SECURITIES AND EXCHANGE COMMISSION
(Mark One)
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| x | Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2022 |
For the fiscal year ended December 31, 2017
☐ | | | | | |
| o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period fromto. |
For the transition period from __________ to ___________.
Commission File Number:
0-25092
INSIGHT ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
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| Delaware | | 86-0766246 |
(State or other jurisdiction of
incorporation or organization)
| | (IRS Employer
Identification No.)
|
|
6820 South Harl Avenue, Tempe,
2701 E. Insight Way, Chandler, Arizona
8528385286
(Address of principal executive offices, Zip Code)
Registrant’s telephone number, including area code: (480)333-3000 Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
| Common stock, par value $0.01 | NSIT | The NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☒ No ☐Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
postsubmit such files).
Yes ☒ No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
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| Large accelerated filer | x | ☒ | | Accelerated filer | o | ☐Non-accelerated filer | o |
| | | |
Non-accelerated filer | | ☐ (Do not check if a smaller reporting company) | | Smaller reporting company | o | ☐ |
| | | |
| Emerging growth company | | ☐ | o | | | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. x
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b).
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes ☐ No ☒
The aggregate market value of the voting and
non-voting common equity held by
non-affiliates of the registrant, based upon the closing price of the registrant’s common stock as reported on The Nasdaq Global Select Market on June 30,
2017,2022, the last business day of the registrant’s most recently completed second fiscal quarter, was
$1,410,322,331.$2,668,515,639.
The number of shares outstanding of the registrant’s common stock on February
15, 201810, 2023 was
35,836,320.33,807,565.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement relating to its
20182023 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission within 120 days after December 31, 2022 have been incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Annual Report on Form
10-K.
INSIGHT ENTERPRISES, INC.
ANNUAL REPORT ON FORM
10-KYear Ended December 31,
20172022
INSIGHT ENTERPRISES, INC.
FORWARD-LOOKING STATEMENTS
References to "the Company," “Insight,” “we,” “us,” “our” and other similar words refer to Insight Enterprises, Inc. and its consolidated subsidiaries, unless the context suggests otherwise. Certain statements in this Annual Report on Form
10-K, including statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this report, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include: projections of,
and matters that affect, net sales, gross profit, gross margin, operating expenses, earnings from operations,
non-operating income and expenses, net earnings or cash flows, cash needs and the payment of accrued expenses and liabilities;
our future responses to and the potential impact of coronavirus strain COVID-19 (“COVID-19”) on our Company; our expectations regarding current supply constraints, including our expectation that our elevated backlog in certain categories, particularly data center and infrastructure, exiting the fourth quarter of 2022 may benefit the first half of 2023, and that supply chain constraints for certain other products, such as infrastructure products, will continue to be extended; the expected effects of seasonality on our business; expectations of further consolidation
and trends in the Information Technology (“IT”) industry; our business strategy and our strategic initiatives, including our efforts to grow our core business
in the current environment, develop and grow our global cloud business and build scalable solutions; expectations regarding
the impact of partner incentives; our expectations about future benefits of our acquisitions and our plans related thereto, including potential expansion into wider regions; the increasing demand for big data solutions; the availability of competitive sources of products for our purchase and resale; our intentions concerning the payment of dividends; our acquisition strategy; our ability to offset the effects of inflation and manage any increase in interest rates; projections of capital expenditures; our
planplans to
migrate EMEA’scontinue to evolve our IT
system;systems; our expectation that our gross margins will improve as our mix of services and solutions increase; our liquidity and the sufficiency of our capital resources, the availability of financing and our needs or plans relating thereto;
our expectation that holders of our convertible senior notes (the “Notes”) will not convert their Notes in the near term; the effects of new accounting principles and expected dates of adoption; the effect of indemnification obligations; projections about the outcome of ongoing tax audits;
our expectations regarding future tax rates; adequate provisions for and our positions and strategies with respect to ongoing and threatened
litigation; our exposure to derivative counterparty concentrationlitigation and
non-performance risks; expected outcomes; our ability to expand our client relationships; our expectations that pricing pressures in the IT industry will continue; our plans to use cash flow from operations for working capital, to pay down debt, repurchase shares of our common stock
including our expectation that we will complete our planned share repurchases in the first quarter of 2023, to make capital expenditures, and fund acquisitions; our belief that our office facilities are adequate and that we will be able to extend our current leases or locate substitute facilities on satisfactory terms; our
expectations that working capital trends will return to normalized levels; our belief that we have adequate provisions for losses; our expectation that we will not incur interest payments under our inventory financing
facility;facilities; our
compliance with leverage ratio requirements;expectations that future income will be sufficient to fully recover deferred tax assets; our exposure to
off-balance sheet arrangements; statements of belief; and statements of assumptions underlying any of the foregoing. Forward-looking statements are identified by such words as “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” “project,” “will,” “may” and variations of such words and similar expressions and are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. There can be no assurances that results described in forward-looking statements will be achieved, and actual results could differ materially from those suggested by the forward-looking statements. Some of the important factors that could cause our actual results to differ materially from those projected in any forward-looking statements include, but are not limited to, the
following:following, which are discussed in “Risk Factors” in Part I, Item 1A of this report: •actions of our competitors, including manufacturers and publishers of products we sell;
•our reliance on our partners for product availability, competitive products to sell and marketing funds and purchasing incentives, which can change significantly in the amounts made available and in the requirements year over year;
•our ability to keep pace with rapidly evolving technological advances and the evolving competitive marketplace
•general economic conditions, economic uncertainties and changes in geopolitical conditions, including the possibility of a recession or as a result of the ongoing war between Russia and Ukraine;
•changes in the IT industry and/or rapid changes in technology;
INSIGHT ENTERPRISES, INC.
