Africa (“EMEA”); and Asia-Pacific (“APAC”).  As a Fortune 500-ranked global provider of digital innovation, cloud/data center transformation, connected workforce, and supply chain optimization solutions, and services, we help clients innovate and optimize their operations to run smarter.  Our company is organized in the following three3 operating segments, which are primarily defined by their related geographies:

 

Operating Segment

Geography

North America

United States and Canada

EMEA

Europe, Middle East and Africa

APAC

Asia-Pacific

 

Our offerings in North America and certain countries in EMEA and APAC include hardware, software and services.  Our offerings in the remainder of our EMEA and APAC segments consist of largely software and certain software-related services.  

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly our financial position as of March 31, 20192020 and our results of operations for the three months ended March 31, 20192020 and 20182019 and cash flows for the three months ended March 31, 20192020 and 2018.2019.  The consolidated balance sheet as of December 31, 20182019 was derived from the audited consolidated balance sheet at such date.  The accompanying unaudited consolidated financial statements and notes have been prepared in accordance with the rules and regulations promulgated by the Securities and Exchange CommissionSEC and consequently do not include all of the disclosures normally required by United States generally accepted accounting principles (“GAAP”).  

The results of operations for interim periods are not necessarily indicative of results for the full year, due in part to the seasonal nature of our business.  These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the related notes thereto, in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.  Our results of operations include the results of Cardinal Solutions Group,PCM, Inc. (“Cardinal”PCM”) from its acquisition date of August 1, 2018.30, 2019 and vNext from its acquisition date of February 28, 2020.  

The consolidated financial statements include the accounts of Insight Enterprises, Inc. and its wholly owned subsidiaries.  All significant intercompany balances and transactions have been eliminated in consolidation.  

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements.  Additionally, these estimates and assumptions affect the reported amounts of net sales and expenses during the reporting period.  Actual results could differ from those estimates.  On an ongoing basis, we evaluate our estimates, including those related to sales recognition, anticipated achievement levels under partner funding programs, assumptions related to stock-based compensation valuation, allowances for doubtful accounts, valuation of inventories, litigation-related obligations, valuation allowances for deferred tax assets and impairment of long-lived assets, including purchased intangibles and goodwill, if indicators of potential impairment exist.

6


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Recently Issued Accounting Standards

Effective January 1,In December 2019, we adopted the Financial Accounting Standards Board’s (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-02—Leases (Topic 842),2019-12, “Simplifying the Accounting for Income Taxes.”  The new standard is intended to simplify various aspects of accounting for income taxes by removing specific exceptions and amending certain requirements.  The new standard is effective for interim and annual periods beginning after December 15, 2020, and early adoption is permitted.  We do not expect this new standard to have a material effect on our consolidated financial statements.    

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses.”  The new standard is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held at each reporting date.  The new standard is effective for interim and annual periods beginning after December 15, 2019, and early adoption is permitted.  We adopted the new standard as of January 1, 2020. The adoption of this new standard did not have a material effect on our consolidated financial statements.

In November 2019, using the FASB issued ASU No. 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.”  The new standard provides amendments to the reporting of expected recoveries.  The new standard is effective date transition method. This approach provides a method for recording existing leases atwith the adoption without restating comparative periods.of ASU No. 2016-13.  We elected the package of practical expedients permitted under the transition guidance withinadopted the new standard which among other things, allowed us to carry forward the historical lease classification.  In addition, we made an accounting policy election not to separate non-lease components from lease components for all existing classes of underlying assets with the exception of land and buildings.  We also made an accounting policy election to not record right of use (“ROU”) assets and lease liabilities for leases with an initial term of twelve months or less on our consolidated balance sheet.

Adoption of the new standard resulted in the recording of additional net operating lease ROU assets and lease liabilities of $65,922,000 and $70,512,000, respectively, as of January 1, 2019.2020. The difference between the additional lease assets and lease liabilities reflected existing accrued and prepaid rent balances that were reclassified to the operating lease ROU asset at January 1, 2019. Theadoption of this new standard did not materially impacthave a material effect on our consolidated net earningsfinancial statements.

In April 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and had no impactHedging, and Topic 825, Financial Instruments.”  The new standard provides changes for how a company considers expected recoveries and contractual extensions or renewal options when estimating expected credit losses.  The new standard is effective with the adoption of ASU No. 2016-13.  We adopted the new standard as of January 1, 2020. The adoption of this new standard did not have a material effect on cash flows.  our consolidated financial statements.

There have been no other material changes in or additions to the recently issued accounting standards as previously reported in Note 1 to our Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 20182019 that affect or may affect our current financial statements.

2.

Leases

We lease office space, distribution centers, land, vehicles and equipment. Lease agreements with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.   7

 

Certain lease agreements include one or more options to renew, with renewal terms that can extend the lease term from one to five years or more. The exercise of lease renewal options is at our sole discretion. Some agreements also include options to purchase the leased property. The estimated life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.  

Certain of our lease agreements include rental payments adjusted periodically for inflation.  Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Significant Accounting Policy

We determine if a contract or arrangement is, or contains a lease at inception.  Balances related to operating leases are included in other assets, other current liabilities, and other liabilities in our consolidated balance sheet.  Balances related to financing leases are included in property and equipment, current portion of long-term debt, and long-term debt in our consolidated balance sheet.  ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.  

Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.  As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.  We use the implicit rate

7


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

when readily determinable.  The operating lease ROU asset includes any prepaid lease payments and additional direct costs and excludes lease incentives.  Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.  

The following table provides information about the financial statement classification of our lease balances reported within the consolidated balances sheets as of March 31, 2019 and January 1, 2019 (in thousands):

Leases

Classification

 

March 31,

2019

 

 

January 1,

2019

 

Assets

 

 

 

 

 

 

 

 

 

Operating lease assets

Other assets

 

$

63,336

 

 

$

65,922

 

Finance lease assets

Property and equipment(a)

 

 

1,522

 

 

 

1,693

 

Total lease assets

 

 

$

64,858

 

 

$

67,615

 

Liabilities

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

   Operating lease liabilities

Accrued expenses and other current liabilities

 

$

15,711

 

 

$

15,788

 

   Finance lease liabilities

Current portion of long-term debt

 

 

1,161

 

 

 

1,399

 

Non-current

 

 

 

 

 

 

 

 

 

   Operating lease liabilities

Other liabilities

 

 

52,692

 

 

 

54,724

 

   Finance lease liabilities

Long-term debt

 

 

1,227

 

 

 

1,521

 

Total lease liabilities

 

 

$

70,791

 

 

$

73,432

 

 

 

 

 

 

 

 

 

 

 

(a)

Recorded net of accumulated amortization of $171,000 as of March 31, 2019 and there is no accumulated amortization as of January 1, 2019.

The following table provides information about the financial statement classification of our lease expenses reported within the consolidated statement of operations for the three months ended March 31, 2019 (in thousands):

Lease cost

Classification

 

Three months ended

March 31,

2019

 

Operating lease cost (a) (b)

Selling and administrative expenses

 

$

4,918

 

Finance lease cost

 

 

 

 

 

   Amortization of leased

     assets

Selling and administrative expenses

 

 

171

 

   Interest on lease liabilities

Interest expense, net

 

 

27

 

Total lease cost

 

 

$

5,116

 

 

 

 

 

 

 

(a)

Includes immaterial amounts recorded to cost of goods sold.

(b)

Excludes short-term and variable lease costs, which are immaterial.

8


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Future minimum lease payments under non-cancelable leases as of March 31, 2019 are as follows (in thousands):

 

 

Operating leases

 

 

Finance leases

 

 

Total

 

Remainder of 2019

 

$

14,118

 

 

$

930

 

 

$

15,048

 

2020

 

 

14,758

 

 

 

1,150

 

 

 

15,908

 

2021

 

 

12,225

 

 

 

432

 

 

 

12,657

 

2022

 

 

9,466

 

 

 

 

 

 

9,466

 

2023

 

 

6,460

 

 

 

 

 

 

6,460

 

After 2023

 

 

20,913

 

 

 

 

 

 

20,913

 

Total lease payments

 

 

77,940

 

 

 

2,512

 

 

 

80,452

 

Less:  Interest

 

 

(9,537

)

 

 

(124

)

 

 

(9,661

)

Present value of lease liabilities

 

$

68,403

 

 

$

2,388

 

 

$

70,791

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease payments include $13.4 million related to options to extend lease terms that are reasonably certain of being exercised.

The following table provides information about the remaining lease terms and discount rates applied as of March 31, 2019:

March 31, 2019

Weighted average remaining lease term (years)

   Operating leases

6.58

   Finance leases

2.19

Weighted average discount rate (%)

   Operating leases

3.86

   Finance leases

4.84

The following table provides other information related to leases for the three months ended March 31, 2019 (in thousands):

 

 

Three months ended

March 31, 2019

 

Cash paid for amounts included in the measurement of lease

   liabilities:

 

 

 

 

   Operating cash flows from operating leases

 

$

4,457

 

Leased assets obtained in exchange for new finance lease liabilities

 

 

 

Leased assets obtained in exchange for new operating lease liabilities

 

 

1,768

 

Operating Leases pre-Topic 842 adoption:

We have non-cancelable operating leases with third parties, primarily for administrative and distribution center space and computer equipment.  Our facilities leases generally provide for periodic rent increases and many contain escalation clauses and renewal options.  We recognize rent expense on a straight-line basis over the lease term.  Rental expense for these third-party operating leases was $20,114,000, $19,126,000 and $14,444,000 in 2018, 2017 and 2016, respectively, and is included in selling and administrative expenses in the accompanying consolidated statements of operations.

9


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2018 are as follows (in thousands):

Years Ending December 31,

 

 

 

 

2019

 

$

21,499

 

2020

 

 

15,580

 

2021

 

 

12,121

 

2022

 

 

9,150

 

2023

 

 

6,296

 

Thereafter

 

 

7,238

 

Total minimum lease payments

 

$

71,884

 

Amounts in the table above exclude approximately $1.6 million in 2019 in non-cancellable rental income.

3.2.

Sales Recognition

In the following table, revenue is disaggregated by our reportable operating segments, which are primarily defined bytheir related geographies, as well as by major product offering, by major client group and by recognition on either a gross basis as a principal in the arrangement, or on a net basis as an agent, for the three months ended March 31, 20192020 and 20182019 (in thousands):

 

 

Three Months Ended March 31, 2019

 

 

Three Months Ended March 31, 2020

 

 

North America

 

 

EMEA

 

 

APAC

 

 

Consolidated

 

 

North America

 

 

EMEA

 

 

APAC

 

 

Consolidated

 

Major Offerings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hardware

 

$

748,337

 

 

$

171,525

 

 

$

6,518

 

 

$

926,380

 

 

$

1,128,486

 

 

$

174,969

 

 

$

7,746

 

 

$

1,311,201

 

Software

 

 

322,079

 

 

 

183,148

 

 

 

35,065

 

 

 

540,292

 

 

 

305,163

 

 

 

201,082

 

 

 

30,870

 

 

 

537,115

 

Services

 

 

172,025

 

 

 

35,502

 

 

 

11,267

 

 

 

218,794

 

 

 

240,732

 

 

 

42,835

 

 

 

12,168

 

 

 

295,735

 

 

$

1,242,441

 

 

$

390,175

 

 

$

52,850

 

 

$

1,685,466

 

 

$

1,674,381

 

 

$

418,886

 

 

$

50,784

 

 

$

2,144,051

 

Major Client Groups

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large Enterprise / Corporate

 

$

976,841

 

 

$

260,607

 

 

$

13,307

 

 

$

1,250,755

 

 

$

1,160,748

 

 

$

292,288

 

 

$

13,025

 

 

$

1,466,061

 

Small and Medium-Sized Businesses

 

 

386,076

 

 

 

17,742

 

 

 

13,654

 

 

 

417,472

 

Public Sector

 

 

97,117

 

 

 

109,066

 

 

 

26,154

 

 

 

232,337

 

 

 

127,557

 

 

 

108,856

 

 

 

24,105

 

 

 

260,518

 

Small and Medium-Sized Businesses

 

 

168,483

 

 

 

20,502

 

 

 

13,389

 

 

 

202,374

 

 

$

1,242,441

 

 

$

390,175

 

 

$

52,850

 

 

$

1,685,466

 

 

$

1,674,381

 

 

$

418,886

 

 

$

50,784

 

 

$

2,144,051

 

Revenue Recognition based on acting as

Principal or Agent in the Transaction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross revenue recognition (Principal)

 

$

1,182,078

 

 

$

367,165

 

 

$

47,866

 

 

$

1,597,109

 

 

$

1,600,514

 

 

$

392,259

 

 

$

45,754

 

 

$

2,038,527

 

Net revenue recognition (Agent)

 

 

60,363

 

 

 

23,010

 

 

 

4,984

 

 

 

88,357

 

 

 

73,867

 

 

 

26,627

 

 

 

5,030

 

 

 

105,524

 

 

$

1,242,441

 

 

$

390,175

 

 

$

52,850

 

 

$

1,685,466

 

 

$

1,674,381

 

 

$

418,886

 

 

$

50,784

 

 

$

2,144,051

 

 

10


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Three Months Ended March 31, 2018

 

 

Three Months Ended March 31, 2019

 

 

North America

 

 

EMEA

 

 

APAC

 

 

Consolidated

 

 

North America

 

 

EMEA

 

 

APAC

 

 

Consolidated

 

Major Offerings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hardware

 

$

873,341

 

 

$

187,010

 

 

$

7,160

 

 

$

1,067,511

 

 

$

748,337

 

 

$

171,525

 

 

$

6,518

 

 

$

926,380

 

Software

 

 

261,060

 

 

 

190,202

 

 

 

39,019

 

 

 

490,281

 

 

 

322,079

 

 

 

183,148

 

 

 

35,065

 

 

 

540,292

 

Services

 

 

143,979

 

 

 

29,922

 

 

 

10,801

 

 

 

184,702

 

 

 

172,025

 

 

 

35,502

 

 

 

11,267

 

 

 

218,794

 

 

$

1,278,380

 

 

$

407,134

 

 

$

56,980

 

 

$

1,742,494

 

 

$

1,242,441

 

 

$

390,175

 

 

$

52,850

 

 

$

1,685,466

 

Major Client Groups

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large Enterprise / Corporate

 

$

952,810

 

 

$

272,640

 

 

$

12,966

 

 

$

1,238,416

 

 

$

976,841

 

 

$

260,607

 

 

$

13,307

 

 

$

1,250,755

 

Small and Medium-Sized Businesses

 

 

168,483

 

