Item 1. Financial Statements.
INSIGHT ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
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| March 31, 2023 | | December 31, 2022 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 175,726 | | | $ | 163,637 | |
Accounts receivable, net of allowance for doubtful accounts of $14,336 and $15,161, respectively | 3,087,105 | | | 3,272,371 | |
Inventories | 265,570 | | | 265,154 | |
Other current assets | 217,415 | | | 199,506 | |
Total current assets | 3,745,816 | | | 3,900,668 | |
Property and equipment, net of accumulated depreciation and amortization of $215,418 and $214,981, respectively | 200,969 | | | 204,260 | |
Goodwill | 493,724 | | | 493,033 | |
Intangible assets, net of accumulated amortization of $146,893 and $142,297, respectively | 196,879 | | | 204,998 | |
Other assets | 323,140 | | | 309,622 | |
| $ | 4,960,528 | | | $ | 5,112,581 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable—trade | $ | 1,711,878 | | | $ | 1,785,076 | |
Accounts payable—inventory financing facilities | 410,126 | | | 301,314 | |
Accrued expenses and other current liabilities | 415,519 | | | 433,789 | |
Current portion of long-term debt | 346,672 | | | 346,228 | |
Total current liabilities | 2,884,195 | | | 2,866,407 | |
Long-term debt | 168,875 | | | 291,672 | |
Deferred income taxes | 28,728 | | | 32,844 | |
Other liabilities | 305,132 | | | 283,590 | |
| 3,386,930 | | | 3,474,513 | |
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; 33,261 shares at March 31, 2023 and 34,009 shares at December 31, 2022 issued and outstanding | 333 | | | 340 | |
Additional paid-in capital | 317,283 | | | 327,872 | |
Retained earnings | 1,310,178 | | | 1,368,658 | |
Accumulated other comprehensive loss – foreign currency translation adjustments | (54,196) | | | (58,802) | |
Total stockholders’ equity | 1,573,598 | | | 1,638,068 | |
| $ | 4,960,528 | | | $ | 5,112,581 | |
See accompanying notes to consolidated financial statements.
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
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| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Net sales: | | | | | | | |
Products | $ | 1,967,645 | | | $ | 2,310,287 | | | | | |
Services | 356,302 | | | 340,563 | | | | | |
Total net sales | 2,323,947 | | | 2,650,850 | | | | | |
Costs of goods sold: | | | | | | | |
Products | 1,772,729 | | | 2,107,209 | | | | | |
Services | 159,903 | | | 164,780 | | | | | |
Total costs of goods sold | 1,932,632 | | | 2,271,989 | | | | | |
Gross profit: | | | | | | | |
Products | 194,916 | | | 203,078 | | | | | |
Services | 196,399 | | | 175,783 | | | | | |
Gross profit | 391,315 | | | 378,861 | | | | | |
Operating expenses: | | | | | | | |
Selling and administrative expenses | 310,001 | | | 297,640 | | | | | |
Severance and restructuring expenses | 3,802 | | | 1,372 | | | | | |
Acquisition and integration related expenses | 51 | | | — | | | | | |
Earnings from operations | 77,461 | | | 79,849 | | | | | |
Non-operating (income) expense: | | | | | | | |
Interest expense, net | 10,348 | | | 8,068 | | | | | |
Other expense (income), net | 752 | | | (2,843) | | | | | |
Earnings before income taxes | 66,361 | | | 74,624 | | | | | |
Income tax expense | 16,389 | | | 17,993 | | | | | |
Net earnings | $ | 49,972 | | | $ | 56,631 | | | | | |
Net earnings per share: | | | | | | | |
Basic | $ | 1.48 | | | $ | 1.62 | | | | | |
Diluted | $ | 1.34 | | | $ | 1.53 | | | | | |
Shares used in per share calculations: | | | | | | | |
Basic | 33,706 | | | 34,974 | | | | | |
Diluted | 37,207 | | | 36,981 | | | | | |
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See accompanying notes to consolidated financial statements.
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
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| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | | | |
Net earnings | $ | 49,972 | | | $ | 56,631 | | | | | | | |
Other comprehensive gain, net of tax: | | | | | | | | | |
Foreign currency translation adjustments | 4,606 | | | 1,865 | | | | | | | |
Total comprehensive income | $ | 54,578 | | | $ | 58,496 | | | | | | | |
See accompanying notes to consolidated financial statements.
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
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| Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total Stockholders' Equity |
| Shares | | Par Value | | Shares | | Amount | | | | |
Balances at December 31, 2022 | 34,009 | | | $ | 340 | | | — | | | $ | — | | | $ | 327,872 | | | $ | (58,802) | | | $ | 1,368,658 | | | $ | 1,638,068 | |
Issuance of common stock under employee stock plans, net of shares withheld for payroll taxes | 165 | | | 2 | | | — | | | — | | | (7,922) | | | — | | | — | | | (7,920) | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 6,896 | | | — | | | — | | | 6,896 | |
Repurchase of treasury stock | — | | | — | | | (913) | | | (117,129) | | | — | | | — | | | — | | | (117,129) | |
Retirement of treasury stock | (913) | | | (9) | | | 913 | | | 117,129 | | | (8,668) | | | — | | | (108,452) | | | — | |
Excise tax on stock repurchases | — | | | — | | | — | | | — | | | (895) | | | — | | | — | | | (895) | |
Foreign currency translation adjustments, net of tax | — | | | — | | | — | | | — | | | — | | | 4,606 | | | — | | | 4,606 | |
Net earnings | — | | | — | | | — | | | — | | | — | | | — | | | 49,972 | | | 49,972 | |
Balances at March 31, 2023 | 33,261 | | | $ | 333 | | | — | | | $ | — | | | $ | 317,283 | | | $ | (54,196) | | | $ | 1,310,178 | | | $ | 1,573,598 | |
Balances at December 31, 2021 | 34,897 | | | $ | 349 | | | — | | | $ | — | | | $ | 368,282 | | | $ | (27,094) | | | $ | 1,167,690 | | | $ | 1,509,227 | |
Cumulative effect of accounting change | — | | | — | | | — | | | — | | | (44,731) | | | — | | | 17,789 | | | (26,942) | |
Issuance of common stock under employee stock plans, net of shares withheld for payroll taxes | 175 | | | 2 | | | — | | | — | | | (6,599) | | | — | | | — | | | (6,597) | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 5,007 | | | — | | | — | | | 5,007 | |
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Foreign currency translation adjustments, net of tax | — | | | — | | | — | | | — | | | — | | | 1,865 | | | — | | | 1,865 | |
Net earnings | — | | | — | | | — | | | — | | | — | | | — | | | 56,631 | | | 56,631 | |
Balances at March 31, 2022 | 35,072 | | | $ | 351 | | | — | | | $ | — | | | $ | 321,959 | | | $ | (25,229) | | | $ | 1,242,110 | | | $ | 1,539,191 | |
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See accompanying notes to consolidated financial statements.