 

 

20,502

 

 

 

13,389

 

 

 

202,374

 

Public Sector

 

 

110,504

 

 

 

116,614

 

 

 

31,376

 

 

 

258,494

 

 

 

97,117

 

 

 

109,066

 

 

 

26,154

 

 

 

232,337

 

Small and Medium-Sized Businesses

 

 

215,066

 

 

 

17,880

 

 

 

12,638

 

 

 

245,584

 

 

$

1,278,380

 

 

$

407,134

 

 

$

56,980

 

 

$

1,742,494

 

 

$

1,242,441

 

 

$

390,175

 

 

$

52,850

 

 

$

1,685,466

 

Revenue Recognition based on acting as

Principal or Agent in the Transaction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross revenue recognition (Principal)

 

$

1,230,412

 

 

$

388,337

 

 

$

51,825

 

 

$

1,670,574

 

 

$

1,182,078

 

 

$

367,165

 

 

$

47,866

 

 

$

1,597,109

 

Net revenue recognition (Agent)

 

 

47,968

 

 

 

18,797

 

 

 

5,155

 

 

 

71,920

 

 

 

60,363

 

 

 

23,010

 

 

 

4,984

 

 

 

88,357

 

 

$

1,278,380

 

 

$

407,134

 

 

$

56,980

 

 

$

1,742,494

 

 

$

1,242,441

 

 

$

390,175

 

 

$

52,850

 

 

$

1,685,466

 

 

The following table provides information about receivables contract assets and contract liabilities as of March 31, 20192020 and December 31, 20182019 (in thousands):

 

 

March 31,

 

 

December 31,

 

 

March 31,

 

 

December 31,

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Current receivables, which are included in “Accounts

receivable, net”

 

$

1,723,817

 

 

$

1,931,736

 

 

$

2,464,377

 

 

$

2,511,383

 

Non-current receivables, which are included in “Other assets”

 

 

142,792

 

 

 

38,157

 

 

 

110,861

 

 

 

154,417

 

Contract assets, which are included in “Other current assets”

 

 

1,207

 

 

 

892

 

Contract liabilities, which are included in “Deferred revenue”

and “Other liabilities”

 

 

88,801

 

 

 

82,117

 

Contract liabilities, which are included in “Accrued expenses

and other current liabilities” and “Other liabilities”

 

 

94,243

 

 

 

84,814

 

Significant changes in the contract assets and the contract liabilities balances during the three months ended March 31, 2019 are as follows (in thousands):8

 

 

 

Increase (Decrease)

 

 

 

Contract

 

 

Contract

 

 

 

Assets

 

 

Liabilities

 

Balances at December 31, 2018

 

$

892

 

 

$

82,117

 

Reclassification of the beginning contract liabilities

   to revenue, as the result of performance obligations satisfied

 

 

 

 

 

(17,651

)

Cash received in advance and not recognized as revenue

 

 

 

 

 

24,335

 

Reclassification of the beginning contract assets to receivables, as

   the result of rights to consideration becoming unconditional

 

 

(117

)

 

 

 

Contract assets recognized, net of reclassification to receivables

 

 

432

 

 

 

 

Balances at March 31, 2019

 

$

1,207

 

 

$

88,801

 

11


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Changes in the contract liabilities balances during the three months ended March 31, 2020 are as follows (in thousands):

 

 

Increase (Decrease)

 

 

 

Contract

 

 

 

Liabilities

 

Balances at December 31, 2019

 

$

84,814

 

Reclassification of the beginning contract liabilities

   to revenue, as the result of performance obligations satisfied

 

 

(18,864

)

Cash received in advance and not recognized as revenue

 

 

28,293

 

Balances at March 31, 2020

 

$

94,243

 

The following table includes estimated net sales related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 20192020 that are expected to be recognized in the future (in thousands):

 

 

Products

 

 

Services

 

 

Total

 

 

Services

 

Remaining nine months of 2019

 

$

9

 

 

$

74,784

 

 

$

74,793

 

2020

 

 

6

 

 

 

33,293

 

 

 

33,299

 

Remainder of 2020

 

$

83,311

 

2021

 

 

 

 

 

 

13,936

 

 

 

13,936

 

 

 

33,744

 

2022

 

 

 

 

 

 

5,191

 

 

 

5,191

 

 

 

19,039

 

2023 and thereafter

 

 

 

 

 

 

2,667

 

 

 

2,667

 

 

 

11,548

 

Total remaining performance obligations

 

$

15

 

 

$

129,871

 

 

$

129,886

 

 

$

147,642

 

 

With the exception of remaining performance obligations associated with our OneCall Support Services contracts which are included in the table above regardless of original duration, remaining performance obligations that have original expected durations of one year or less are not included in the table above.  Amounts not included in the table above have an average original expected duration of nine months.  Additionally, for our time and material services contracts, whereby we have the right to consideration from a client in an amount that corresponds directly with the value to the client of our performance completed to date, we recognized revenue in the amount to which we have a right to invoice as of March 31, 20192020 and do not disclose information about related remaining performance obligations in the table above.  Our time and material contracts have an average expected duration of 1415 months.

The majority of our backlog historically has been and continues to be open cancelable purchase orders.  We do not believe that backlog as of any particular date is predictive of future results, therefore we do not include performance obligations under open cancelable purchase orders, which do not qualify for revenue recognition, in the table above.

3.

Assets Held for Sale

During 2019, we completed the purchase of real estate in Chandler, Arizona that we intend to use as our global corporate headquarters.  During the fourth quarter of 2019, properties in Tempe, Arizona, El Segundo and Santa Monica, California and Woodbridge, Illinois were classified as held for sale, for approximately $68,916,000, which is included in other current assets in the accompanying consolidated balance sheet as of March 31, 2020, as we look to sell current properties in preparation for our move to Chandler.  During the first quarter of 2020, we completed the sale of our property in Irvine, California for approximately $14,218,000.  See note 13 for additional information regarding the sale of our Tempe, Arizona and El Segundo and Santa Monica, California properties.  

9


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

4.

Net Earnings Per Share (“EPS”)

Basic EPS is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during each period.  Diluted EPS is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method.  Dilutive potential common shares include outstanding restricted stock units (“RSUs”). A reconciliation of the denominators of the basic and diluted EPS calculations follows (in thousands, except per share data):

 

 

Three Months Ended

March 31,

 

 

Three Months Ended

March 31,

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

39,327

 

 

$

33,003

 

 

$

33,961

 

 

$

39,327

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used to

compute basic EPS

 

 

35,609

 

 

 

35,913

 

 

 

35,233

 

 

 

35,609

 

Dilutive potential common shares due to

dilutive RSUs, net of tax effect

 

 

494

 

 

 

350

 

 

 

413

 

 

 

494

 

Weighted average shares used to compute

diluted EPS

 

 

36,103

 

 

 

36,263

 

 

 

35,646

 

 

 

36,103

 

Net earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.10

 

 

$

0.92

 

 

$

0.96

 

 

$

1.10

 

Diluted

 

$

1.09

 

 

$

0.91

 

 

$

0.95

 

 

$

1.09

 

 

12


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

For the three months ended March 31, 2019 and 2018, 164,000 and 20,000, respectively,2020, 86,000 of our RSUs were not included in the diluted EPS calculations because their inclusion would have been anti-dilutive.  These share-based awards could be dilutive in the future.  There were 164,000 anti-dilutive RSUs for the three months ended March 31, 2019.  

5.

Debt, Inventory Financing Facility,Facilities, Finance Leases and Other Financing Obligations

Debt

Our long-term debt consists of the following (in thousands):

 

 

March 31,

2019

 

 

December 31,

2018

 

 

March 31,

2020

 

 

December 31,

2019

 

Senior revolving credit facility

 

$

 

 

$

 

Accounts receivable securitization financing facility

 

 

112,000

 

 

 

194,000

 

ABL revolving credit facility

 

$

460,141

 

 

$

570,706

 

Convertible senior notes due 2025

 

 

287,670

 

 

 

284,836

 

Finance leases and other financing obligations

 

 

2,388

 

 

 

2,920

 

 

 

3,436

 

 

 

3,822

 

Total

 

 

114,388

 

 

 

196,920

 

 

 

751,247

 

 

 

859,364

 

Less: current portion of long-term debt

 

 

(1,161

)

 

 

(1,395

)

 

 

(1,700

)

 

 

(1,691

)

Long-term debt

 

$

113,227

 

 

$

195,525

 

 

$

749,547

 

 

$

857,673

 

 

OurOn August 30, 2019, we entered into a credit agreement (the “credit agreement”) providing for a senior secured revolving credit facility (“revolving(the “ABL facility”), which has an aggregate U.S. dollar equivalent maximum borrowing amount of $350,000,000,$1,200,000,000, including a maximum borrowing capacity that maycould be used for borrowing in certain foreign currencies of $50,000,000, and matures on June 23, 2021.

Our accounts receivable securitization financing facility (the “ABS facility”) has a maximum aggregate borrowing availability of $250,000,000, and matures on June 23, 2021.$150,000,000.  While the ABSABL facility has a stated maximum amount, the actual availability under the ABSABL facility is limited by specified percentages of eligible accounts receivable and certain eligible inventory, in each case as set forth in the quantitycredit agreement.  From time to time and qualityat our option, we may request to

10


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

increase the aggregate amount available for borrowing under the ABL facility by up to an aggregate of the underlying accounts receivable.U.S. dollar equivalent of $500,000,000, subject to customary conditions, including receipt of commitments from lenders.  The ABL facility is guaranteed by certain of our material subsidiaries and is secured by a lien on certain of our assets and certain of each other borrower’s and each guarantor’s assets.  The interest rates applicable to borrowings under the ABL facility are based on the average aggregate excess availability under the ABL facility as set forth on a pricing grid in the credit agreement.  The ABL facility matures on August 30, 2024.  As of March 31, 2019, qualified receivables2020, eligible accounts receivable and inventory were sufficient to permit access to the full $250,000,000$1,200,000,000 facility amount, of which $112,000,000$460,141,000 was outstanding.

Our consolidated debt balance

The ABL facility contains customary affirmative and negative covenants and events of default.  If a default occurs (subject to customary grace periods and materiality thresholds) under the credit agreement, certain actions may be taken, including, but not limited to, possible termination of commitments and required payment of all outstanding principal amounts plus accrued interest and fees payable under the credit agreement.  

Convertible Senior Notes due 2025

On August 15, 2019, we issued $300,000,000 aggregate principal amount of convertible senior notes (the “notes”) that canmature on February 15, 2025. On August 23, 2019, we issued an additional $50,000,000 aggregate principal amount of the notes pursuant to the exercise in full by the initial purchasers of the notes of their option to purchase additional notes.  The notes bear interest at an annual rate of 0.75% payable semiannually, in arrears, on February 15th and August 15th of each year. The notes are general unsecured obligations of Insight and are guaranteed on a senior unsecured basis by Insight Direct USA, Inc., a wholly owned subsidiary of Insight.  

Holders of the notes may convert their notes at their option at any time prior to the close of business on the business day immediately preceding June 15, 2024, under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2019 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any 5 consecutive trading day period (the “measurement period”) in which the trading price of our common stock per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) if we call any or all of the notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after June 15, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date, the holders may convert their notes at any time, regardless of the foregoing circumstances.

Upon conversion, we will pay or deliver cash, shares of our common stock or a combination of the two, at our discretion. The conversion rate will initially be outstanding14.6376 shares of common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of approximately $68.32 per share of common stock). The conversion rate is subject to change in certain circumstances and will not be adjusted for any accrued and unpaid interest. In addition, following certain events that occur prior to the maturity date or following our issuance of a notice of redemption, the conversion rate is subject to an increase for a holder who elects to convert their notes in connection with those events or during the related redemption period in certain circumstances.

11


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

If we undergo a fundamental change, the holders may require us to repurchase for cash all or any portion of their notes at a fundamental change repurchase price equal to 100% of the endprincipal amount of any fiscal quarter under our revolving facilitythe notes to be repurchased, plus accrued and our ABS facility is limited by certain financial covenants, particularlyunpaid interest to, but excluding, the fundamental change repurchase date. As of March 31, 2020, none of the criteria for a maximum leverage ratio.  fundamental change or a conversion rate adjustment had been met.

The maximum leverage ratio is calculated as aggregate debt outstanding divided bynumber of shares issuable upon conversion, including the sumeffect of a fundamental change and subject to other conversion rate adjustments, would be 6,788,208.

We may redeem for cash all or any portion of the notes, at our option, on or after August 20, 2022 if the last reported sale price of our trailing twelve month net earnings (loss) plus (i) interest expense, excluding non-cash imputed interestcommon stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, our inventory financing facility, (ii) income tax expense (benefit), (iii) depreciation and amortization, (iv) non-cash stock-based compensation, (v) extraordinary or non-recurring non-cash losses or expenses and (vi) certain cash restructuring and acquisition-related charges and synergies, notincluding, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to exceed a specified cap (“adjusted earnings”).  The maximum leverage ratio permitted under100% of the facilities is currently 3.0 times our trailing twelve-month adjusted earnings.  A significant drop in our adjusted earnings would limit theprincipal amount of indebtedness that couldthe notes to be outstanding atredeemed, plus accrued and unpaid interest to, but excluding, the endredemption date. No sinking fund is provided for the notes.  

The notes are subject to certain customary events of any fiscal quarter to a level that would be below ourdefault and acceleration clauses.  As of March 31, 2020, no such events have occurred.

The notes consist of the following balances reported within the consolidated maximum facility amount.  Based on our maximum leverage ratiobalance sheet as of March 31, 2019, our aggregate debt balance that could have been outstanding under our revolving facility and our ABS facility was the full amount2020 (in thousands):

Liability:

 

 

 

 

Principal

 

$

350,000

 

Less: debt discount and issuance costs, net of accumulated accretion

 

 

(62,330

)

Net carrying amount

 

$

287,670

 

 

 

 

 

 

Equity, net of deferred tax

 

$

44,731

 

The remaining life of the maximum borrowing capacitydebt discount and issuance cost accretion is approximately 4.875 years.  The effective interest rate on the liability component of $600,000,000.the notes is 4.325%.

Interest expense resulting from the notes reported within the consolidated statement of operations for the three months ended March 31, 2020 is made up of contractual coupon interest, amortization of debt discount and amortization of debt issuance costs.

Convertible Note Hedge and Warrant Transaction

In connection with the issuance of the notes, we entered into certain convertible note hedge and warrant transactions (the “Call Spread Transactions”) with respect to the Company’s common stock.