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
Cash flows from operating activities: | | | |
Net earnings | $ | 49,972 | | | $ | 56,631 | |
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: | | | |
Depreciation and amortization | 14,663 | | | 13,314 | |
Provision for losses on accounts receivable | 1,484 | | | 1,031 | |
Non-cash stock-based compensation | 6,896 | | | 5,007 | |
Deferred income taxes | (4,284) | | | (1,715) | |
Amortization of debt issuance costs | 1,213 | | | 1,623 | |
Other adjustments | 2,122 | | | (106) | |
Changes in assets and liabilities: | | | |
Decrease (increase) in accounts receivable | 197,918 | | | (103,326) | |
Increase in inventories | (1,146) | | | (57,876) | |
(Increase) decrease in other assets | (22,794) | | | 4,111 | |
Decrease in accounts payable | (76,783) | | | (137,144) | |
Decrease in accrued expenses and other liabilities | (9,101) | | | (65,789) | |
Net cash provided by (used in) operating activities: | 160,160 | | | (284,239) | |
Cash flows from investing activities: | | | |
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Purchases of property and equipment | (9,106) | | | (25,745) | |
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Net cash used in investing activities: | (9,106) | | | (25,745) | |
Cash flows from financing activities: | | | |
Borrowings on ABL revolving credit facility | 1,016,980 | | | 1,151,440 | |
Repayments on ABL revolving credit facility | (1,140,774) | | | (831,440) | |
Net borrowings under inventory financing facilities | 108,257 | | | 6,692 | |
Repurchases of common stock | (117,129) | | | — | |
Other payments | (7,988) | | | (6,738) | |
Net cash (used in) provided by financing activities: | (140,654) | | | 319,954 | |
Foreign currency exchange effect on cash, cash equivalents and restricted cash balances | 1,652 | | | 969 | |
Increase in cash, cash equivalents and restricted cash | 12,052 | | | 10,939 | |
Cash, cash equivalents and restricted cash at beginning of period | 165,718 | | | 105,977 | |
Cash, cash equivalents and restricted cash at end of period | $ | 177,770 | | | $ | 116,916 | |
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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
We help our clients accelerate their digital journey to modernize their business and maximize the value of technology. We serve these clients in North America; Europe, the Middle East and Africa (“EMEA”); and Asia-Pacific (“APAC”). As a Fortune 500-ranked solutions integrator, we enable secure, end-to-end digital transformation and meet the needs of our clients through a comprehensive portfolio of solutions, far-reaching partnerships and 35 years of broad IT expertise. We amplify our solutions and services with global scale, local expertise and our e-commerce experience, enabling our clients to realize their digital ambitions at every opportunity. Our company is organized in the following three operating segments, which are primarily defined by their related geographies:
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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, including cloud solutions. Our offerings in the remainder of our EMEA and APAC segments are largely software, certain software-related services and cloud solutions.
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, 2023 and our results of operations for the three months ended March 31, 2023 and 2022 and cash flows for the three months ended March 31, 2023 and 2022. The consolidated balance sheet as of December 31, 2022 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 SEC 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, 2022.
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.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Recently Issued Accounting Standards
In September 2022, the Financial Accounting Standards Board ("FASB") issued ASU No. 2022-04, “Liabilities - Supplier Finance Programs (Subtopic 405-50)”. This standard is intended to address requests from stakeholders for information about an entity’s use of supplier finance programs and their effect on the entity’s working capital, liquidity, and cash flows. The guidance was effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on roll-forward information requirement, which is effective for fiscal years beginning after December 15, 2023. The Company adopted this standard effective January 1, 2023, with the exception of the roll-forward information requirement. The adoption did not have a material effect on the Company's disclosures.
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, 2022 that affect or may affect our current financial statements.
2. Receivables, Contract Liabilities and Performance Obligations
The following table provides information about receivables and contract liabilities as of March 31, 2023 and December 31, 2022 (in thousands):
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| March 31, 2023 | | December 31, 2022 |
Current receivables, which are included in “Accounts receivable, net” | $ | 3,087,105 | | | $ | 3,272,371 | |
Non-current receivables, which are included in “Other assets” | 181,782 | | | 161,837 | |
Contract liabilities, which are included in “Accrued expenses and other current liabilities” and “Other liabilities” | 108,186 | | | 102,057 | |
Changes in the contract liabilities balances during the three months ended March 31, 2023 are as follows (in thousands):
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| Increase (Decrease) |
| Contract Liabilities |
Balances at December 31, 2022 | $ | 102,057 | |
Reclassification of the beginning contract liabilities to revenue, as the result of performance obligations satisfied | (26,611) | |
Cash received in advance and not recognized as revenue | 32,740 | |
Balances at March 31, 2023 | $ | 108,186 | |
During the three months ended March 31, 2022, the Company recognized revenue of $31,452,000 related to its contract liabilities.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table includes estimated net sales related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 2023 that are expected to be recognized in the future (in thousands):
| | | | | |
| Services |
Remainder of 2023 | $ | 88,421 | |
2024 | 36,634 | |
2025 | 17,345 | |
2026 and thereafter | 8,287 | |
Total remaining performance obligations | $ | 150,687 | |
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, 2023 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 23 months.
The majority of our backlog historically has been and continues to be open cancellable 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 cancellable purchase orders, which do not qualify for revenue recognition, in the table above.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
3. Net Earnings Per Share
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”) and certain shares underlying the Notes and the warrants relating to the Call Spread Transactions. A reconciliation of the denominators of the basic and diluted EPS calculations follows (in thousands, except per share data):
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| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Numerator: | | | | | | | |
Net earnings | $ | 49,972 | | | $ | 56,631 | | | | | |
Denominator: | | | | | | | |
Weighted average shares used to compute basic EPS | 33,706 | | | 34,974 | | | | | |
Dilutive potential common shares due to dilutive RSUs, net of tax effect | 314 | | | 330 | | | | | |
Dilutive potential common shares due to the Notes | 2,310 | | | 1,677 | | | | | |
Dilutive potential common shares due to the Warrants | 877 | | | — | | | | | |
Weighted average shares used to compute diluted EPS | 37,207 | | | 36,981 | | | | | |
Net earnings per share: | | | | | | | |
Basic | $ | 1.48 | | | $ | 1.62 | | | | | |
Diluted | $ | 1.34 | | | $ | 1.53 | | | | | |
For the three months ended March 31, 2023, 84,137 of our RSUs were excluded from the diluted EPS calculations because their inclusion would have been anti-dilutive. For the three months ended March 31, 2022, 13,000 of our RSUs were excluded from the diluted EPS calculations and certain potential outstanding shares from the warrants related to the Call Spread Transactions were excluded from the diluted EPS calculations because their inclusion would have been anti-dilutive.