The convertible note hedge consists of an option to purchase up to 5,123,160 common stock shares at a price of $68.32 per share. The hedge expires on February 15, 2025 and can only be concurrently executed upon the conversion of the notes. We paid approximately $66,325,000 for the convertible note hedge transaction.

Additionally, we sold warrants to purchase 5,123,160 shares of common stock at a price of $103.12 per share. The warrants expire on May 15, 2025 and can only be exercised at maturity.  The Company received aggregate proceeds of approximately $34,440,000 for the sale of the warrants.

12


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The Call Spread Transactions have no effect on the terms of the notes and reduce potential dilution by effectively increasing the initial conversion price of the notes to $103.12 per share of the Company’s common stock.

Inventory Financing FacilityFacilities

OurDuring the first quarter of 2020, we increased our maximum availability for vendor purchases under our unsecured inventory financing facility haswith MUFG Bank Ltd (“MUFG”) from $200,000,000 to $240,000,000.  We also have an unsecured inventory financing facility with Wells Fargo Capital Finance, LLC (“Wells Fargo”) with an aggregate availability for vendor purchases under the facility of $250,000,000.As of March 31, 2020, our combined inventory financing facilities had a total maximum borrowing capacity of $400,000,000,$490,000,000, of which $260,160,000$252,912,000 was outstanding at March 31, 2019.outstanding.  The inventory financing facility matures on June 23, 2021.facilities will remain in effect until they are terminated by any of the parties.  If balances are not paid within stated vendor terms, they will accrue interest at prime plus 2.00% or prime plus 1.25%.   with respect to the MUFG facility and Wells Fargo facility, respectively.Amounts outstanding under this facilitythese facilities are classified separately as accounts payable – inventory financing facilityfacilities in the accompanying consolidated balance sheets.

13


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Finance Lease and Other Financing Obligations

OurFrom time to time, we enter into finance lease obligations totaled $2,388,000leases and $2,920,000 asother financing agreements with financial intermediaries to facilitate the purchase of March 31, 2019 and December 31, 2018, respectively.products from certain vendors.     

The current and long-term portions of our finance leases and other financing obligations are included in the current and long-term portions of long-term debt in the table above and in our consolidated balance sheets as of March 31, 20192020 and December 31, 2018.  Further, see2019.  See Note 26 for additional information.    

6.

Restricted CashLeases

Amounts included in restricted cash represent those required to be set aside by a contractual agreement with a lessor related to certain leased

We lease office space, in foreign jurisdictions.  distribution centers, land, vehicles and equipment.  Lease agreements with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

Certain lease agreements include one or more options to renew, with renewal terms that can extend the lease term from one to five years or more.  The exercise of lease renewal options is at our sole discretion. Some agreements also include options to purchase the leased property.  The estimated life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

Certain of our lease agreements include rental payments adjusted periodically for inflation.  Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

13


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The following table provides a reconciliationinformation about the financial statement classification of cash, cash equivalents and restricted cashour lease balances reported within the consolidated balance sheets that sum toas of March 31, 2020 and December 31, 2019 (in thousands):

Leases

Classification

 

March 31, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

 

Operating lease assets

Other assets

 

$

89,869

 

 

$

74,684

 

Finance lease assets

Property and equipment(a)

 

 

2,973

 

 

 

3,297

 

Total lease assets

 

 

$

92,842

 

 

$

77,981

 

Liabilities

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

   Operating lease liabilities

Accrued expenses and other current liabilities

 

$

21,000

 

 

$

19,648

 

   Finance lease liabilities

Current portion of long-term debt

 

 

1,700

 

 

 

1,691

 

Non-current

 

 

 

 

 

 

 

 

 

   Operating lease liabilities

Other liabilities

 

 

74,114

 

 

 

60,285

 

   Finance lease liabilities

Long-term debt

 

 

1,736

 

 

 

2,131

 

Total lease liabilities

 

 

$

98,550

 

 

$

83,755

 

 

 

 

 

 

 

 

 

 

 

(a)

Recorded net of accumulated amortization of $1,185,000 and $861,000 as of March 31, 2020 and December 31, 2019, respectively.

The following table provides information about the totalfinancial statement classification of our lease expenses reported within the same such amounts shown in the statementsconsolidated statement of cash flowsoperations for the three months ended March 31, 20192020 and 20182019 (in thousands):

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Cash and cash equivalents

 

$

124,831

 

 

$

142,655

 

Restricted cash included in other current assets

 

 

8

 

 

 

8

 

Restricted cash included in other non-current assets

 

 

1,627

 

 

 

1,630

 

Total cash, cash equivalents and restricted cash shown in

   the statement of cash flows

 

$

126,466

 

 

$

144,293

 

Lease cost

Classification

 

Three months ended

March 31, 2020

 

 

Three months ended

March 31, 2019

 

Operating lease cost (a) (b)

Selling and administrative expenses

 

$

6,514

 

 

$

4,918

 

Finance lease cost

 

 

 

 

 

 

 

 

 

   Amortization of leased

     assets

Selling and administrative expenses

 

 

324

 

 

 

171

 

   Interest on lease liabilities

Interest expense, net

 

 

32

 

 

 

27

 

Total lease cost

 

 

$

6,870

 

 

$

5,116

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Cash and cash equivalents

 

$

100,237

 

 

$

105,831

 

Restricted cash included in other current assets

 

 

10

 

 

 

46

 

Restricted cash included in other non-current assets

 

 

1,604

 

 

 

1,568

 

Total cash, cash equivalents and restricted cash shown in

   the statement of cash flows

 

$

101,851

 

 

$

107,445

 

(a)

Includes immaterial amounts recorded to cost of goods sold.

(b)

Excludes short-term and variable lease costs, which are immaterial.

 

14


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Future minimum lease payments under non-cancelable leases as of March 31, 2020 are as follows (in thousands):

 

 

Operating leases

 

 

Finance leases

 

 

Total

 

Remainder of 2020

 

$

18,308

 

 

$

1,368

 

 

$

19,676

 

2021

 

 

21,199

 

 

 

1,077

 

 

 

22,276

 

2022

 

 

18,287

 

 

 

645

 

 

 

18,932

 

2023

 

 

12,742

 

 

 

449

 

 

 

13,191

 

2024

 

 

7,917

 

 

 

45

 

 

 

7,962

 

After 2024

 

 

27,991

 

 

 

 

 

 

27,991

 

Total lease payments

 

 

106,444

 

 

 

3,584

 

 

 

110,028

 

Less:  Interest

 

 

(11,330

)

 

 

(148

)

 

 

(11,478

)

Present value of lease liabilities

 

$

95,114

 

 

$

3,436

 

 

$

98,550

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease payments include $13.4 million related to options to extend lease terms that are reasonably certain of being exercised.

The following table provides information about the remaining lease terms and discount rates applied as of March 31, 2020:

 

 

March 31, 2020

 

 

March 31, 2019

 

Weighted average remaining lease term (years)

 

 

 

 

 

 

 

 

   Operating leases

 

 

6.29

 

 

 

6.58

 

   Finance leases

 

 

2.74

 

 

 

2.19

 

Weighted average discount rate (%)

 

 

 

 

 

 

 

 

   Operating leases

 

 

3.49

 

 

 

3.86

 

   Finance leases

 

 

3.61

 

 

 

4.84

 

The following table provides other information related to leases for the three months ended March 31, 2020 and 2019 (in thousands):

 

 

Three months ended

March 31, 2020

 

 

Three months ended

March 31, 2019

 

Cash paid for amounts included in the measurement of lease

   liabilities:

 

 

 

 

 

 

 

 

   Operating cash flows from operating leases

 

$

6,582

 

 

$

4,457

 

Leased assets obtained in exchange for new operating lease liabilities

 

$

21,294

 

 

$

1,768

 

15


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

7.Stock-Based Compensation

We recorded the following pre-tax amounts in selling and administrative expenses for stock-based compensation, by operating segment, in the accompanying consolidated financial statements (in thousands):

 

 

Three Months Ended

March 31,

 

 

Three Months Ended

March 31,

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

North America

 

$

3,123

 

 

$

2,390

 

 

$

3,390

 

 

$

3,123

 

EMEA

 

 

870

 

 

 

690

 

 

 

878

 

 

 

870

 

APAC

 

 

122

 

 

 

104

 

 

 

141

 

 

 

122

 

Total Consolidated

 

$

4,115

 

 

$

3,184

 

 

$

4,409

 

 

$

4,115

 

 

As of March 31, 2019,2020, total compensation cost related to nonvested RSUs not yet recognized is $36,742,000,$37,650,000, which is expected to be recognized over the next 1.841.44 years on a weighted-average basis.  

14


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The following table summarizes our RSU activity during the three months ended March 31, 2019:2020:

 

 

Number

 

 

Weighted

Average

Grant Date

Fair Value

 

 

Fair Value

 

 

 

Number

 

 

Weighted

Average

Grant Date

Fair Value

 

 

Fair Value

 

 

Nonvested at January 1, 2019

 

 

1,020,930

 

 

$

36.10

 

 

 

 

 

 

Nonvested at January 1, 2020

 

 

923,400

 

 

$

45.58

 

 

 

 

 

 

Granted(a)

 

 

326,868

 

 

 

57.52

 

 

 

 

 

 

 

 

291,648

 

 

 

58.58

 

 

 

 

 

 

Vested, including shares withheld to cover taxes

 

 

(387,406

)

 

 

33.90

 

 

$

13,133,063

��

(b)

 

 

(320,623

)

 

 

41.49

 

 

$

13,302,648

 

(b)

Forfeited

 

 

(7,888

)

 

 

40.94

 

 

 

 

 

 

 

 

(5,777

)

 

 

46.50

 

 

 

 

 

 

Nonvested at March 31, 2019(a)

 

 

952,504

 

 

 

44.30

 

 

$

52,444,870

 

(c)

Nonvested at March 31, 2020(a)

 

 

888,648

 

 

 

51.32

 

 

$

37,438,740

 

(c)

 

 

(a)

Includes 88,50992,315 RSUs subject to remaining performance conditions.  The number of RSUs subject to performance conditions are based on the Company achieving 97%100% of its 20192020 targeted financial results.  The numberThese RSUs will be awarded at 100% this annual period due to the completion of RSUs ultimately awarded undera significant acquisition in the performance-based RSUs varies based on actual achieved financial results for 2019.period.  

 

(b)

The aggregate fair value of vested RSUs represents the total pre-tax fair value, based on the closing stock price on the day of vesting, which would have been received by holders of RSUs had all such holders sold their underlying shares on that date.  

 

(c)

The aggregate fair value of the nonvested RSUs and the RSUs expected to vest represents the total pre-tax fair value, based on our closing stock price of $55.06$42.13 as of March 29, 2019 (the last trading day of the quarter),31, 2020, which would have been received by holders of RSUs had all such holders sold their underlying shares on that date.

8.

Income Taxes

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law in the U.S. to provide certain relief as a result of the coronavirus (“COVID-19”) pandemic, which includes, among other things, provisions relating to net operating loss carrybacks and other tax-related matters. In addition, governments around the world have enacted or implemented various forms of tax relief measures in response to the economic conditions in the wake of COVID-19. As of March 31, 2020, we had recorded a discrete tax benefit of approximately $1,712,000 related to the CARES Act.

Our effective tax rate for the three months ended March 31, 2020 was 20.3%.  For the three months ended March 31, 2020, our effective tax rate was lower than the United States federal statutory rate of 21.0% due primarily to the remeasurement of acquired net operating

16


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

losses to be carried back to higher tax rate years under the CARES Act, excess tax benefits on the settlement of share-based compensation and tax benefits related to research and development activities.  These benefits were partially offset by state income taxes, net of federal benefit and higher taxes on earnings in foreign jurisdictions.  

Our effective tax rate for the three months ended March 31, 2019 and 2018 was 23.5% and 25.9%, respectively..  For the three months ended March 31, 2019, our effective tax rate was higher than the United States federal statutory rate of 21.0% due primarily to state income taxes, net of federal benefit and higher taxes on earnings in foreign jurisdictions partially offset by excess tax benefits on the settlement of employee share-based awardscompensation and the recognition of tax benefits related to research and development activities.  For the three months ended March 31, 2018, our effective tax rate was higher than the United States federal statutory rate of 21.0% due primarily to state income taxes net of federal benefit.activities.

As of March 31, 20192020 and December 31, 2018,2019, we had approximately $7,423,000$10,180,000 and $6,849,000,$9,736,000, respectively, of unrecognized tax benefits.  Of these amounts, approximately $373,000$515,000 and $313,000,$442,000, respectively, related to accrued interest.  In the future, if recognized, the liability associated with uncertain tax positions would affect our effective tax rate.  We do not believe there will be any changes over the next 12 months that would have a material effect on our effective tax rate.  

Several of our subsidiaries are currently under audit for tax years 20122013 through 2017.2018.  Although the timing of the resolutions and/or closures of audits is highly uncertain, it is reasonably possible that the examination phase of these audits may be concluded within the next 12 months, which could increase or decrease the balance of our gross unrecognized tax benefits.  However, based on the status of the various examinations in multiple jurisdictions, an estimate of the range of reasonably possible outcomes cannot be made at this time, but the estimated effect on our income tax expense and net earnings is not expected to be significant.  

15


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

9.

Share Repurchase Program

On February 13, 2018,26, 2020, our Board of Directors authorized the repurchase of up to $50,000,000 of our common stock.  Our share repurchases willmay be made on the open market, subject to Rule 10b-18 or in privately negotiated transactions, through block trades, through 10b5-1 plans or otherwise, at management’s discretion.  The amount of shares purchased and the timing of the purchases will be based on market conditions, working capital requirements, general business conditions and other factors.  We intend to retire the repurchased shares. 

During the three months ended March 31, 2019,2020, we did not repurchase any shares of our common stock.  During the comparative three months ended March 31, 2018, we repurchased 221,256444,813 shares of our common stock on the open market at a total cost of approximately $7,679,000$24,999,996 (an average price of $34.71$56.20 per share).  All shares repurchased were retired.  During the comparative three months ended March 31, 2019, we did 0t repurchase any shares of our common stock.        

10.

Commitments and Contingencies

Contractual

In the ordinary course of business, we issue performance bonds to secure our performance under certain contracts or state tax requirements.  As of March 31, 2019, we had approximately $3,939,000 of performance bonds outstanding.  These bonds are issued on our behalf by a surety company on an unsecured basis; however, if the surety company is ever required to pay out under the bonds, we have contractually agreed to reimburse the surety company.

Management believes that payments, if any, related to these performance bonds are not probable at March 31, 2019.2020.  Accordingly, we have not accrued any liabilities related to such performance bonds in our consolidated financial statements.

17


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Employment Contracts and Severance Plans

We have employment contracts with, and severance plans covering, certain officers and management teammates under which severance payments would become payable in the event of specified terminations without cause or terminations under certain circumstances after a change in control.  In addition, vesting of outstanding nonvested RSUs would accelerate following a change in control.  If severance payments under the current employment agreements or plan payments were to become payable, the severance payments would generally range from three to twenty-four months of salary.

Indemnifications

From time to time, in the ordinary course of business, we enter into contractual arrangements under which we agree to indemnify either our clients or third-party service providers from certain losses incurred relating to services performed on our behalf or for losses arising from defined events, which may include litigation or claims relating to past performance.  These arrangements include, but are not limited to, the indemnification of our clients for certain claims arising out of our performance under our sales contracts, the indemnification of our landlords for certain claims arising from our use of leased facilities and the indemnification of the lenders that provide our credit facilities for certain claims arising from their extension of credit to us.  Such indemnification obligations may not be subject to maximum loss clauses.

Management believes that payments, if any, related to these indemnifications are not probable at March 31, 2019.2020.  Accordingly, we have not accrued any liabilities related to such indemnifications in our consolidated financial statements.

16


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

We have entered into separate indemnification agreements with certain of our executive officers and with each of our directors.  These agreements require us, among other requirements, to indemnify such officers and directors against expenses (including attorneys’ fees), judgments and settlements incurred by such individual in connection with any action arising out of such individual’s status or service as our executive officer or director (subject to exceptions such as where the individual failed to act in good faith or in a manner the individual reasonably believed to be in, or not opposed to, the best interests of the Company) and to advance expenses incurred by such individual with respect to which such individual may be entitled to indemnification by us.  There are no pending legal proceedings that involve the indemnification of any of the Company’s directors or officers.

Contingencies Related to Third-Party Review

From time to time, we are subject to potential claims and assessments from third parties.  We are also subject to various governmental, client and partner audits.  We continually assess whether or not such claims have merit and warrant accrual.  Where appropriate, we accrue estimates of anticipated liabilities in the consolidated financial statements.  Such estimates are subject to change and may affect our results of operations and our cash flows.

Legal Proceedings

From time to time, we are party to various legal proceedings arising inincidental to the ordinary course of business, including preference payment claims asserted in client bankruptcy proceedings, indemnification claims, claims of alleged infringement of patents, trademarks, copyrights and other intellectual property rights, employment claims, claims of alleged non-compliance with contract provisions and claims related to alleged violations of laws and regulations.  We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable or there is a reasonable possibility that a loss, or an additional loss, may have been incurred and determine if accruals are appropriate.required.  If accruals are not appropriate,required, we further evaluate each legal proceeding to

18


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

assess whether an estimate of possible loss or range of possible loss can be made for disclosure.made.  Although litigation is inherently unpredictable, we believe that we have adequate provisions for any probable and estimable losses.  It is possible, nevertheless, that our consolidated financial position, results of operations or liquidity could be materially and adversely affected in any particular period by the work required pursuant to any legal proceedings or the resolution of aany legal proceeding.proceedings during such period.  Legal expenses related to defense of any legal proceeding or the negotiations, settlements, rulings and advice of outside legal counsel in connection with any legal proceedings are expensed as incurred.

In connection with the acquisition of PCM, the Company has effectively assumed responsibility for PCM litigation matters, including various disputes related to PCM’s acquisition of certain assets of En Pointe Technologies in 2015.  The seller of En Pointe Technologies and related entities providing various post-closing support functions to PCM have asserted claims regarding the sufficiency of earnout payments paid by PCM under the asset purchase agreement and the unwinding of the support functions post-closing.  PCM has rejected and vigorously responded to those claims and is pursuing various counterclaims.  The disputes are being heard by multiple courts and arbitrators in several different jurisdictions including California, Delaware and Pakistan.  The Company cannot determine with certainty the costs or outcome of these matters.  However, the Company is not involved in any pending or threatened legal proceedings, including the PCM litigation matters, that it believes would reasonably be expected to have a material adverse effect on its business, financial condition or results of operations.

17


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

11.Segment Information

 

We operate in three3 reportable geographic operating segments: North America; EMEA; and APAC.APAC with PCM being included in our North America and EMEA segments for the three months ended March 31, 2020.  Our offerings in North America and certain countries in EMEA and APAC include IT hardware, software and services.  Our offerings in the remainder of our EMEA and APAC segments are largely software and certain software-related services.

The following table summarizes net sales by offering for North America, EMEA and APAC including the effect of the reclassifications on the previously reported net sales by sales mix amounts for the three months ended March 31, 20192020 and 20182019 (in thousands):

 

 

North America

 

 

EMEA

 

 

APAC

 

 

North America

 

 

EMEA

 

 

APAC

 

 

Three Months Ended

March 31,

 

 

Three Months Ended

March 31,

 

 

Three Months Ended

March 31,

 

 

Three Months Ended

March 31,

 

 

Three Months Ended

March 31,

 

 

Three Months Ended

March 31,

 

Sales Mix

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hardware

 

$

748,337

 

 

$

873,341

 

 

$

171,525

 

 

$

187,010

 

 

$

6,518

 

 

$

7,160

 

 

$

1,128,486

 

 

$

748,337

 

 

$

174,969

 

 

$

171,525

 

 

$

7,746

 

 

$

6,518

 

Software

 

 

322,079

 

 

 

261,060

 

 

 

183,148

 

 

 

190,202

 

 

 

35,065

 

 

 

39,019

 

 

 

305,163

 

 

 

322,079

 

 

 

201,082

 

 

 

183,148

 

 

 

30,870

 

 

 

35,065

 

Services

 

 

172,025

 

 

 

143,979

 

 

 

35,502

 

 

 

29,922

 

 

 

11,267

 

 

 

10,801

 

 

 

240,732

 

 

 

172,025

 

 

 

42,835

 

 

 

35,502

 

 

 

12,168

 

 

 

11,267

 

 

$

1,242,441

 

 

$

1,278,380

 

 

$

390,175

 

 

$

407,134

 

 

$

52,850

 

 

$

56,980

 

 

$

1,674,381

 

 

$

1,242,441

 

 

$

418,886

 

 

$

390,175

 

 

$

50,784

 

 

$

52,850

 

All significant intercompany transactions are eliminated upon consolidation, and there are no differences between the accounting policies used to measure profit and loss for our segments or on a consolidated basis.  Net sales are defined as net sales to external clients.  None of our clients exceeded ten percent of consolidated net sales for the three months ended March 31, 20192020 or 2018.2019.

A portion of our operating segments’ selling and administrative expenses arise from shared services and infrastructure that we have historically provided to them in order to realize economies of scale and to use resources efficiently.  These expenses, collectively identified as corporate charges, include senior management expenses, internal audit, legal, tax, insurance services, treasury and other corporate infrastructure expenses.  Charges are allocated to our operating

19


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

segments, and the allocations have been determined on a basis that we consideredconsider to be a reasonable reflection of the utilization of services provided to or benefits received by the operating segments.  

 

The following tables present our results of operations by reportable operating segment for the periods indicated (in thousands):

 

 

Three Months Ended March 31, 2019

 

 

Three Months Ended March 31, 2020

 

 

North America

 

 

EMEA

 

 

APAC

 

 

Consolidated

 

 

North America

 

 

EMEA

 

 

APAC

 

 

Consolidated

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

1,070,416

 

 

$

354,673

 

 

$

41,583

 

 

$

1,466,672

 

 

$

1,433,649

 

 

$

376,051

 

 

$

38,616

 

 

$

1,848,316

 

Services

 

 

172,025

 

 

 

35,502

 

 

 

11,267

 

 

 

218,794

 

 

 

240,732

 

 

 

42,835

 

 

 

12,168

 

 

 

295,735

 

Total net sales

 

 

1,242,441

 

 

 

390,175

 

 

 

52,850

 

 

 

1,685,466

 

 

 

1,674,381

 

 

 

418,886

 

 

 

50,784

 

 

 

2,144,051

 

Costs of goods sold:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

974,701

 

 

 

324,038

 

 

 

38,569

 

 

 

1,337,308

 

 

 

1,288,197

 

 

 

345,749

 

 

 

36,292

 

 

 

1,670,238

 

Services

 

 

85,133

 

 

 

9,154

 

 

 

5,399

 

 

 

99,686

 

 

 

129,256

 

 

 

14,363

 

 

 

4,858

 

 

 

148,477

 

Total costs of goods sold

 

 

1,059,834

 

 

 

333,192

 

 

 

43,968

 

 

 

1,436,994

 

 

 

1,417,453

 

 

 

360,112

 

 

 

41,150

 

 

 

1,818,715

 

Gross profit

 

 

182,607

 

 

 

56,983

 

 

 

8,882

 

 

 

248,472

 

 

 

256,928

 

 

 

58,774

 

 

 

9,634

 

 

 

325,336

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses

 

 

136,950

 

 

 

47,145

 

 

 

6,968

 

 

 

191,063

 

 

 

211,203

 

 

 

50,244

 

 

 

7,416

 

 

 

268,863

 

Severance and restructuring expenses

 

 

331

 

 

 

(85

)

 

 

124

 

 

 

370

 

 

 

2,122

 

 

 

6

 

 

 

16

 

 

 

2,144

 

Acquisition and integration related expenses

 

 

1,262

 

 

 

204

 

 

 

 

 

 

1,466

 

Earnings from operations

 

$

45,326

 

 

$

9,923

 

 

$

1,790

 

 

$

57,039

 

 

$

42,341

 

 

$

8,320

 

 

$

2,202

 

 

$

52,863

 

18


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

 

Three Months Ended March 31, 2018

 

 

Three Months Ended March 31, 2019

 

 

North America

 

 

EMEA

 

 

APAC

 

 

Consolidated

 

 

North America

 

 

EMEA

 

 

APAC

 

 

Consolidated

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

1,134,401

 

 

$

377,212

 

 

$

46,179

 

 

$

1,557,792

 

 

$

1,070,416

 

 

$

354,673

 

 

$

41,583

 

 

$

1,466,672

 

Services

 

 

143,979

 

 

 

29,922

 

 

 

10,801

 

 

 

184,702

 

 

 

172,025

 

 

 

35,502

 

 

 

11,267

 

 

 

218,794

 

Total net sales

 

 

1,278,380

 

 

 

407,134

 

 

 

56,980

 

 

 

1,742,494

 

 

 

1,242,441

 

 

 

390,175

 

 

 

52,850

 

 

 

1,685,466

 

Costs of goods sold:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

1,028,970

 

 

 

343,019

 

 

 

42,997

 

 

 

1,414,986

 

 

 

974,701

 

 

 

324,038

 

 

 

38,569

 

 

 

1,337,308

 

Services

 

 

74,039

 

 

 

8,065

 

 

 

5,141

 

 

 

87,245

 

 

 

85,133

 

 

 

9,154

 

 

 

5,399

 

 

 

99,686

 

Total costs of goods sold

 

 

1,103,009

 

 

 

351,084

 

 

 

48,138

 

 

 

1,502,231

 

 

 

1,059,834

 

 

 

333,192

 

 

 

43,968

 

 

 

1,436,994

 

Gross profit

 

 

175,371

 

 

 

56,050

 

 

 

8,842

 

 

 

240,263

 

 

 

182,607

 

 

 

56,983

 

 

 

8,882

 

 

 

248,472

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses

 

 

132,640

 

 

 

48,283

 

 

 

7,257

 

 

 

188,180

 

 

 

136,950

 

 

 

47,145

 

 

 

6,968

 

 

 

191,063

 

Severance and restructuring expenses

 

 

443

 

 

 

1,074

 

 

 

127

 

 

 

1,644

 

 

 

331

 

 

 

(85

)

 

 

124

 

 

 

370

 

Earnings from operations

 

$

42,288

 

 

$

6,693

 

 

$

1,458

 

 

$

50,439

 

 

$

45,326

 

 

$

9,923

 

 

$

1,790

 

 

$

57,039

 

 

The following is a summary of our total assets by reportable operating segment (in thousands):

 

 

March 31,

2019

 

 

December 31,

2018

 

 

March 31,

2020

 

 

December 31,

2019

 

North America

 

$

2,640,942

 

 

$

2,660,886

 

 

$

3,977,876

 

 

$

3,814,408

 

EMEA

 

 

614,556

 

 

 

611,338

 

 

 

781,651

 

 

 

699,856

 

APAC

 

 

114,156

 

 

 

98,959

 

 

 

159,268

 

 

 

123,349

 

Corporate assets and intercompany eliminations, net

 

 

(613,187

)

 

 

(595,236

)

 

 

(861,777

)

 

 

(459,434

)

Total assets

 

$

2,756,467

 

 

$

2,775,947

 

 

$

4,057,018

 

 

$

4,178,179

 

 

20


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

We recorded the following pre-tax amounts, by reportable operating segment, for depreciation and amortization in the accompanying consolidated financial statements (in thousands):

 

 

Three Months Ended

March 31,

 

 

Three Months Ended

March 31,

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Depreciation and amortization of property and

equipment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

3,957

 

 

$

4,298

 

 

$

5,826

 

 

$

3,957

 

EMEA

 

 

955

 

 

 

1,003

 

 

 

1,328

 

 

 

955

 

APAC

 

 

132

 

 

 

132

 

 

 

135

 

 

 

132

 

 

 

5,044

 

 

 

5,433

 

 

 

7,289

 

 

 

5,044

 

Amortization of intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

 

3,636

 

 

 

3,360

 

 

 

9,493

 

 

 

3,636

 

EMEA

 

 

69

 

 

 

74

 

 

 

506

 

 

 

69

 

APAC

 

 

118

 

 

 

177

 

 

 

109

 

 

 

118

 

 

 

3,823

 

 

 

3,611

 

 

 

10,108

 

 

 

3,823

 

Total

 

$

8,867

 

 

$

9,044

 

 

$

17,397

 

 

$

8,867

 

 

1912.Acquisitions

PCM

On August 30, 2019, we completed our acquisition of PCM, acquiring 100 percent of the issued and outstanding shares of PCM for a cash purchase price of $745,562,000, which included cash and cash equivalents acquired of $84,637,000 and the payment of PCM’s outstanding debt. PCM is a provider of multi-vendor technology offerings, including hardware, software and services to small, mid-sized and corporate/enterprise commercial clients, state, local and federal governments and educational institutions across the United States, Canada and the United Kingdom.  Based in El Segundo, California, PCM has 40 office locations globally and more than 4,000 teammates.  We believe that this acquisition allows us to help existing PCM clients in positioning their businesses for future growth, transforming and securing their data platforms, creating modern and mobile experiences for their workforce and optimizing the procurement of technology.  The addition of PCM complements our supply chain optimization solution offering, adding scale and clients in the mid-market and corporate space primarily in North America.