4. Debt, Inventory Financing Facilities, Finance Leases and Other Financing Obligations
Debt
Our long-term debt consists of the following (in thousands):
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| March 31, 2023 | | December 31, 2022 |
ABL revolving credit facility | $ | 168,822 | | | $ | 291,599 | |
Convertible senior notes due 2026 | 346,647 | | | 346,199 | |
Finance leases and other financing obligations | 78 | | | 102 | |
Total | 515,547 | | | 637,900 | |
Less: current portion of long-term debt | (346,672) | | | (346,228) | |
Long-term debt | $ | 168,875 | | | $ | 291,672 | |
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
On July 22, 2022, we entered into the Third Amendment to the Credit Agreement (as amended, the "credit agreement") to modify our senior secured revolving credit facility (the “ABL facility”), increasing the maximum borrowing amount from $1,200,000,000 to $1,800,000,000, including a maximum borrowing capacity that could be used for borrowing in certain foreign currencies of $350,000,000 and extending the maturity date. From time to time and at our option, we may request to increase the aggregate amount available for borrowing under the ABL facility by up to an aggregate of the U.S. dollar equivalent of $750,000,000, 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 ABL facility now provides for an uncommitted first-in, last-out revolving facility in an aggregate amount of up to $100,000,000. 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 now matures on July 22, 2027. As of March 31, 2023, eligible accounts receivable and inventory permitted availability to $1,587,950,000 of the full $1,800,000,000 facility amount, of which $168,822,000 was outstanding.
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
In August 2019, we issued $350,000,000 aggregate principal amount of Notes that mature on February 15, 2025. 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 (the “market price trigger”); (2) during the five business day period after any five days consecutive trading day period (the “measurement period”) in which the trading price 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.
The Notes exceeded the market price trigger of $88.82 in the first quarter of 2023 and as such, the Notes are convertible at the option of the holders through June 30, 2023. All of the Notes remain outstanding at March 31, 2023. The notes are convertible at the option of the holders at March 31, 2023 and, if converted, we are required to settle the principal amount of the Notes in cash. As such, the Notes balance net of unamortized debt issuance costs are classified as a current liability. If the Notes continue to exceed the market price trigger in future periods, they
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
will remain convertible at the option of the holders, and the principal amount will continue to be classified as current.
Upon conversion, we will pay cash equal to the principal amount of the Notes, plus shares of our common stock for any additional amounts due. The conversion rate will initially be 14.6376 shares of common stock per $1,000 principal amount of the 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.
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 principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. As of March 31, 2023, none of the criteria for a fundamental change or a conversion rate adjustment had been met.
The maximum number of shares issuable upon conversion, including the effect of a fundamental change and subject to other conversion rate adjustments, would be 6,788,208.
The Notes are subject to certain customary events of default and acceleration clauses. As of March 31, 2023, no such events have occurred.
The Notes consist of the following balances reported within the consolidated balance sheets (in thousands):
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| March 31, 2023 | | December 31, 2022 |
Liability: | | | |
Principal | $ | 350,000 | | | $ | 350,000 | |
Less: debt issuance costs, net of accumulated amortization | (3,353) | | | (3,801) | |
Net carrying amount | $ | 346,647 | | | $ | 346,199 | |
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| | | |
In January 2022, we filed an irrevocable settlement election notice with the note holders to inform them of our election to settle the principal amount of the Notes in cash. As a result of this election, at period ends where the market price, or other conversion triggers are met, the Notes will be classified in our consolidated balance sheet as current.
The remaining life of the debt issuance cost accretion is approximately 1.87 years. The effective interest rate on the principal of the Notes is 0.75%.
Interest expense resulting from the Notes reported within the consolidated statement of operations for the three months ended March 31, 2023 and 2022 is made up of contractual coupon interest and amortization of debt issuance costs.
Convertible Note Hedge and Warrant Transaction
In connection and concurrent with the issuance of the Notes, we entered into 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.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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.
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 Facilities
We have an unsecured inventory financing facility with MUFG Bank Ltd (“MUFG”) for $280,000,000. During 2022, we increased our maximum availability under our unsecured inventory financing facility with PNC Bank, N.A. (“PNC”) from $300,000,000 to $375,000,000, including the $25,000,000 facility in Canada (the "Canada facility"). We also increased our unsecured inventory financing facility with Wells Fargo in EMEA (the "EMEA facility") to $50,000,000. The inventory financing facilities will remain in effect until they are terminated by any of the parties. If balances are not paid within stated vendor terms (typically 60 days), they will accrue interest at prime plus 2.00% on the MUFG facility, Canadian Dollar Offered Rate plus 4.50% on the Canada facility and LIBOR, EURIBOR, or SONIA, as applicable, plus 4.50% and 0.25% on the PNC (other than the Canada facility) and EMEA facilities, respectively. The PNC facility allows for an alternative rate to be identified if LIBOR is no longer available. Amounts outstanding under these facilities are classified separately as accounts payable – inventory financing facilities in the accompanying consolidated balance sheets and within cash flows from financing activities in the accompanying consolidated statements of cash flows.
As of March 31, 2023, our combined inventory financing facilities had a total maximum capacity of $705,000,000, of which $410,126,000 was outstanding.
5. Income Taxes
Our effective tax rate for the three months ended March 31, 2023 and 2022 were 24.7% and 24.1%, respectively. Our effective tax rates were higher than the United States federal statutory rate of 21.0% due primarily to state income taxes and higher taxes on earnings in foreign jurisdictions, partially offset by excess tax benefits on the settlement of employee share-based compensation and tax benefits related to research and development activities.
As of March 31, 2023 and December 31, 2022, we had approximately $15,806,000 and $14,814,000, respectively, of unrecognized tax benefits. Of these amounts, approximately $2,124,000 and $1,642,000, 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 to our unrecognized tax benefits over the next 12 months that would have a material effect on our effective tax rate.
We are currently under audit in various jurisdictions for tax years 2015 through 2020. 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.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
6. Share Repurchase Program
On May 6, 2021, we announced that our Board of Directors had authorized the repurchase of up to $125,000,000 of our common stock. On September 19, 2022, we announced that our Board of Directors had authorized the repurchase of up to $300,000,000 of our common stock, including $50,000,000 that remained available from our prior authorization. As of March 31, 2023, approximately $99,958,155 remained available for repurchases under this share repurchase plan. Our 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.
During the three months ended March 31, 2023, we repurchased 913,445 shares of our common stock on the open market at a total cost of $117,129,000 (an average price of $128.23 per share). During the three months ended March 31, 2022, we did not repurchase any shares of our common stock.
7. 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, 2023, we had approximately $27,984,413 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, 2023. Accordingly, we have not accrued any liabilities related to such performance bonds in our consolidated financial statements.
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.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Management believes that payments, if any, related to these indemnifications are not probable at March 31, 2023. Accordingly, we have not accrued any liabilities related to such indemnifications in our consolidated financial statements.
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 incidental to the 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 required. If accruals are not required, we further evaluate each legal proceeding to assess whether an estimate of possible loss or range of possible loss can be 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 any legal 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.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
8. Segment Information
We operate in three reportable geographic operating segments: North America; EMEA; and APAC. Our offerings in North America and certain countries in EMEA and APAC include IT hardware, software and services, including cloud solutions. Our offerings in the remainder of our EMEA and APAC segments are largely software, certain software-related services and cloud solutions.