The following table summarizes the purchase price and the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):  

Purchase price net of cash and cash equivalents acquired

 

 

 

 

 

$

660,925

 

Fair value of net assets acquired:

 

 

 

 

 

 

 

 

Current assets

 

$

532,433

 

 

 

 

 

Identifiable intangible assets - see description below

 

 

191,370

 

 

 

 

 

Property and equipment

 

 

91,213

 

 

 

 

 

Other assets

 

 

32,699

 

 

 

 

 

Current liabilities

 

 

(368,647

)

 

 

 

 

Long-term liabilities, including deferred taxes

 

 

(63,623

)

 

 

 

 

Total fair value of net assets acquired

 

 

 

 

 

 

415,445

 

Excess purchase price over fair value of net assets acquired ("goodwill")

 

 

 

 

 

$

245,480

 

21


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

12.

Acquisition

Effective August 1, 2018, weUnder the acquisition method of accounting, the total purchase price as shown in the table above was allocated to the tangible and identifiable intangible assets acquired 100 percentand liabilities assumed based on their estimated fair values.  The excess of the issued and outstanding shares of Cardinal, a digital solutions provider based in Cincinnati, Ohio, with offices across the Midwest and Southeast United States, for a cash purchase price over fair value of net assets acquired was recorded as goodwill.  In the fourth quarter of 2019, an adjustment of $56,700,000 was recorded to goodwill primarily due to a change in the customer relationships valuation based on updated information received for key inputs as well as an associated change in deferred taxes.  

The fair values of current assets and liabilities are based upon their historical costs on the date of acquisition due to their short-term nature.  The estimated fair values of the majority of property and equipment, excluding acquired real estate, are also based upon historical costs net of cash acquired, of approximately $78,400,000,depreciation, as they approximated fair value.  Certain long-term assets, including final working capital and tax gross up adjustments.  Cardinal provides technology solutionsPCM’s IT systems, were written down to digitally transform organizations through their expertise in mobile applications development, Internet of Things and cloud enabled business intelligence.  We believe that this acquisition strengthens our services capabilities and will bring value to our clients within our digital innovation services solution offering.the estimated fair value.  

The preliminary estimated fair value of net assets acquired was approximately $42,360,000,$415,445,000, including $27,540,000$191,370,000 of identifiableidentified intangible assets, consisting primarily of customer relationships that will beof $178,900,000.  The fair value of the customer relationships were determined using the multiple-period excess earnings method.  The identifiable intangible assets resulting from the acquisition are amortized using the straight linestraight-line method over the following estimated economic lifeuseful lives: customer relationships – 10-12 years; trade names – 1 year; non-compete agreements – 2-3 years.

Goodwill of ten years.  The preliminary purchase price was allocated using the information currently available.  We finalized the fair value assumptions for identifiable intangible assets acquired in the fourth quarter of 2018.  Goodwill acquired approximated $36,040,000$245,480,000, which was recorded in our North America and EMEA operating segment.segments, represents the excess of the purchase price over the estimated fair value assigned to tangible and identifiable intangible assets acquired and liabilities assumed from PCM.  The goodwill is tax deductible.  The working capital adjustment in the amount of $762,000 was finalizednot amortized and will be tested for impairment annually in the fourth quarter of 2018our fiscal year.  The addition of the PCM technical employees to our team and paid in January 2019.  Additionally, we finalizedthe opportunity to grow our business are the primary factors making up the goodwill recognized as part of the transaction.  NaNne of the goodwill is tax deductible.  

The purchase price allocation is preliminary and was allocated using information currently available.  Further information related to legal accruals, taxes and other statutory assessments may lead to an adjustment of the purchase price allocation when the tax gross up adjustment of $2,600,000 was agreed upon in April 2019.  This resulted in a reduction of the previously recorded purchase price of $400,000.allocation.  

We have consolidated the results of operations for Cardinal within our North America operating segment beginningPCM since its acquisition on August 1, 2018, the effective date of the acquisition.  Our historical results would not have been materially affected by the acquisition of Cardinal and, accordingly, we have not presented30, 2019.  

The following table reports pro forma information as if the acquisition of PCM had been completed at the beginning of eachthe earliest period presented in our statement of operations.(in thousands, except per share amounts):

 


 

 

 

Three Months Ended

March 31,

 

 

 

 

2019

 

Net sales

As reported

 

$

1,685,466

 

 

Pro forma

 

$

2,218,774

 

Net earnings

As reported

 

$

39,327

 

 

Pro forma

 

$

37,057

 

Diluted earnings per share

As reported

 

$

1.09

 

 

Pro forma

 

$

1.03

 

22


INSIGHT ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Changes in Goodwill and Intangible Assets

Other than the goodwill and intangible assets recorded in conjunction with the acquisitions of vNext and PCM, the only other change in consolidated goodwill and intangible assets as of March 31, 2020 compared to the balance as of December 31, 2019 resulted from foreign currency translation adjustments associated with the balances in our North America, EMEA and APAC operating segments.

13.Subsequent Event

On April 23, 2020 we entered into an agreement for the group sale of our properties in Tempe, Arizona, and El Segundo and Santa Monica, California for approximately $86,000,000.  The agreement provides for a due diligence period during which the buyer can terminate the contract for any reason.  If the sale is completed, we intend to use the proceeds to ready our property in Chandler, Arizona to be used as our global corporate headquarters.

23


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this Quarterly Report on Form 10-Q.  We refer to our customers as “clients,” our suppliers as “partners” and our employees as “teammates.”

Quarterly Overview

Today, every business is a technology business.  We empower organizations of all sizes with Intelligent Technology SolutionsTM and services to maximize the business value of ITinformation technology (“IT”) in North America; Europe, the Middle East and Africa (“EMEA”); and Asia-Pacific (“APAC”).  As a Fortune 500-ranked global provider of digital innovation, cloud/data center transformation, connected workforce, and supply chain optimization solutions, 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.  Our offerings in the remainder of our EMEA and APAC segments are largely software and certain software-related services.

 

On a consolidated basis, for the three months ended March 31, 2019:2020:

 

Net sales of $2.14 billion increased 27% compared to the three months ended March 31, 2019, primarily due to the addition of PCM.  This reflects an increase in hardware and services net sales.  Excluding the effects of fluctuating foreign currency exchange rates, net sales increased 28% compared to the first quarter of 2019.

Gross profit of $325.3 million increased 31% compared to the three months ended March 31, 2019, up 32% year over year, excluding the effects of fluctuating foreign currency exchange rates.

Gross margin improved approximately 50 basis points to 15.2% of net sales in the three months ended March 31, 2020.  This increase reflects an increase in margins on hardware net sales and an increase in higher margin Insight delivered services compared to the same period in the prior year.

Earnings from operations decreased 7% year to year to $52.9 million in the first quarter of 2020 compared to $57.0 million in the first quarter of 2019, primarily due to increased amortization of intangible assets from the PCM acquisition.  Excluding the effects of fluctuating foreign currency exchange rates, earnings from operations decreased 7% year to year.

Net earnings and diluted earnings per share were $34.0 million and $0.95, respectively, for the first quarter of 2020.  This compares to net earnings of $39.3 million and diluted earnings per share of $1.09 for the first quarter of 2019.

Recent Developments – Impact of $1.69 billion decreased 3% comparedCOVID 19 to our Business

In late 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”), which has since spread globally.  On March 11, 2020, the three months ended March 31, 2018.  This change reflectsWorld Health Organization declared COVID-19 a decrease in hardware net salespandemic.  In an effort to large enterprise clients offset by growthprotect the health and safety of our teammates, we took proactive action to adopt social distancing policies at our locations globally, including working from home where possible, limiting the number of teammates attending in-person meetings, reducing the number of people in our softwarelocations at any one time, and services net sales.  Excludingsuspending teammate travel. Governments around the effects of fluctuating foreign currency exchange rate net sales decreased 1% comparedworld have also enacted various measures, including orders to the first quarter of 2018.close all businesses not deemed

Gross profit of $248.5 million increased 3% compared to the three months ended March 31, 2018, up 6% year over year excluding the effects of fluctuating foreign currency exchange rates.

Gross margin improved approximately 90 basis points to 14.7% of net sales in the three months ended March 31, 2019.  This increase reflects a change in sales mix towards higher margin net sales categories, including Insight delivered services and cloud solutions compared to the same period in the prior year.

Earnings from operations increased 13% year over year to $57.0 million in the first quarter of 2019 compared to $50.4 million in the first quarter of 2018.  Excluding the effects of fluctuating foreign currency exchange rates, consolidated earnings from operations increased 14% year over year.

Net earnings and diluted earnings per share were $39.3 million and $1.09, respectively, for the first quarter of 2019.  This compares to net earnings of $33.0 million and diluted earnings per share of $0.91 for the first quarter of 2018.

2124


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

“essential,” isolate residents to their homes or places of residence, and practice social distancing when engaging in essential activities.

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and workforce participation, and initially created significant volatility and disruption of financial markets.  While we observed a limited impact of COVID-19 on our first quarter financial results, we anticipate demand for our products and services will decline significantly in the second quarter as clients evaluate the impact of COVID-19 on their businesses, their profitability and liquidity. We have started to experience a significant decrease in April booking trends year over year. In the short run we are taking steps to accelerate our integration plans with PCM and to reduce discretionary operating expenditures, such as certain teammate benefits and variable compensation, and travel related expenditures.  We believe that we have a strong balance sheet and sufficient liquidity, including amounts available under our ABL facility with current capacity of up to $1.2 billion, of which approximately $460.1 million was outstanding at March 31, 2020.

The ultimate extent of the impact of the COVID-19 pandemic on our business operations, financial performance and results of operation, 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, its severity, the actions to contain the virus or treat its impact, such as related restrictions on travel and transportation, and how quickly and to what extent normal economic and operating conditions can resume.

We will continue to actively monitor the situation and anticipate further actions altering our business operations that we determine will be in the best interests of our teammates, clients, partners, suppliers, and shareholders, or as required by federal, state, or local authorities. 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 for the remainder of 2020.

Accordingly, our current results and financial condition discussed herein may not be indicative of future operating results and trends.  See “Risk Factors” in Part II, Item 1A of this report for additional risks we face due to the COVID-19 pandemic.

Throughout the “Quarterly Overview” and “Results of Operations” sections of this “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 the changes in 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.

Details about segment results of operations can be found in Note 11 to the Consolidated Financial Statements in Part I, Item 1 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 period to period and the primary factors that contributed to those changes, as well as how certain critical accounting estimates affect our consolidated financial statements.

25


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

Critical Accounting Estimates

Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”GAAP��).  For a summary of significant accounting policies, see Note 1 to the Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2018.2019.  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 estimates we have made.  Members of our senior management have discussed the critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors.  

There have been no changes to the items disclosed as critical accounting estimates in “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 year ended December 31, 2018.  

22


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)2019.  

 

Results of Operations

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and workforce participation.  While we observed an insignificant impact on our first quarter financial results, the ultimate extent of the impact of the COVID-19 pandemic on our future business operations, financial performance and results of operation, 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.  

The following table sets forth certain financial data as a percentage of net sales for the three months ended March 31, 20192020 and 2018:2019:

 

 

Three Months Ended

March 31,

 

 

Three Months Ended

March 31,

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Net sales

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Costs of goods sold

 

 

85.3

 

 

 

86.2

 

 

 

84.8

 

 

 

85.3

 

Gross profit

 

 

14.7

 

 

 

13.8

 

 

 

15.2

 

 

 

14.7

 

Selling and administrative expenses

 

 

11.3

 

 

 

10.8

 

 

 

12.5

 

 

 

11.3

 

Severance and restructuring expenses

 

 

 

 

 

0.1

 

Severance and restructuring expenses and acquisition and integration related expenses

 

 

0.2

 

 

 

 

Earnings from operations

 

 

3.4

 

 

 

2.9

 

 

 

2.5

 

 

 

3.4

 

Non-operating expense, net

 

 

0.3

 

 

 

0.3

 

 

 

0.5

 

 

 

0.3

 

Earnings before income taxes

 

 

3.1

 

 

 

2.6

 

 

 

2.0

 

 

 

3.1

 

Income tax expense

 

 

0.8

 

 

 

0.7

 

 

 

0.4

 

 

 

0.8

 

Net earnings

 

 

2.3

%

 

 

1.9

%

 

 

1.6

%

 

 

2.3

%

 

We experience some seasonal trends in our sales of IT hardware, software and services.  Software sales are typically seasonally higher in our second quarter.  Business clients, particularly larger enterprise businesses in the United States, tend to spend more in our fourth quarter and less in our first quarter.  Sales to the federal government in the United States are often stronger in our third quarter, while sales in the state and local government and education markets are stronger in

26


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

our second quarter.  Sales to public sector clients in the United Kingdom are often stronger in our first quarter.  These trends create overall seasonality in our consolidated results such that net sales and profitability are expected to be higher in the second and fourth quarters of the year.

Our gross profit across the business is, and will continue to be, impacted by partner incentives, which can change significantly in the amounts made available and in the related product or services sales being incentivized by the partner.  Incentives from our largest partners are significant and changes in the incentives could impact our results of operations to the extent we are unable to adapt our sales strategies to optimize performance under the revised programs.   