In the following table, revenue is disaggregated by our reportable operating segments, which are primarily defined by their 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, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| North America | | EMEA | | APAC | | Consolidated |
Major Offerings | | | | | | | |
Hardware | $ | 1,155,639 | | | $ | 162,890 | | | $ | 10,316 | | | $ | 1,328,845 | |
Software | 394,797 | | | 214,561 | | | 29,442 | | | 638,800 |
Services | 283,528 | | | 49,553 | | | 23,221 | | | 356,302 |
| $ | 1,833,964 | | | $ | 427,004 | | | $ | 62,979 | | | $ | 2,323,947 | |
Major Client Groups | | | | | | | |
Large Enterprise / Corporate | $ | 1,293,533 | | | $ | 309,063 | | | $ | 21,402 | | | $ | 1,623,998 | |
Commercial | 372,025 | | | 4,790 | | | 17,025 | | | 393,840 | |
Public Sector | 168,406 | | | 113,151 | | | 24,552 | | | 306,109 | |
| $ | 1,833,964 | | | $ | 427,004 | | | $ | 62,979 | | | $ | 2,323,947 | |
Revenue Recognition based on acting as Principal or Agent in the Transaction | | | | | | | |
Gross revenue recognition (Principal) | $ | 1,725,177 | | | $ | 401,343 | | | $ | 53,884 | | | $ | 2,180,404 | |
Net revenue recognition (Agent) | 108,787 | | | 25,661 | | | 9,095 | | | 143,543 | |
| $ | 1,833,964 | | | $ | 427,004 | | | $ | 62,979 | | | $ | 2,323,947 | |
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| North America | | EMEA | | APAC | | Consolidated |
Major Offerings | | | | | | | |
Hardware | $ | 1,451,319 | | | $ | 210,623 | | | $ | 11,646 | | | $ | 1,673,588 | |
Software | 341,547 | | | 272,402 | | | 22,750 | | | 636,699 | |
Services | 271,639 | | | 48,408 | | | 20,516 | | | 340,563 | |
| $ | 2,064,505 | | | $ | 531,433 | | | $ | 54,912 | | | $ | 2,650,850 | |
Major Client Groups | | | | | | | |
Large Enterprise / Corporate | $ | 1,438,729 | | | $ | 353,904 | | | $ | 21,429 | | | $ | 1,814,062 | |
Commercial | 441,159 | | | 18,421 | | | 14,659 | | | 474,239 | |
Public Sector | 184,617 | | | 159,108 | | | 18,824 | | | 362,549 | |
| $ | 2,064,505 | | | $ | 531,433 | | | $ | 54,912 | | | $ | 2,650,850 | |
Revenue Recognition based on acting as Principal or Agent in the Transaction | | | | | | | |
Gross revenue recognition (Principal) | $ | 1,970,921 | | | $ | 506,862 | | | $ | 47,018 | | | $ | 2,524,801 | |
Net revenue recognition (Agent) | 93,584 | | | 24,571 | | | 7,894 | | | 126,049 | |
| $ | 2,064,505 | | | $ | 531,433 | | | $ | 54,912 | | | $ | 2,650,850 | |
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, 2023 or 2022.
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 segments, and the allocations have been determined on a basis that we consider to be a reasonable reflection of the utilization of services provided to or benefits received by the operating segments.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following tables present our results of operations by reportable operating segment for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| North America | | EMEA | | APAC | | Consolidated |
Net sales: | | | | | | | |
Products | $ | 1,550,436 | | | $ | 377,451 | | | $ | 39,758 | | | $ | 1,967,645 | |
Services | 283,528 | | | 49,553 | | | 23,221 | | | 356,302 | |
Total net sales | 1,833,964 | | | 427,004 | | | 62,979 | | | 2,323,947 | |
Costs of goods sold: | | | | | | | |
Products | 1,387,962 | | | 347,633 | | | 37,134 | | | 1,772,729 | |
Services | 130,858 | | | 18,483 | | | 10,562 | | | 159,903 | |
Total costs of goods sold | 1,518,820 | | | 366,116 | | | 47,696 | | | 1,932,632 | |
Gross profit | 315,144 | | | 60,888 | | | 15,283 | | | 391,315 | |
Operating expenses: | | | | | | | |
Selling and administrative expenses | 248,820 | | | 49,905 | | | 11,276 | | | 310,001 | |
Severance and restructuring expenses | 3,087 | | | 702 | | | 13 | | | 3,802 | |
Acquisition and integration related expenses | 51 | | | — | | | — | | | 51 | |
Earnings from operations | $ | 63,186 | | | $ | 10,281 | | | $ | 3,994 | | | $ | 77,461 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| North America | | EMEA | | APAC | | Consolidated |
Net sales: | | | | | | | |
Products | $ | 1,792,866 | | | $ | 483,025 | | | $ | 34,396 | | | $ | 2,310,287 | |
Services | 271,639 | | | 48,408 | | | 20,516 | | | 340,563 | |
Total net sales | 2,064,505 | | | 531,433 | | | 54,912 | | | 2,650,850 | |
Costs of goods sold: | | | | | | | |
Products | 1,625,775 | | | 449,632 | | | 31,802 | | | 2,107,209 | |
Services | 138,646 | | | 17,031 | | | 9,103 | | | 164,780 | |
Total costs of goods sold | 1,764,421 | | | 466,663 | | | 40,905 | | | 2,271,989 | |
Gross profit | 300,084 | | | 64,770 | | | 14,007 | | | 378,861 | |
Operating expenses: | | | | | | | |
Selling and administrative expenses | 235,220 | | | 52,326 | | | 10,094 | | | 297,640 | |
Severance and restructuring expenses | 304 | | | 1,068 | | | — | | | 1,372 | |
Earnings from operations | $ | 64,560 | | | $ | 11,376 | | | $ | 3,913 | | | $ | 79,849 | |
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following is a summary of our total assets by reportable operating segment (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
North America | $ | 5,285,303 | | | $ | 5,219,480 | |
EMEA | 898,680 | | | 939,327 | |
APAC | 171,296 | | | 153,232 | |
Corporate assets and intercompany eliminations, net | (1,394,751) | | | (1,199,458) | |
Total assets | $ | 4,960,528 | | | $ | 5,112,581 | |
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, | | |
| 2023 | | 2022 | | | | |
Depreciation and amortization of property and equipment: | | | | | | | |
North America | $ | 5,648 | | | $ | 4,420 | | | | | |
EMEA | 596 | | | 807 | | | | | |
APAC | 109 | | | 162 | | | | | |
| 6,353 | | | 5,389 | | | | | |
Amortization of intangible assets: | | | | | | | |
North America | 7,785 | | | 7,348 | | | | | |
EMEA | 412 | | | 457 | | | | | |
APAC | 113 | | | 120 | | | | | |
| 8,310 | | | 7,925 | | | | | |
Total | $ | 14,663 | | | $ | 13,314 | | | | | |
9. Acquisition
Effective June 1, 2022, we acquired 100 percent of the issued and outstanding shares of Hanu Software Solutions, Inc. and Hanu Software Solutions (India) Private Ltd. (collectively, “Hanu”) for a cash purchase price, net of cash and cash equivalents acquired, of approximately $83,555,000, including $15,307,000 attributed to an earn out agreement, but excluding hold backs for representations and warranties of approximately $8,501,000 to be paid in future periods. We finalized the earn out and paid $10,748,000 in April 2023 and expect to pay the remaining amount due in May 2023. Hanu, a global leading cloud technology services and solutions provider, provides cloud solutions in the areas of applications and infrastructure, data and artificial intelligence, and cloud security to clients. Hanu is recognized as one of Microsoft’s top public cloud service partners globally. We believe this acquisition strengthens our service capabilities as a cloud solutions provider and is also a strategic investment in expanding our presence in India.
The preliminary fair value of net assets acquired was approximately $22,326,000, including $24,750,000 of identifiable intangible assets, consisting primarily of customer relationships that will be amortized using the straight line method over the estimated economic life of ten years. The preliminary purchase price was allocated using the information currently available. Goodwill acquired approximated $69,923,000 which was recorded in our North America operating segment.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
We have not finalized the purchase price allocation in relation to this acquisition as work on certain liabilities, including tax related balances, is not yet complete. We do not believe that the completion of this work will materially modify the preliminary purchase price allocation. We expect to complete our purchase price allocation prior to June 1, 2023.
We consolidated the results of operations for Hanu within our North America operating segment beginning on June 1, 2022, the effective date of the acquisition. Our historical results would not have been materially affected by the acquisition of Hanu and, accordingly, we have not presented pro forma information as if the acquisition had been completed at the beginning of each period presented in our consolidated statement of operations.
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 needs to be a technology business. We help our clients accelerate their digital journal to modernize their business and maximize the value of technology. We serve these clients in North America; Europe, the Middle East and Africa (“EMEA”); and Asia-Pacific (“APAC”). As a Fortune 500-ranked solutions integrator, we enable secure, end-to-end digital transformation and meet the needs of our clients through a comprehensive portfolio of solutions, far-reaching partnerships and 35 years of broad IT expertise. We amplify our solutions and services with global scale, local expertise and our e-commerce experience, enabling our clients to realize their digital ambitions at every opportunity. Our offerings in North America and certain countries in EMEA and APAC include hardware, software and services, including cloud solutions. Our offerings in the remainder of our EMEA and APAC segments consist largely of software and certain software-related services and cloud solutions.
On a consolidated basis, for the three months ended March 31, 2023:
•Net sales of $2.3 billion decreased 12% compared to the three months ended March 31, 2022. The decrease in net sales reflects a decrease in hardware net sales, partially offset by an increase in services net sales. We believe hardware sales have declined throughout the industry. Excluding the effects of fluctuating foreign currency exchange rates, net sales decreased 11% compared to the first quarter of 2022.
•Gross profit of $391.3 million increased 3% compared to the three months ended March 31, 2022. Excluding the effects of fluctuating foreign currency exchange rates, gross profit increased 5% compared to the first quarter of 2022.
•Compared to the three months ended March 31, 2022, gross margin expanded approximately 250 basis points to 16.8% of net sales in the three months ended March 31, 2023. This expansion primarily reflects an increase in higher margin services net sales, particularly cloud net sales, compared to the same period in the prior year.
•Earnings from operations decreased 3%, year to year, to $77.5 million in the first quarter of 2023 compared to $79.8 million in the first quarter of 2022. The decrease was primarily due to increases in selling and administrative expenses and severance and restructuring expenses, partially offset by increased gross profit in the current quarter. Excluding the effects of fluctuating foreign currency exchange rates, earnings from operations decreased 1% year to year.
•Net earnings and diluted earnings per share were $50.0 million and $1.34, respectively, for the first quarter of 2023. This compares to net earnings of $56.6 million and diluted earnings per share of $1.53 for the first quarter of 2022. Excluding the effects of fluctuating foreign currency exchange rates, diluted earnings per share decreased 11% year to year.
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
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 8 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.
COVID-19, Supply Chain Constraints and Inflation Update
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and reduced workforce participation. We saw minimal negative impact of COVID-19 on our first quarter 2023 financial results; however, supply constraints for certain products have persisted. We anticipate that continued supply constraints and extended lead times for networking and infrastructure products may now impact results into the latter part of 2023 and possibly into 2024. In addition, inflation has resulted in higher interest rates on all of our variable rate facilities compared to the first quarter of 2022 and we expect these higher rates and higher interest expense will continue for the remainder of 2023.
Since the initial outbreak, new variants of COVID-19 that are significantly more contagious than previous strains have emerged. The spread of these new strains initially caused many government authorities and businesses to reimplement prior restrictions in an effort to lessen the spread of COVID-19 and its variants; however, while many of these restrictions have been lifted, uncertainty remains as to whether additional restrictions may be initiated or again reimplemented in responses to surges in COVID-19 cases. The ultimate extent of the impact of the COVID-19 pandemic on our business operations, financial performance, and results of operations, including our ability to execute our business strategies and initiatives in the expected time frame, is currently unknown and will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted. This includes, but is not limited to, the duration and spread of the COVID-19 pandemic and its severity; the emergence and severity of its variants; the availability and efficacy of vaccines (particularly with respect to emerging strains of the virus) and potential hesitancy to utilize them; the reduction in travel and increase in teammates working from remote locations and other protective actions taken to contain the virus or treat its impact; general economic factors, such as increased inflation; supply chain constraints; labor supply issues; and how quickly and to what extent normal economic and operating conditions can resume.
We will continue to actively monitor the situation and anticipate taking further actions as may be required by government authorities or that we determine are in the best interests of our teammates, clients and partners. It is not clear what the potential effects of any such alterations or modifications may have on our business, including the effects on our clients, teammates, and prospects, or on our financial results in 2023 and beyond. Accordingly, our current results and financial condition discussed herein may not be indicative of future operating results and trends.
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”). 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, 2022. 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, 2022.
Results of Operations
The following table sets forth certain financial data as a percentage of net sales for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | |
| 2023 | | 2022 | | | | | | |
Net sales | 100.0 | % | | 100.0 | % | | | | | | |
Costs of goods sold | 83.2 | | | 85.7 | | | | | | | |
Gross profit | 16.8 | | | 14.3 | | | | | | | |
Selling and administrative expenses | 13.3 | | | 11.2 | | | | | | | |
Severance and restructuring expenses and acquisition and integration related expenses | 0.2 | | | 0.1 | | | | | | | |
Earnings from operations | 3.3 | | | 3.0 | | | | | | | |
Non-operating expense, net | 0.4 | | | 0.2 | | | | | | | |
Earnings before income taxes | 2.9 | | | 2.8 | | | | | | | |
Income tax expense | 0.7 | | | 0.7 | | | | | | | |
Net earnings | 2.2 | % | | 2.1 | % | | | | | | |
We generally experience some seasonal trends in our sales of IT hardware, software and services. Software sales are typically seasonally higher in our second and fourth quarter, particularly the 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 also stronger in 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 and related to product versus services sales are, and will continue to be, impacted by partner incentives, which can change significantly in the amounts made available and in the related product or services sales being incentivized by the partner. Incentives from our largest partners are significant and changes in the incentive requirements, which occur regularly, could impact our results of operations to the extent we are
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
unable to shift our focus and respond to them. For a discussion of risks associated with our reliance on partners, see “Risk Factors – Risks related to Our Business, Operations and Industry – We rely on our partners for product availability, competitive products to sell and marketing funds and purchasing incentives, which can change significantly in the amounts made available and the requirements year over year,” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022.