Net Sales.  Net sales decreased 3%for the three months ended March 31, 2020 increased 27% year over year to year to $1.69$2.14 billion compared to the three months ended March 31, 2018.2019.  Our net sales by operating segment were as follows for the three months ended March 31, 20192020 and 20182019 (dollars in thousands):

 

 

Three Months Ended

March 31,

 

 

%

 

 

Three Months Ended

March 31,

 

 

%

 

 

2019

 

 

2018

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

North America

 

$

1,242,441

 

 

$

1,278,380

 

 

 

(3

%)

 

$

1,674,381

 

 

$

1,242,441

 

 

 

35

%

EMEA

 

 

390,175

 

 

 

407,134

 

 

 

(4

%)

 

 

418,886

 

 

 

390,175

 

 

 

7

%

APAC

 

 

52,850

 

 

 

56,980

 

 

 

(7

%)

 

 

50,784

 

 

 

52,850

 

 

 

(4

%)

Consolidated

 

$

1,685,466

 

 

$

1,742,494

 

 

 

(3

%)

 

$

2,144,051

 

 

$

1,685,466

 

 

 

27

%

 

Our net sales by offering category for North America for the three months ended March 31, 2020 and 2019 were as follows (dollars in thousands):

 

 

Three Months Ended

March 31,

 

 

%

 

Sales Mix

 

2020

 

 

2019

 

 

Change

 

Hardware

 

$

1,128,486

 

 

$

748,337

 

 

 

51

%

Software

 

 

305,163

 

 

 

322,079

 

 

 

(5

%)

Services

 

 

240,732

 

 

 

172,025

 

 

 

40

%

 

 

$

1,674,381

 

 

$

1,242,441

 

 

 

35

%

Net sales in North America decreased 3%increased 35%, or $35.9$431.9 million, for the three months ended March 31, 20192020 compared to the three months ended March 31, 2018,2019, primarily driven by declinesthe addition of PCM.  Net sales of hardware and services increased 51% and 40%, respectively, year over year, partially offset by a decrease of 5% in hardwaresoftware net sales, year to large enterprise clients.  Net sales in EMEA decreased 4%, or $17.0 million, inyear.  The net changes for the first quarterthree months ended March 31, 2020 were the result of 2019 compared to the first quarter of 2018.  Excluding the effects of fluctuating foreign currency exchange rates net sales in EMEA increased 2%, year over year. Net sales in APAC decreased 7%, or $4.1 million, in the first quarter of 2019 compared to the first quarter of 2018. Excluding the effects of fluctuating foreign currency exchange rates net sales in APAC increased 1%, year over year.following:

23

The increase in hardware net sales was due primarily to the addition of PCM and higher volume of sales to large enterprise and corporate clients.  The increase in volume of sales was largely due to increased demand for work-from-home and collaboration solutions as companies responded to shelter in place mandates, although certain sales were delayed to future quarters by continued supply constraints by chip manufacturers.

The decrease in software net sales was due to a significant transaction in the prior year with no comparable activity in the current year, partially offset by the addition of PCM.

The increase in services net sales was primarily due to higher sales of Insight delivered services, the addition of PCM and an increase in warranty net sales.

27


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Our net sales by offering category for North America for the three months ended March 31, 2019 and the three months ended March 31, 2018 were as follows (dollars in thousands):

 

 

Three Months Ended

March 31,

 

 

%

 

Sales Mix

 

2019

 

 

2018

 

 

Change

 

 

 

 

 

Hardware

 

$

748,337

 

 

$

873,341

 

 

 

(14

%)

Software

 

 

322,079

 

 

 

261,060

 

 

 

23

%

Services

 

 

172,025

 

 

 

143,979

 

 

 

19

%

 

 

$

1,242,441

 

 

$

1,278,380

 

 

 

(3

%)

  In North America, net sales of software and services were up 23% and 19%, respectively, year over year, while net sales of hardware declined 14% year to year.  The net changes year to year were the result of the following:

The decrease in hardware net sales was due primarily to lower sales of client devices, storage and networking solutions to large enterprise clients.

The increase in the software category was primarily the result of a significant transaction during the current quarter with a large enterprise client with no comparable transaction in the same quarter in prior year.

The increase in services net sales was due to higher sales of cloud solutions and an increase in Insight delivered services, attributable to our acquisition of Cardinal.

Our net sales by offering category for EMEA for the three months ended March 31, 2020 and 2019 andwere as follows (dollars in thousands):  

 

 

Three Months Ended

March 31,

 

 

%

 

Sales Mix

 

2020

 

 

2019

 

 

Change

 

Hardware

 

$

174,969

 

 

$

171,525

 

 

 

2

%

Software

 

 

201,082

 

 

 

183,148

 

 

 

10

%

Services

 

 

42,835

 

 

 

35,502

 

 

 

21

%

 

 

$

418,886

 

 

$

390,175

 

 

 

7

%

Net sales in EMEA increased 7%, or $28.7 million, in the three months ended March 31, 2018 were as follows (dollars2020 compared to the three months ended March 31, 2019.  Excluding the effects of fluctuating foreign currency exchange rates, net sales in thousands):  

 

 

Three Months Ended

March 31,

 

 

%

 

Sales Mix

 

2019

 

 

2018

 

 

Change

 

 

 

 

 

Hardware

 

$

171,525

 

 

$

187,010

 

 

 

(8

%)

Software

 

 

183,148

 

 

 

190,202

 

 

 

(4

%)

Services

 

 

35,502

 

 

 

29,922

 

 

 

19

%

 

 

$

390,175

 

 

$

407,134

 

 

 

(4

%)

In EMEA netincreased 10%, year over year.  Net sales of hardware, and software declined 8% and 4%, respectively, year to year, while net sales of services increased 19%2%, 10% and 21% year over year.year, respectively.  The net changes year to yearfor the three months ended March 31, 2020 were the result of the following:

 

The increase in hardware net sales was due primarily to higher volume sales of devices to corporate and public sector clients.

The increase in software net sales was due to higher volume of sales to large enterprise, corporate and public sector clients.

The increase in services net sales was due primarily to higher sales of cloud solutions, increased software referral fees and higher volume sales of Insight delivered services.

The decrease

Our net sales by offering category for APAC for the three months ended March 31, 2020 and 2019 were as follows (dollars in thousands):

 

 

Three Months Ended

March 31,

 

 

%

 

Sales Mix

 

2020

 

 

2019

 

 

Change

 

Hardware

 

$

7,746

 

 

$

6,518

 

 

 

19

%

Software

 

 

30,870

 

 

 

35,065

 

 

 

(12

%)

Services

 

 

12,168

 

 

 

11,267

 

 

 

8

%

 

 

$

50,784

 

 

$

52,850

 

 

 

(4

%)

Net sales in APAC decreased 4%, or $2.1 million, in the first quarter of 2020 compared to the first quarter of 2019.  Excluding the effects of fluctuating foreign currency exchange rates, net sales in APAC increased 3%, year over year.  Net sales of software decreased by 12%, year to year, partially offset by increases in hardware net sales was due primarily to lower volume sales of networking solutions to public sector clients.

The decrease in software net sales was due to continued client migration of software applications to cloud solutions which are recorded net in services net sales.

The increase inand services net sales was due primarily to a higher volume of software maintenance19% and cloud solutions, and a higher volume8%, respectively, year over year.  The net changes for the three months ended March 31, 2020 were the result of Insight delivered services.the following:

 

The increase in hardware net sales was primarily due to higher volume sales to large enterprise and corporate clients.

The decrease in software net sales was primarily due to lower volume sales to large enterprise clients.

The increase in services net sales was primarily due to higher sales of Insight delivered services.  

2428


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Our net sales by offering category for APAC for the three months ended March 31, 2019 and the three months ended March 31, 2018 were as follows (dollars in thousands):

 

 

Three Months Ended

March 31,

 

 

%

 

Sales Mix

 

2019

 

 

2018

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hardware

 

$

6,518

 

 

$

7,160

 

 

 

(9

%)

Software

 

 

35,065

 

 

 

39,019

 

 

 

(10

%)

Services

 

 

11,267

 

 

 

10,801

 

 

 

4

%

 

 

$

52,850

 

 

$

56,980

 

 

 

(7

%)

In APAC, net sales of hardware and software declined 9% and 10%, respectively, year to year, partially offset by an increase in services net sales of 4%, year over year.  The net changes year to year were the result of the following:

The decrease in hardware and software net sales was due primarily to lower volume with enterprise and public sector clients.

The increase in services net sales was due to higher sales of cloud solutions and an increase in Insight delivered services.  

The percentage of net sales by category for North America, EMEA and APAC were as follows for the three months ended March 31, 20192020 and the three months ended March 31, 2018:2019:

 

 

North America

 

 

EMEA

 

 

APAC

 

 

North America

 

 

EMEA

 

 

APAC

 

 

Three Months Ended

March 31,

 

 

Three Months Ended

March 31,

 

 

Three Months Ended

March 31,

 

 

Three Months Ended

March 31,

 

 

Three Months Ended

March 31,

 

 

Three Months Ended

March 31,

 

Sales Mix

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Hardware

 

 

60

%

 

 

68

%

 

 

44

%

 

 

46

%

 

 

12

%

 

 

13

%

 

 

68

%

 

 

60

%

 

 

42

%

 

 

44

%

 

 

15

%

 

 

12

%

Software

 

 

26

%

 

 

21

%

 

 

47

%

 

 

47

%

 

 

67

%

 

 

68

%

 

 

18

%

 

 

26

%

 

 

48

%

 

 

47

%

 

 

61

%

 

 

67

%

Services

 

 

14

%

 

 

11

%

 

 

9

%

 

 

7

%

 

 

21

%

 

 

19

%

 

 

14

%

 

 

14

%

 

 

10

%

 

 

9

%

 

 

24

%

 

 

21

%

 

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

 

Gross Profit.Gross profit increased 3%31%, or $8.2$76.9 million, in the three months ended March 31, 2019,2020, compared to the three months ended March 31, 2018,2019, with gross margin increasing approximately 9050 basis points to 14.7% for the three months ended March 31, 2019 compared to 13.8%15.2% for the three months ended March 31, 2018.  2020 compared to 14.7% for the three months ended March 31, 2019.  

Our gross profit and gross profit as a percentage of net sales by operating segment were as follows for the three months ended March 31, 20192020 and 20182019 (dollars in thousands):

 

 

Three Months Ended March 31,

 

 

Three Months Ended March 31,

 

 

2019

 

 

% of

Net Sales

 

 

2018

 

 

% of

Net Sales

 

 

2020

 

 

% of

Net Sales

 

 

2019

 

 

% of

Net Sales

 

North America

 

$

182,607

 

 

 

14.7

%

 

$

175,371

 

 

 

13.7

%

 

$

256,928

 

 

 

15.3

%

 

$

182,607

 

 

 

14.7

%

EMEA

 

 

56,983

 

 

 

14.6

%

 

 

56,050

 

 

 

13.8

%

 

 

58,774

 

 

 

14.0

%

 

 

56,983

 

 

 

14.6

%

APAC

 

 

8,882

 

 

 

16.8

%

 

 

8,842

 

 

 

15.5

%

 

 

9,634

 

 

 

19.0

%

 

 

8,882

 

 

 

16.8

%

Consolidated

 

$

248,472

 

 

 

14.7

%

 

$

240,263

 

 

 

13.8

%

 

$

325,336

 

 

 

15.2

%

 

$

248,472

 

 

 

14.7

%

 

North America’s gross profit for the three months ended March 31, 20192020 increased $7.2$74.3 million, or 4%41%, compared to the three months ended March 31, 2018.2019.  As a percentage of net sales, gross margin increased approximately 10060 basis points to 14.7% 15.3% for the first quarter of 20192020.  The year over year improvement in gross margin was primarily attributable to the following:

An increase in product margin, which includes partner funding and freight, of 98 basis points partially offset by a decrease in margin on services net sales, which contracted 34 basis points compared to the same period in the prior year.

The increase in product margin is primarily the result of sales of hardware at higher margins than in the same period in the prior year and the addition of PCM.  

The decrease in margin from services net sales during the current quarter resulted from PCM services net sales that achieved lower gross margins than Insight delivered services.

EMEA’s gross profit for the three months ended March 31, 2020 increased $1.8 million, or 3%, year over year (increasing 6% excluding the effects of fluctuating foreign currency exchange rates), compared to the three months ended March 31, 2019.  As a percentage of net sales, gross margin decreased approximately 60 basis points, year to year.  The year to year net decline in gross margin was primarily attributable to a net decrease in product margin, which includes partner funding and freight, of 62 basis points, partially offset by a net increase in services margin, which increased by 5 basis points.

 

25APAC’s gross profit for the three months ended March 31, 2020 increased $752,000, or 8%, compared to the three months ended March 31, 2019 (increasing 16% excluding fluctuating foreign currency exchange rates).  As a percentage of net sales, gross margin increased approximately 220

29


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

The year over year improvement in gross margin was primarily attributable to the following:

An increase in higher margin services net sales, which contributed 152 basis points of the margin expansion, partially offset by a net decrease in product margin, which includes partner funding and freight, of 54 basis points.

The increase in margin from services net sales during the current quarter resulted from a higher volume of Insight delivered services and a higher volume of cloud solutions that are recorded net.

The decrease in product margin is primarily the result of a reduction in partner funding due to lower hardware sales in the current quarter compared to the same period in the prior year.

EMEA’s gross profit for the three months ended March 31, 2018 increased $933,000, or 2% (9% excluding the effects of fluctuating foreign currency exchange rates), compared to the three months ended March 31, 2018.  As a percentage of net sales, gross margin increased approximately 80 basis points, year over year.  The year over year improvement in gross margin was primarily attributable to an increase in higher margin services net sales, which contributed 138 basis points of the margin expansion, partially offset by a net decrease in product margin, which includes partner funding and freight, of 55 basis points.          

APAC’s gross profit for the three months March 31, 2019 remained flat compared to the three months ended March 31, 2018.  As a percentage of net sales, gross margin increased approximately 130 basis points, year over year.  The increase in gross margin in the first quarter of 20192020 compared to the first quarter of 20182019 was primarily due to an increase in mix ofgross margin on services net sales of software maintenance329 basis points, offset by a decrease in product margin, which includes partner funding and cloud solutions recorded net and higher gross profits from Insight delivered services.freight, of 112 basis points.

 

Operating Expenses.

 

Selling and Administrative Expenses. Selling and administrative expenses increased $2.9$77.8 million, or 2%41%, for the three months ended March 31, 20192020 compared to the three months ended March 31, 20182019.  Our selling and administrative expenses by major expense type for the three months ended March 31, 20192020 and 20182019 were as follows (dollars in thousands):

 

 

Three Months Ended March 31,

 

Three Months Ended March 31,

 

 

2019

 

 

2018

 

 

 

2020

 

 

2019

 

Personnel costs, including teammate benefits

 

$

150,491

 

 

$

147,836

 

 

 

$

201,815

 

 

$

150,491

 

Depreciation and amortization

 

 

8,867

 

 

 

9,044

 

 

 

 

17,397

 

 

 

8,867

 

Facility expenses

 

 

6,663

 

 

 

6,591

 

 

 

 

10,978

 

 

 

6,663

 

Travel and entertainment

 

 

6,246

 

 

 

6,128

 

 

 

 

7,165

 

 

 

6,246

 

Legal and professional fees

 

 

3,942

 

 

 

4,033

 

 

 

 

5,825

 

 

 

3,942

 

Marketing

 

 

2,322

 

 

 

2,644

 

 

 

 

3,461

 

 

 

2,322

 

Other

 

 

12,532

 

 

 

11,904

 

 

 

 

22,222

 

 

 

12,532

 

Total

 

$

191,063

 

 

$

188,180

 

 

 

$

268,863

 

 

$

191,063

 

 

Selling and administrative expenses increased approximately 50120 basis points as a percentage of net sales in the first quarter of 20192020 compared to the first quarter of 2018.2019.  The overall net increase in selling and administrative expenses reflects a $2.7$51.3 million increase in personnel costs, including teammate benefits expenses primarily due to increased headcount, includingreflecting the acquisition of Cardinal,PCM in August 2019, and increased variable compensation resulting from increased gross profit in the first quarter of 20192020 compared to the first quarter of 2018.  2019.  There was also an increase in depreciation and amortization, facility and other expenses of $8.5 million, $4.3 million and $9.7 million, respectively, primarily as a result of PCM.