Net Sales. Net sales for the three months ended March 31, 2023 decreased 12%, year to year, to $2.3 billion compared to the three months ended March 31, 2022, reflecting decreases in our North America and EMEA segments. Our net sales by operating segment were as follows for the three months ended March 31, 2023 and 2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | % Change | | | | |
| 2023 | | 2022 | | | | | | |
North America | $ | 1,833,964 | | | $ | 2,064,505 | | | (11) | % | | | | | | |
EMEA | 427,004 | | | 531,433 | | | (20) | % | | | | | | |
APAC | 62,979 | | | 54,912 | | | 15 | % | | | | | | |
Consolidated | $ | 2,323,947 | | | $ | 2,650,850 | | | (12) | % | | | | | | |
Our net sales by offering category for North America for the three months ended March 31, 2023 and 2022 were as follows (dollars in thousands):
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| | Three Months Ended March 31, | | % Change | | | | |
Sales Mix | | 2023 | | 2022 | | | | | | |
Hardware | | $ | 1,155,639 | | | $ | 1,451,319 | | | (20) | % | | | | | | |
Software | | 394,797 | | | 341,547 | | | 16 | % | | | | | | |
Services | | 283,528 | | | 271,639 | | | 4 | % | | | | | | |
| | $ | 1,833,964 | | | $ | 2,064,505 | | | (11) | % | | | | | | |
Net sales in North America decreased 11%, or $230.5 million, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily driven by a decrease in hardware net sales. Hardware net sales decreased by 20%, year to year. This decrease was partially offset by software and services net sales increases of 16% and 4%, respectively, year over year. The net changes for the three months ended March 31, 2023 were the result of the following:
•The decrease in hardware net sales was due to lower volume of sales to large enterprise and corporate clients. This decline was primarily attributable to devices and was consistent with our expectations as well as with declines observed throughout the industry.
•The increase in software net sales was primarily due to higher volume of software licensing, partially offset by the continued migration of on-premise software to cloud solutions, reported net in services net sales.
•The increase in services net sales was primarily due to an increase in fees for cloud solutions.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Our net sales by offering category for EMEA for the three months ended March 31, 2023 and 2022 were as follows (dollars in thousands):
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| | Three Months Ended March 31, | | % Change | | | | |
Sales Mix | | 2023 | | 2022 | | | | | | |
Hardware | | $ | 162,890 | | | $ | 210,623 | | | (23) | % | | | | | | |
Software | | 214,561 | | | 272,402 | | | (21) | % | | | | | | |
Services | | 49,553 | | | 48,408 | | | 2 | % | | | | | | |
| | $ | 427,004 | | | $ | 531,433 | | | (20) | % | | | | | | |
Net sales in EMEA decreased 20%, or $104.4 million, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. Excluding the effects of fluctuating foreign currency exchange rates, net sales in EMEA decreased 13%, year to year. Net sales of hardware and software decreased by 23% and 21%, respectively, year to year, partially offset by an increase in services net sales of 2%, year over year. The net changes for the three months ended March 31, 2023 were the result of the following:
•The decrease in software net sales was primarily due to continued migration of on-premise software to cloud solutions, reported net in services net sales.
•The decrease in hardware net sales was primarily due to lower volume of sales to public sector clients and decline in sales of devices.
•The increase in services net sales year over year was primarily due to an increase in fees for cloud solutions.
Our net sales by offering category for APAC for the three months ended March 31, 2023 and 2022 were as follows (dollars in thousands):
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| | Three Months Ended March 31, | | % Change | | | | |
Sales Mix | | 2023 | | 2022 | | | | | | |
Hardware | | $ | 10,316 | | | $ | 11,646 | | | (11) | % | | | | | | |
Software | | 29,442 | | | 22,750 | | | 29 | % | | | | | | |
Services | | 23,221 | | | 20,516 | | | 13 | % | | | | | | |
| | $ | 62,979 | | | $ | 54,912 | | | 15 | % | | | | | | |
Net sales in APAC increased 15%, or $8.1 million, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. Excluding the effects of fluctuating foreign currency exchange rates, net sales in APAC increased 21%, year over year. Net sales of software and services increased by 29% and 13%, respectively, year over year.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
These increases were partially offset by a decrease in hardware net sales of 11%, year to year. The net changes for the three months ended March 31, 2023 were the result of the following:
•The increase in software net sales was due to higher volume of sales to public sector clients partially offset by continued migration of on-premise software to cloud solutions, reported net in services net sales.
•The increase in services net sales was primarily due to higher volume sales of Insight Delivered services and an increase in fees for cloud solutions.
•The decrease in hardware net sales was primarily the result of lower volume of sales to enterprise clients.
The percentage of net sales by category for North America, EMEA and APAC were as follows for the three months ended March 31, 2023 and 2022:
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| | North America | | EMEA | | APAC |
| | Three Months Ended March 31, | | Three Months Ended March 31, | | Three Months Ended March 31, |
Sales Mix | | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
Hardware | | 63 | % | | 70 | % | | 38 | % | | 40 | % | | 16 | % | | 21 | % |
Software | | 22 | % | | 17 | % | | 50 | % | | 51 | % | | 47 | % | | 42 | % |
Services | | 15 | % | | 13 | % | | 12 | % | | 9 | % | | 37 | % | | 37 | % |
| | 100 | % | | 100 | % | | 100 | % | | 100 | % | ` | 100 | % | | 100 | % |
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Gross Profit. Gross profit increased 3%, or $12.5 million, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, with gross margin expanding approximately 250 basis points to 16.8% for the three months ended March 31, 2023 compared to 14.3% for the three months ended March 31, 2022.
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, 2023 and 2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | % of Net Sales | | 2022 | | % of Net Sales | | | | | | | | |
North America | $ | 315,144 | | | 17.2 | % | | $ | 300,084 | | | 14.5 | % | | | | | | | | |
EMEA | 60,888 | | | 14.3 | % | | 64,770 | | | 12.2 | % | | | | | | | | |
APAC | 15,283 | | | 24.3 | % | | 14,007 | | | 25.5 | % | | | | | | | | |
Consolidated | $ | 391,315 | | | 16.8 | % | | $ | 378,861 | | | 14.3 | % | | | | | | | | |
North America's gross profit for the three months ended March 31, 2023 increased 5%, or $15.1 million, compared to the three months ended March 31, 2022. As a percentage of net sales, gross margin expanded approximately 270 basis points to 17.2% for the first quarter of 2023. The year over year net increase in gross margin was primarily attributable to the following:
•A net increase in product margin of 77 basis points, year over year, and an increase in services margin of 188 basis points compared to the same period in the prior year.
•The increase in services margin during the current quarter reflects an increase in fees for cloud solutions and an increase in margin contribution from Insight Core services (consisting of Insight Delivered and managed services).
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
•The increase in product margin is due in part to a shift away from devices towards higher margin infrastructure sales and also sales of software at higher margins partially due to changes in product and client mix.
EMEA's gross profit for the three months ended March 31, 2023 decreased 6%, or $3.9 million, year to year (increasing 1% when excluding the effects of fluctuating foreign currency exchange rates), compared to the three months ended March 31, 2022. As a percentage of net sales, gross margin expanded 210 basis points, year over year. The year over year net expansion in gross margin was attributable to the following:
•A net increase in product margin of 70 basis points and an increase in margin from services net sales of 137 basis points.
•The increase in product margin is primarily the result of sales of software at higher margins than in the same period in the prior year.
•The increase in services margin is primarily the result of higher fees from cloud solutions and an increase in net sales of software maintenance.
APAC's gross profit for the three months ended March 31, 2023 increased 9%, or $1.3 million, year over year (increasing 14% when excluding the effects of fluctuating foreign currency exchange rates), compared to the three months ended March 31, 2022. As a percentage of net sales, gross margin contracted 120 basis points, year to year. The year to year net decline in gross margin was primarily attributable to the following:
•A decrease in product margin of 56 basis points and a decline in services margin of 68 basis points.
•The decline in product margin was due to higher volume of software net sales with public sector clients at lower margins than in the prior year period.
•The contracted services margin was driven by lower margins on Insight Core services and lower net sales of software maintenance partially offset by higher volume of cloud solutions recognized on a net basis.
Operating Expenses.
Selling and Administrative Expenses. Selling and administrative expenses increased $12.4 million, or 4% (increasing 6% when excluding fluctuating foreign currency exchange rates), for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.
Selling and administrative expenses increased approximately 210 basis points as a percentage of net sales in the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The overall net increase in selling and administrative expenses reflects an increase in other expenses of $9.1 million and an $8.4 million increase in personnel costs, including teammate benefits, year over year. The increase in other expenses was driven by an increase in service agreement fees and third party transformation costs incurred in the current quarter to support our strategic plan. The increase in personnel costs reflects an increase in overall teammate headcount in the current year period. These increases were partially offset by a $7.1 million decrease in professional fees, year to year.
Severance and Restructuring Expenses, Net. During the three months ended March 31, 2023, we recorded severance and restructuring expense, net of adjustments, of approximately $3.8 million. Comparatively, during the three months ended March 31, 2022, we recorded severance and restructuring expense, net of adjustments, of approximately $1.4 million. The charges primarily related to a realignment of certain roles and responsibilities.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Earnings from Operations. Earnings from operations decreased 3%, or $2.4 million, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. Our earnings from operations and earnings from operations as a percentage of net sales by operating segment were as follows for the three months ended March 31, 2023 and 2022 (dollars in thousands):
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| Three Months Ended March 31, | | |
| 2023 | | % of Net Sales | | 2022 | | % of Net Sales | | | | | | | | |
North America | $ | 63,186 | | | 3.4 | % | | $ | 64,560 | | | 3.1 | % | | | | | | | | |
EMEA | 10,281 | | | 2.4 | % | | 11,376 | | | 2.1 | % | | | | | | | | |
APAC | 3,994 | | | 6.3 | % | | 3,913 | | | 7.1 | % | | | | | | | | |
Consolidated | $ | 77,461 | | | 3.3 | % | | $ | 79,849 | | | 3.0 | % | | | | | | | | |
North America's earnings from operations for the three months ended March 31, 2023 decreased $1.4 million, or 2%, compared to the three months ended March 31, 2022. As a percentage of net sales, earnings from operations increased by approximately 30 basis points to 3.4%. The decrease in earnings from operations was primarily driven by increases in selling and administrative expenses and severance and restructuring expenses, partially offset by an increase in gross profit when compared to the three months ended March 31, 2022.
EMEA's earnings from operations for the three months ended March 31, 2023 decreased $1.1 million, or 10% (decreasing 4% when excluding the effects of fluctuating foreign currency exchange rates), compared to the three months ended March 31, 2022. As a percentage of net sales, earnings from operations increased by approximately 30 basis points to 2.4%. The decrease in earnings from operations was driven by the decrease in gross profit, partially offset by a decrease in selling and administrative expenses compared to the three months ended March 31, 2022.
APAC's earnings from operations for the three months ended March 31, 2023 increased $0.1 million, or 2% (increasing 5% when excluding the effects of fluctuating foreign currency exchange rates), compared to the three months ended March 31, 2022. As a percentage of net sales, earnings from operations decreased by approximately 80 basis points to 6.3%. The increase in earnings from operations was driven by an increase in gross profit, partially offset by an increase in selling and administrative expenses compared to the three months ended March 31, 2022.
Non-Operating (Income) Expense.
Interest Expense, Net. Interest expense, net primarily relates to borrowings under our financing facilities and the Notes and imputed interest under our inventory financing facilities, partially offset by interest income generated from interest earned on cash and cash equivalent bank balances. Interest expense, net for the three months ended March 31, 2023 increased 28%, or $2.3 million, compared to the three months ended March 31, 2022. The increase was primarily due to higher interest rates under our ABL facility.
Imputed interest under our inventory financing facilities was $4.0 million for the three months ended March 31, 2023 compared to $4.3 million for the three months ended March 31, 2022.
Other Expense (Income), Net. Other expense (income), net changed $3.6 million, from other income, net of $2.8 million in the three months ended March 31, 2022, compared to other expense, net of $0.8 million in the three months ended March 31, 2023. The change primarily related to foreign currency exchange losses resulting from foreign currency transactions, including foreign currency derivative contracts and intercompany balances that are
not considered long-term in nature. See Note 12 to our Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information.
Income Tax Expense. Our effective tax rate of 24.7% for the three months ended March 31, 2023 was higher than our effective tax rate of 24.1% for the three months ended March 31, 2022. The increase in our effective tax rate was primarily due to a reduction in research and development and other tax credits, partially offset by higher excess tax benefits on the settlement of employee share-based compensation in the current year period.
Liquidity and Capital Resources
The following table sets forth certain consolidated cash flow information for the three months ended March 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
Net cash provided by (used in) operating activities | $ | 160,160 | | | $ | (284,239) | |
Net cash used in investing activities | (9,106) | | | (25,745) | |
Net cash (used in) provided by financing activities | (140,654) | | | 319,954 | |
Foreign currency exchange effect on cash, cash equivalent and restricted cash balances | 1,652 | | | 969 | |
Increase in cash, cash equivalents and restricted cash | 12,052 | | | 10,939 | |
Cash, cash equivalents and restricted cash at beginning of period | 165,718 | | | 105,977 | |
Cash, cash equivalents and restricted cash at end of period | $ | 177,770 | | | $ | 116,916 | |
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Cash and Cash Flow
•Our primary uses of cash during the three months ended March 31, 2023 were to fund repurchases of our common stock and pay down the ABL facility.