 

26


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

Severance and Restructuring Expenses.  During the three months ended March 31, 2019,2020, we recorded severance expense, net of adjustments, of approximately $370,000.$2.1 million.  The charges in all three operating segments primarily related to a realignment of certain roles and responsibilities.responsibilities and for North America and EMEA, the acquisition of PCM.  Current period charges were partially offset by adjustments for changes in estimates of previous accruals as cash payments were made.  Comparatively, during the three months ended March 31, 2018, North America, EMEA and APAC2019, we recorded severance expense, net of adjustments, of approximately $443,000, $1.1 million and $127,000, respectively.  $370,000.  

 

Non-Operating (Income) Expense.

 

Interest Income.Expense, Net.  Interest income for the three months ended March 31, 2019 and 2018 was generated from interest earned on cash and cash equivalent bank balances.  The increase in interest income year over year was primarily due to higher average interest-bearing cash and cash equivalent balances and to higher interest rates during the three months ended March 31, 2019 compared to the three months ended March 31, 2018.    

Interest Expense.  Interest expense, net primarily relates to borrowings under our financing facilities and imputed interest under our inventory financing facility.facilities and our convertible senior notes, partially offset by interest income generated from interest earned on cash and cash equivalent bank balances.  Interest expense for the three months ended March 31, 2019 decreased 20%2020 increased more than 100%, or $1.2$7.3 million, compared to the three months ended March 31, 2018.2019.  The decreaseincrease was due primarily to lowerhigher average daily balances onunder our debtABL facility in comparison to our facilities in the first quarter of 2019 partially offset by higher interest rates.prior year.  Imputed interest under our inventory financing facilityfacilities was $2.8 million for the three months ended March 31, 2020 compared to $3.0 million for the three months ended March 31, 2019.  Imputed interest under our convertible senior notes, which were issued in August 2019, compared towas $2.5 million for the three months ended March 31, 2018.  The increase was a result of a higher average incremental borrowing rate used to compute the imputed interest amounts during the first quarter of 2019.  2020. For a description of our various financing facilities, see Note 5 to our Consolidated Financial Statements in Part I, Item 1 of this report.

30

 

Net Foreign Currency Exchange Gains/Losses.  These gains/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.

Other Expense, Net.  Other expense, net, consists primarily of bank fees associated with our cash management activities.  

Income Tax Expense.  Our effective tax rate of 23.5% for the three months ended March 31, 2019 was lower than our effective tax rate of 25.9% for the three months ended March 31, 2018 due primarily to an increase in tax benefits on the settlement of employee share-based awards and the recognition of tax benefits related to research and development activities for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.

27


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

our various financing facilities and our convertible senior notes, see Note 5 to our Consolidated Financial Statements in Part I, Item 1 of this report.

Income Tax Expense.  Our effective tax rate of 20.3% for the three months ended March 31, 2020 was lower than our effective tax rate of 23.5% for the three months ended March 31, 2019. The decrease in our effective tax rate for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was due primarily to the remeasurement of acquired net operating losses to be carried back to higher tax rate years under the CARES Act.

Liquidity and Capital Resources

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and workforce participation.  While we observed an insignificant impact on our first quarter financial results, the ultimate extent of the impact of the COVID-19 pandemic on our future business operations, financial performance and results of operation, 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.

The following table sets forth certain consolidated cash flow information for the three months ended March 31, 20192020 and 20182019 (in thousands):

 

 

Three Months Ended

March 31,

 

 

Three Months Ended

March 31,

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Net cash provided by operating activities

 

$

121,913

 

 

$

150,745

 

 

$

93,126

 

 

$

121,913

 

Net cash used in investing activities

 

 

(6,114

)

 

 

(5,044

)

Net cash provided by (used in) investing activities

 

 

430

 

 

 

(6,114

)

Net cash used in financing activities

 

 

(132,640

)

 

 

(153,232

)

 

 

(141,766

)

 

 

(132,640

)

Foreign currency exchange effect on cash, cash equivalent

and restricted cash balances

 

 

(986

)

 

 

1,937

 

 

 

(3,615

)

 

 

(986

)

Increase in cash, cash equivalents and restricted cash

 

 

(17,827

)

 

 

(5,594

)

Decrease in cash, cash equivalents and restricted cash

 

 

(51,825

)

 

 

(17,827

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

144,293

 

 

 

107,445

 

 

 

116,297

 

 

 

144,293

 

Cash, cash equivalents and restricted cash at end of period

 

$

126,466

 

 

$

101,851

 

 

$

64,472

 

 

$

126,466

 

 

Cash and Cash Flow

 

Our primary uses of cash during the three months ended March 31, 2019 were to pay down our debt balances and for capital expenditures, as well as funding our working capital requirements.  

Our primary uses of cash during the three months ended March 31, 2020 were to pay down our debt balances and to fund our working capital requirements.  

Operating activities provided $121.9 million in cash during the three months ended March 31, 2019, compared to $150.7 million during the three months ended March 31, 2018.

Operating activities provided $93.1 million in cash during the three months ended March 31, 2020, compared to $121.9 million during the three months ended March 31, 2019.

We had net repayments under our inventory financing facility of $44.0 million during the three months ended March 31, 2019, compared to net repayments of $91.4 million during the three months ended March 31, 2018.  

We had net repayments under our inventory financing facilities of $764,000 during the three months ended March 31, 2020, compared to net repayments of $44.0 million during the three months ended March 31, 2019.  

We had combined net repayments under our revolving facility and ABS facility that decreased our outstanding long-term debt by $82.0 million.  

Net repayments under our ABL revolving credit facility during the three months ended March 31, 2020 were $110.2 million.  Net repayments under our prior senior revolving credit facility and ABS facility combined during the three months ended March 31, 2019 were $82.0 million.  

Capital expenditures were $5.4 million in the three months ended March 31, 2019.  

Capital expenditures were $7.4 million and $5.4 million in the three months ended March 31, 2020 and March 31, 2019, respectively.

We acquired vNext for $6.4 million and received proceeds from the sale of a property held for sale of $14.2 million in the first quarter of 2020.

31


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

Cash, cash equivalents and restricted cash balances in the three months ended March 31, 2019 were negatively affected by $1.0 million, while the balances in the three months ended March, 31 2018 were positively affected by $1.9 million, as a result of foreign currency exchange rates.

During the three months ended March 31, 2020, we repurchased an aggregate of $25.0 million of our common stock, pursuant to a repurchase program approved in February 2020 with no comparable repurchases during the three months ended March 31, 2019.  

Cash, cash equivalents and restricted cash balances in the three months ended March 31, 2020 and 2019 were negatively affected by $3.6 million and $1.0 million, respectively, as a result of foreign currency exchange rates.

 

We expect that cash flows from operations, together with the funds available under our financing facilities, will be adequate to support our presently anticipated cash and working capital requirements for operations over the next 12 months. We believe that we have a strong balance sheet and sufficient liquidity, including amounts available under our ABL facility with current capacity of up to $1.2 billion, of which approximately $460.1 million was outstanding at March 31, 2020.     

 

Net cash provided by operating activities

 

Cash flow from operating activities in the first three months of 2019 was $121.9 million compared to $150.7 million in the first three months of 2018.  

Cash flow from operating activities in the first three months of 2020 was $93.1 million compared to $121.9 million in the first three months of 2019.  

The decrease in accounts receivable and accounts payable reflects our continued enhanced focus on collection of receivables and optimization of working capital.  

The significant increases in both other assets and accrued expenses and other liabilities for the three months ended March 31, 2019 resulted from a single significant transaction in 2019 with no comparable activity in the prior year.  

The significant decreases in both other assets and accrued expenses and other liabilities for the three months ended March 31, 2020 resulted from a single significant transaction in 2019 with no comparable activity in the current year.

28


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

Our consolidated cash flow operating metrics were as follows:

 

 

Three Months Ended

March 31,

 

 

Three Months Ended

March 31,

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Days sales outstanding in ending accounts receivable (“DSOs”) (a)

 

 

92

 

 

 

91

 

 

 

104

 

 

 

92

 

Days inventory outstanding (“DIOs”) (b)

 

 

11

 

 

 

12

 

 

 

11

 

 

 

11

 

Days purchases outstanding in ending accounts payable (“DPOs”) (c)

 

 

(73

)

 

 

(67

)

 

 

(77

)

 

 

(73

)

Cash conversion cycle (days) (d)

 

 

30

 

 

 

36

 

 

 

38

 

 

 

30

 

 

 

(a)

Calculated as the balance of current accounts receivable, net at the end of the quarter divided by daily net sales.  Daily net sales is calculated as net sales for the quarter divided by 91 and 90 days.days in 2020 and 2019, respectively.

 

(b)

Calculated as average inventories (excluding inventories not available for sale) divided by daily costs of goods sold.  Average inventories is calculated as the sum of the balances of inventories at the beginning of the quarter plus inventories at the end of the quarter divided by two.  Daily costs of goods sold is calculated as costs of goods sold for the quarter divided by 91 and 90 days.days in 2020 and 2019, respectively.

 

(c)

Calculated as the sum of the balances of accounts payable – trade and accounts payable – inventory financing facility at the end of the quarter divided by daily costs of goods sold.  Daily costs of goods sold is calculated as costs of goods sold for the quarter divided by 91 and 90 days.days in 2020 and 2019, respectively.

 

(d)

Calculated as DSOs plus DIOs, less DPOs.

 

Our cash conversion cycle was 38 days in the first quarter of 2020, up eight days from the first quarter of 2019.  

The net changes were a result of a 12 day increase in DSOs primarily due to an increase in aged receivables, partly driven by client circumstances surrounding COVID-19 as well as the increased working capital needs of PCM.  The 4 day increase in DPOs was due to timing of transactions during the respective quarters.

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 to take advantage of supplier discounts.  

Our cash conversion cycle was 30 days in the first quarter of 2019, down six days from the first quarter of 2018.  32

 

The decrease resulted from the net effect of a one day increase in DSOs and a six day increase in DPOs due to the relative timing of client receipts and supplier payments during the respective quarters.

This was partially offset by a one day decrease in DIO due to delivering inventory against client specific engagements and an overall focus on minimizing inventory on hand.  

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 to take advantage of supplier discounts.  We intend to use cash generated in the remainder of 2019 in excess of working capital needs to pay down our debt balances, to repurchase shares of our common stock and to support our capital expenditures for the year.  We also may use cash to fund potential acquisitions to add select capabilities within our current geographic operating segments.

Net cash used in investing activities  

Capital expenditures were $5.4 million and $5.0 million for the three months ended March 31, 2019 and 2018, respectively.  

We expect capital expenditures for the full year 2019 to be between $20.0 million and $25.0 million, primarily for technology-related upgrade projects.    

Net cash used in financing activities  

During the three months ended March 31, 2019, we had net combined repayments under our revolving facility and our ABS facility that decreased our outstanding long-term debt balance by $82.0 million.  Comparatively, during the three months ended March 31, 2018, we had net combined repayments under our revolving credit facility and our ABS facility that decreased our outstanding long-term debt balance by $49.8 million, including scheduled amortization payments under our TLA.  

29


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

 

We intend to use cash generated in the remainder of 2020 in excess of working capital needs, given current market conditions, to be focused on paying down our debt balances.  

Net cash provided by (used in) investing activities

Capital expenditures were $7.4 million and $5.4 million for the three months ended March 31, 2020 and 2019, respectively.

We acquired vNext for $6.4 million and received proceeds from the sale of a property held for sale of $14.2 million in the first quarter of 2020.

We expect capital expenditures for the full year 2020 to be between $40.0 million and $45.0 million, of which approximately $20.0 million will be used to ready our global corporate headquarters, and the remaining is for technology-related upgrade projects and the integration of prior acquisitions.    

Net cash used in financing activities

During the three months ended March 31, 2020, we had net repayments under our ABL facility that decreased our outstanding long-term debt balance by $110.2 million.  

During the three months ended March 31, 2019, we had net combined repayments under our prior senior revolving credit facility and our ABS facility that decreased our outstanding long-term debt balance by $82.0 million.  

We had net repayments under our inventory financing facilityfacilities of $764,000 during the three months ended March 31, 2020 compared to $44.0 million during the three months ended March 31, 2019 compared2019.  

During the three months ended March 31, 2020, we repurchased an aggregate of $25.0 million of our common stock, pursuant to $91.4 milliona repurchase program approved in February 2020, with no comparable repurchases during the three months ended March 31, 2018.  2019.  

During the three months ended March 31, 2019 we did not repurchase any shares of our common stock.  We repurchased an aggregate of $7.7 million of our common stock under a previously announced repurchase program during the three months ended March 31, 2018.  

 

Financing Facilities

Our consolidated debt balance that can be outstanding at the end of any fiscal quarter under our revolving facility and our ABS facility is limited by certain financial covenants, particularly a maximum leverage ratio.  

The maximum leverage ratio is calculated as aggregate debt outstanding divided by the sum of the Company’s trailing twelve month net earnings (loss) plus (i) interest expense, excluding non-cash imputed interest on our inventory financing facility, (ii) income tax expense (benefit), (iii) depreciation and amortization, (iv) non-cash stock-based compensation, (v) extraordinary or non-recurring non-cash losses or expenses and (vi) certain cash restructuring and acquisition-related charges and synergies, not to exceed a specified cap (“adjusted earnings”).  

The maximum leverage ratio permitted under the facilities is currently 3.0 times our trailing twelve-month adjusted earnings.  

A significant drop in the Company’s adjusted earnings would limit the amount of indebtedness that could be outstanding at the end of any fiscal quarter to a level that would be below the Company’s consolidated maximum facility amount.  We anticipate that we will be in compliance with our maximum leverage ratio requirements over the next four quarters.  