•Operating activities provided $160.2 million in cash during the three months ended March 31, 2023, compared to cash used in operating activities of $284.2 million during the three months ended March 31, 2022.
•Capital expenditures were $9.1 million and $25.7 million, for the three months ended March 31, 2023 and 2022, respectively.
•During the three months ended March 31, 2023, we repurchased $117.1 million of our common stock compared to no repurchases during the three months ended March 31, 2022.
•Net repayments under our ABL facility during the three months ended March 31, 2023 were $123.8 million compared to net borrowings of $320.0 million during the three months ended March 31, 2022.
•We had net borrowings under our inventory financing facilities of $108.3 million during the three months ended March 31, 2023 compared to net borrowings of $6.7 million during the three months ended March 31, 2022.
We anticipate that cash flows from operations, together with the funds available under our financing facilities, will be adequate to support our expected cash and working capital requirements for operations as well as other strategic investments over the next 12 months and beyond. We expect existing cash and cash flows from operations to continue to be sufficient to fund our operating cash activities and cash commitments for investing and financing activities, such as capital expenditures, strategic acquisitions, repurchases of our common stock, debt repayments and repayment of our inventory financing facilities for the next 12 months. We
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
currently expect to fund known cash commitments beyond the next 12 months through operating cash activities or other available financing resources.
Net cash provided by (used in) operating activities
•Our cash conversion cycle is inverted, meaning on average we pay our partners on terms shorter than we receive payments from our clients. This means we generate more cash in our operations in periods of sequential decline in sales and particularly in hardware net sales.
•Cash flow provided by operating activities in the first three months of 2023 was $160.2 million compared to cash used in operating activities of $284.2 million in the first three months of 2022.
•The increase in cash flow from operating activities was primarily driven by the decline in hardware net sales in the current year period and changes in partner mix.
Our consolidated cash flow operating metrics were as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
Days sales outstanding in ending accounts receivable (“DSOs”) (a) | 120 | | | 103 | |
Days inventory outstanding (“DIOs”) (b) | 12 | | | 15 | |
Days purchases outstanding in ending accounts payable (“DPOs”) (c) | (99) | | | (77) | |
Cash conversion cycle (days) (d) | 33 | | | 41 | |
(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 90 days.
(b)Calculated as the balance of inventories 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 90 days.
(c)Calculated as the sum of the balances of accounts payable – trade and accounts payable – inventory financing facilities 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 90 days.
(d)Calculated as DSOs plus DIOs, less DPOs.
•Our cash conversion cycle was 33 days in the first quarter of 2023, down 8 days from the first quarter of 2022.
•The net changes were a result of a 22 day increase in DPOs and a 3 day decrease in DIOs, partially offset by a 17 day increase in DSOs. The increase in DPOs is primarily due to the impacts of netting on certain transaction streams (agent net revenue) that flow through accounts payable on a gross basis while flowing through our income statement on a net basis. The increase is also due to changes in partner mix, including an increase in the balances on our inventory financing facilities which have longer payment terms than discount vendors. The increase in DSOs is primarily due to the impacts of netting on certain revenue streams (agent net revenue) that flow through accounts receivable on a gross basis while flowing through our income statement on a net basis. The decrease in DIOs is due to a return to normalized inventory levels.
•Our cash conversion cycle is impacted by netted costs that we apply to our services net sales to appropriately record net sales that we earn as an agent. These netted costs, while excluded from both net sales and cost of goods sold, are processed
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
and applied to accounts receivable and accounts payable in each reporting period. As a result, our DSO and DPO calculated on the basis of unadjusted net sales and unadjusted cost of goods sold are inherently inflated. Netted costs were $1.7 billion and $1.3 billion in the first quarter of 2023 and 2022, respectively. Adjusting our cash conversion cycle calculation by adding netted costs to both daily net sales and daily cost of goods sold results in a reduction to our cash conversion cycle from 33 days down to 23 days in the first quarter of 2023 and from 41 days down to 30 days in the first quarter of 2022.
•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 2023 in excess of working capital needs to pay down our ABL facility and inventory financing facilities, to fund repurchases of our common stock and for strategic acquisitions.
Net cash used in investing activities
•Capital expenditures were $9.1 million and $25.7 million for the three months ended March 31, 2023 and 2022, respectively. The majority of the capital expenditures in the first three months of 2022 were used for our global corporate headquarters with no comparable activity in the first three months of 2023.
•We expect capital expenditures for the full year 2023 to be in a range of $55.0 to $60.0 million.
Net cash (used in) provided by financing activities
•During the three months ended March 31, 2023, we had net repayments under our ABL facility that decreased our outstanding long-term debt balance by $123.8 million.
•During the three months ended March 31, 2022, we had net borrowings under our ABL facility that increased our outstanding long-term debt balance by $320.0 million.
•We had net borrowings under our inventory financing facilities of $108.3 million during the three months ended March 31, 2023 compared to net borrowings of $6.7 million during the three months ended March 31, 2022.
•During the three months ended March 31, 2023, we repurchased $117.1 million of our common stock.
•During the three months ended March 31, 2022, we did not repurchase any of our common stock.
Financing Facilities
Our debt balance as of March 31, 2023 was $515.5 million, including our finance lease obligations for certain IT equipment and other financing obligations.
•We expanded the maximum borrowing capacity under our ABL facility in July 2022 from $1.2 billion to $1.8 billion.
•Our objective is to pay our debt balances down while retaining adequate cash balances to meet overall business objectives.
•The Notes are subject to certain events of default and certain acceleration clauses. As of March 31, 2023, no such events have occurred.
•Our ABL facility contains various covenants customary for transactions of this type, including complying with a minimum receivable and inventory requirement and meeting monthly, quarterly and annual reporting requirements. The credit agreement contains customary affirmative and negative covenants and events of default. At March 31, 2023, we were in compliance with all such covenants.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
We also have agreements with financial intermediaries to facilitate the purchase of inventory from various suppliers under certain terms and conditions.
•These amounts are classified separately as accounts payable – inventory financing facilities in our consolidated balance sheets.
•Our inventory financing facilities have an aggregate availability for vendor purchases of $705.0 million, of which $410.1 million was outstanding at March 31, 2023.
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 of March 31, 2023, we had approximately $142.3 million in cash and cash equivalents in certain of our foreign subsidiaries, primarily residing in Canada and the Netherlands. 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 7 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 Note 1 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 “Cash Requirements From 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, 2022.
INSIGHT ENTERPRISES, INC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Except 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, 2022.
Although our Notes are based on a fixed rate, changes in interest rates could impact the fair market value of such Notes. As of March 31, 2023, the fair market value of our Notes was $732 million. For additional information about our Notes, see Note 4 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, 2023 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, as appropriate, to allow timely decisions regarding required disclosure.
Change in Internal Control over Financial Reporting
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.
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.
INSIGHT ENTERPRISES, INC.