Based on the maximum permitted leverage ratio as of March 31, 2019, the Company’s debt balance that could have been outstanding under our revolving facility and ABS facility was the full amount of the maximum borrowing capacity of $600.0 million, of which $112.0 million was outstanding under the ABS facility and no amount was outstanding under our revolving facility at March 31, 2019.  

While our ABS facility has a stated maximum amount, the actual availability under the ABS facility is limited by the quantity and quality of the underlying accounts receivable.  As of March 31, 2019, qualified receivables were sufficient to permit access to the full $250.0 million under the ABS facility.   

 

Our debt balance as of March 31, 20192020 was $114.4$751.2 million, including our finance lease obligations for certain IT equipment 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 of March 31, 2020, no such events have occurred.

Our ABL revolving credit 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.  

At March 31, 2020, we were in compliance with all such covenants.

We also have agreements with financial intermediaries to pay our debt balances down while retaining adequate cash balances to meet overall business objectives.

Our revolving facilityfacilitate the purchase of inventory from various suppliers under certain terms and our ABS facility contain various covenants customary for transactions of this type, including limitations on the payment of dividends and the requirement that we comply with maximum leverage and minimum fixed charge ratio requirements, comply with a minimum receivable requirement and meet monthly, quarterly and annual reporting requirements.  conditions.  

If we fail to comply with these covenants, the lenders would be able to demand payment within a specified time period.  At March 31, 2019, we were in compliance with all such covenants.  

These amounts are classified separately as accounts payable – inventory financing facilities in our consolidated balance sheets.  

3033


INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

 

The termsOur inventory financing facilities have an aggregate availability for vendor purchases of the ABS facility identify various circumstances that would result in an “amortization event” under the facility.  At$490.0 million, of which $252.9 million was outstanding at March 31, 2019, no such “amortization event” had occurred.  2020.  

We also have an agreement with a financial intermediary to facilitate the purchase of inventory from various suppliers under certain terms and conditions.  

These amounts are classified separately as accounts payable – inventory financing facility in our consolidated balance sheets.  

Our inventory financing facility has an aggregate availability for vendor purchases of $400.0 million, of which $260.2 million was outstanding at March 31, 2019.  

The inventory financing facility matures on June 23, 2021 and may be renewed under certain circumstances described in the agreement for successive 12-month periods.  

 

Undistributed Foreign Earnings

 

Cash and cash equivalents held by foreign subsidiaries are generally subject to U.S. income taxation upon repatriation to the United States.  As a result of the U.S. federal tax reform enacted in December 2017, all undistributed foreign earnings are deemed distributed.  As of March 31, 2019,2020, we had approximately $106.9$50.5 million in cash and cash equivalents in certain of our foreign subsidiaries.  As of March 31, 2019, the majority of our foreign cash residessubsidiaries, primarily residing in Canada, the Netherlands, Sweden and Canada.the United Kingdom.  Certain of these cash balances will be remitted to the United States 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 indemnifications.  The indemnifications are discussed in Note 10 to the Consolidated Financial Statements in Part I, Item 1 of this report and such discussion is incorporated by reference herein.  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 business, financial condition or results of operations.

 

Recently Issued Accounting Standards

 

The information contained in NotesNote 1 and 2 to the Consolidated Financial Statements in Part I, Item 1 of this report concerning a description of recently issued accounting standards which affect or may affect our financial statements, including our expected dates of adoption and the estimated effects on our results of operations and financial condition, is incorporated by reference herein.

 

Contractual Obligations

 

There have been no material changes in our reported contractual obligations, as described under “Contractual Obligations” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018.2019.

 

3134


INSIGHT ENTERPRISES, INC.

 

Item 3.  Quantitative and QualitativeQualitative Disclosures About Market Risk.

 

ThereExcept as described below, there have been no material changes in our reported market risks, as described in “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2018.2019.

Although our convertible senior notes are based on a fixed rate, changes in interest rates could impact the fair market value of such notes. As of March 31, 2020, the fair market value of our convertible senior notes was $315.7 million. For additional information about our convertible senior notes, see Note 5 to our Consolidated Financial Statements in Part I, Item 1 of this report.

 

Item 4. Controls and Procedures.  

 

Evaluation of Disclosure Controls and Procedures

 

Our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) and determined that as of March 31, 20192020 our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.  We completed the acquisition of PCM on August 30, 2019. As permitted under U.S. Securities and Exchange Commission guidance, management’s assessment as of March 31, 2020 did not include an assessment of controls and procedures of PCM, which is included in the consolidated financial statements as of March 31, 2020.  PCM constituted approximately 19% of our total assets as of March 31, 2020 and approximately 21% of our total net sales for the three months ended March 31, 2020.

 

Change in Internal Control over Financial Reporting

 

ThereExcept as described below, there was no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) in the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

As noted above, on August 30, 2019 we completed the acquisition of PCM.  We are currently integrating PCM into our control environment.  In executing this integration, we are analyzing, evaluating, and where necessary, making changes in controls and procedures related to the PCM business, which is expected to be completed in the year ended December 31, 2020.    

 

Inherent Limitations of Internal Control Over Financial Reporting

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

3235


INSIGHT ENTERPRISES, INC.

 

Part II – OTHEROTHER INFORMATION

 

 

For a discussion of legal proceedings, see “– Legal Proceedings” in Note 10 to the Consolidated Financial Statements in Part I, Item 1 of this report, which section is incorporated by reference herein.   

 

Item 1A.  Risk Factors.

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors”, in our Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect our business, financial condition or future results.2019 (the “Annual Report”) and the risks relating to the impact of the COVID-19 pandemic described below.  The risks described in our Annual Report on Form 10-Kand below are not the only risks facing the Company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or operating results. 

The widespread outbreak of an illness or any other communicable disease, or any other public health crisis, such as the recent novel coronavirus (“COVID-19”) global pandemic, could adversely affect our business, results of operations and financial condition, the extent of which is uncertain and difficult to predict.

We could be negatively impacted by the widespread outbreak of an illness, any other communicable disease or any other public health crisis that results in economic and trade disruptions, including the disruption of global supply chains.  For example, in late 2019, there was an outbreak of a new strain of coronavirus, COVID-19, which has since spread globally. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic.  In an effort to protect the health and safety of our employees, we took proactive action to adopt social distancing policies at our locations globally, including working from home where possible, limiting the number of employees attending in-person meetings, reducing the number of people in our locations at any one time, and suspending employee travel.

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and workforce participation due to “shelter-in-place,” total lock-down orders or similar restrictions by various governments worldwide, and created significant volatility and disruption of financial markets.  As a result of the COVID-19 pandemic and the related responses from government authorities, our business operations, financial performance and results of operations have been and may continue to be adversely impacted in a number of ways, including, but not limited to, the following:

disruptions to our operations, including any closures of our offices and facilities; restrictions on our operations and sales, marketing and distribution efforts; and interruptions to our other important business activities;

reduced demand for our products and services due to disruptions to the businesses and operations of our clients;

interruptions, availability or delays in global shipping to transport our products;

a slowdown or stoppage in the supply chain for our products;

limitations on employee resources and availability, including due to sickness, government restrictions, the desire of employees to avoid contact with large groups of people or mass transit disruptions;

the ability of our clients to pay for our products, services and solutions;

the willingness of clients in the travel, hospitality, retail and other industries significantly impacted by the pandemic to continue with current and expected projects;

a fluctuation in foreign currency exchange rates or interest rates could result from market uncertainties;

36


INSIGHT ENTERPRISES, INC.

an increase in the cost or the difficulty to obtain debt or equity financing could affect our financial condition or our ability to fund operations or future investment opportunities;

changes to the carrying value of our goodwill and intangible assets; and

an increase in regulatory restrictions or continued market volatility could hinder our ability to execute strategic business activities, including acquisitions, as well as negatively impact our stock price.

The spread of COVID-19 has caused us to modify our business practices (including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences), and we anticipate taking further actions as may be required by government authorities or that we determine are in the best interests of our clients, partners and teammates. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and our ability to perform critical functions could be harmed. Further, should any key employees become ill from COVID-19 and unable to work, the attention of the management team could be diverted.

The potential effects of the COVID-19 pandemic may also impact our other risk factors discussed in in Part I, Item 1A, “Risk Factors”, in our Annual Report.  The ultimate extent of the impact of the COVID-19 pandemic on our business operations, financial performance and results of operation, including our ability to execute our business strategies and initiatives in the expected time frame, 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, its severity, the actions to contain the virus or treat its impact, such as related restrictions on travel and transportation, and how quickly and to what extent normal economic and operating conditions can resume.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

 

There were no unregistered sales of equity securities during the three months ended March 31, 2019.2020.

 

We have never paid a cash dividend on our common stock, and we currently do not intend to pay any cash dividends in the foreseeable future.  Our revolving facility, our ABS facility and our inventory financing facility contain restrictions on the payment of cash dividends.

 

Issuer Purchases of Equity Securities

 

Period

 

(a)

Total

Number

of Shares

Purchased

 

 

(b)

Average

Price

Paid per

Share

 

 

(c)

Total Number

of Shares

Purchased

as Part of

Publicly

Announced

Plans or

Programs

 

 

(d)

Approximate

Dollar Value

of Shares

that May

Yet Be

Purchased

Under

the Plans or

Programs

 

January 1, 2020 through January 31, 2020

 

 

 

 

$

 

 

 

 

 

$

32,000

 

February 1, 2020 through February 29, 2020

 

 

 

 

 

 

 

 

 

 

 

50,032,000

 

March 1, 2020 through March 31, 2020

 

 

444,813

 

 

 

56.20

 

 

 

444,813

 

 

 

25,032,004

 

Total

 

 

444,813

 

 

$

56.20

 

 

 

444,813

 

 

 

 

 

We did not

On February 14, 2018, we announced that our Board of Directors had authorized the repurchase sharesof up to $50 million of our common stockstock. There was no stated expiration date for this share repurchase plan.  As of January 1, 2020, $32,000 remained available for repurchases under this share repurchase plan (of which none remains available as of March 31, 2020).

37


INSIGHT ENTERPRISES, INC.

On February 26, 2020, we announced that our Board of Directors had authorized the repurchase of up to $50 million of our common stock.  There is no stated expiration date for this share repurchase plan.  

In accordance with the share repurchase plans, share repurchases may be made on the open market, subject to Rule 10b-18 or in privately negotiated transactions, through block trades, through 10b5-1 plans or otherwise, at management’s discretion.  The amount of shares purchased and the timing of the purchases will be based on market conditions, working capital requirements, general business conditions and other factors.  We intend to retire the repurchased shares.  

Repurchases during the quarter ended March 31, 2019.2020 are reflected in the table above and were made pursuant to our share repurchase plans.  All shares repurchased during the three months ended March 31, 2020 were retired.

 

Item 3.  Defaults Upon Senior Securities.

 

Not applicable.

 

Item 4.  Mine Safety Disclosures.

 

Not applicable.

 

Item 5.  Other Information.

 

Not applicable.

33

38


INSIGHT ENTERPRISES, INC.

 

Item 6.  Exhibits.Exhibits.

 

 

 

 

 

Incorporated by Reference

 

 

Exhibit

Number

 

Exhibit Description

 

Form

 

File No.

 

Exhibit

Number

 

Filing

Date

 

Filed

Herewith

3.1

 

Amended and Restated Certificate of Incorporation of Insight Enterprises, Inc.

 

10-K

 

000-25092

 

3.1

 

February 17, 2006

 

 

3.2

 

Certificate of Amendment of Amended and Restated Certificate of Incorporation of Insight Enterprises, Inc.

 

8-K

 

000-25092

 

3.1

 

May 21, 2015

 

 

3.3

 

Amended and Restated Bylaws of Insight Enterprises, Inc.

 

8-K

 

000-25092

 

3.2

 

May 21, 2015

 

 

4.1

 

Specimen Common Stock Certificate (P)

 

S-1

 

33-86142

 

4.1

 

January 20, 1995

 

 

31.1

 

Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14

 

 

 

 

 

 

 

 

 

X

31.2

 

Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14

 

 

 

 

 

 

 

 

 

X

32.1

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

 

 

X

101

 

Interactive data files pursuant to Rule 405 of Regulation S-T

 

 

 

 

 

 

 

 

 

X

 

 

 

 

Incorporated by Reference

 

 

Exhibit

Number

 

Exhibit Description

 

Form

 

File No.

 

Exhibit

Number

 

Filing

Date

 

Filed/Furnished

Herewith

3.1

 

Amended and Restated Certificate of Incorporation of Insight Enterprises, Inc.

 

10-K

 

000-25092

 

3.1

 

February 17, 2006

 

 

3.2

 

Certificate of Amendment of Amended and Restated Certificate of Incorporation of Insight Enterprises, Inc.

 

8-K

 

000-25092

 

3.1

 

May 21, 2015

 

 

3.3

 

Amended and Restated Bylaws of Insight Enterprises, Inc.

 

8-K

 

000-25092

 

3.2

 

May 21, 2015

 

 

4.1

 

Specimen Common Stock Certificate (P)

 

S-1

 

33-86142

 

4.1

 

January 20, 1995

 

 

10.1

 

First Amendment to the Insight Enterprises, Inc. Executive Management Separation Plan effective as of February 1, 2020

 

10-K

 

000-25092

 

10.5

 

February 21, 2020

 

 

31.1

 

Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14

 

 

 

 

 

 

 

 

 

X

31.2

 

Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14

 

 

 

 

 

 

 

 

 

X

32.1

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

 

 

X

101.INS

 

XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

 

 

 

 

 

 

 

 

 

X

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

 

 

 

 

 

 

X

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

 

 

 

 

 

 

X

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

 

 

 

 

 

X

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

 

 

 

 

 

X

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

 

 

 

 

X

104

 

Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101)

 

 

 

 

 

 

 

 

 

X

(P) Paper exhibit.

3439


INSIGHT ENTERPRISES, INC.

 

SIGNATURESSIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date:

May 1, 20197, 2020

INSIGHT ENTERPRISES, INC.

 

 

 

 

 

By:

/s/ Kenneth T. Lamneck

 

 

 

Kenneth T. Lamneck

 

 

 

President and Chief Executive Officer

 

 

 

(Duly Authorized Officer)

 

 

 

By:

/s/ Glynis A. Bryan

 

 

 

Glynis A. Bryan      

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial Officer)

 

 

 

By:

/s/ Rachael A. Bertrandt

 

 

 

Rachael A. Bertrandt      

 

 

 

Global Corporate Controller

 

 

 

(Principal Accounting Officer)

 

3540