•our ability to provide high quality services to our clients;
•accounts receivable risks, associatedincluding increased credit loss experience or extended payment terms with the integration and operation of acquired businesses;
possible significant fluctuations in our future operating results;clients;
•our reliance on independent shipping companies;
•the risks associated with our international operations;
general economic conditions;•supply constraints for products;
increased debt•the duration and interest expenseseverity of the COVID-19 pandemic and decreased availabilityits effects on our business, results of funds under our financing facilities;
operations and financial condition, as well as the securitywidespread outbreak of our electronic andany other confidential information;illnesses or communicable diseases;
•natural disasters or other adverse occurrences;
•disruptions in our IT systems and voice and data networks;
•cyberattacks or breaches of data privacy and security regulations;
•intellectual property infringement claims and challenges to our registered trademarks and trade names;
•legal proceedings, client audits and failure to comply with laws and regulations;
•failure to comply with the terms and conditions of our commercial and public sector contracts;
legal proceedings and client audits and failure to comply with laws and regulations;
accounts receivable risks, including increased credit loss experience or extended payment terms with our clients;
our reliance on independent shipping companies;
our dependence on certain key personnel;
natural disasters or other adverse occurrences;
•exposure to changes in, interpretations of, or enforcement trends related to tax rules and regulations;
•our potential to draw down a substantial amount of indebtedness;
•the conditional conversion feature of the Notes, which has been triggered, may adversely affect the Company’s financial condition and operating results;
intellectual property infringement claims•the Company is subject to counterparty risk with respect to certain hedge and challengeswarrant transactions entered into in connection with the issuance of the notes (the "Call Spread Transactions");
•increased debt and interest expense and the possibility of decreased availability of funds under our financing facilities;
•risks associated with the discontinuation of LIBOR as a benchmark rate;
•possible significant fluctuations in our future operating results as well as seasonality and variability in client demands;
•our dependence on certain key personnel and our ability to attract, train and retain skilled teammates;
•risks associated with the integration and operation of acquired businesses, including achievement of expected synergies and benefits; and
•future sales of the Company’s common stock or equity-linked securities in the public market could lower the market price for our registered trademarkscommon stock.
Additionally, there may be other risks described from time to time in the reports that we file with the Securities and trade names.
Exchange Commission (the “SEC”). Any forward-looking statements in this report including those identified under “Risk Factors” in Part I, Item 1Aare made as of the date of this report,filing and should be considered in light of various important factors, including the risks and uncertainties listed above, as well as others. Additionally, there are risks described from time to time in the reports that we file with the Securities and Exchange Commission. We assume no obligation to update, and, except as may be required by law, do not intend to update, any forward-looking statements. We do not endorse any projections regarding future performance that may be made by third parties.
INSIGHT ENTERPRISES, INC.
Item 1. Business
Our Company
Insight Enterprises, Inc. (“Insight” or
Today, every business needs to be a technology business. We help our clients accelerate their digital journey to modernize their business and maximize the
“Company”) is a Fortune 500 global IT provider helping businessesvalue of
all sizes – from small and medium sized firms to worldwide enterprises, governments, schools and health care organizations – define, architect, implement and manage Intelligent Technology SolutionsTMtechnology. 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 34 years of broad IT expertise. We
empoweramplify our solutions and services with global scale, local expertise and our e-commerce experience, enabling our clients to
managerealize their
IT environments so they can drive meaningful business outcomes today and transform their operations for tomorrow.digital ambitions at every opportunity.
The Company is organized in the following three operating segments, which are primarily defined by their related geographies:
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Operating Segment* | | Geography | | %
Consolidated Net Sales |
North America | | United States and Canada | | 77%81% |
EMEA | | Europe, Middle East and Africa | | 20%17% |
APAC | | Asia-Pacific | | 3%2% |
* | *Additional detailed segment and geographic information can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 and in Note 20 to the Consolidated Financial Statements in Part II, Item 8 of this report. |
This year, 2018, marks 30 years of doing business for Insight. Across three decades, we have evolved withFinancial Condition and Results of Operations” in Part II, Item 7 and in Note 19 to the industry. Each strategic pivot has been madeConsolidated Financial Statements in pursuitPart II, Item 8 of helping our clients run their businesses smarter. this report.
Insight began operations in Arizona in 1988, incorporated in Delaware in 1991 and completed its initial public offering in 1995. Our corporate headquarters are located in
Tempe,Chandler, Arizona. From our original location in the United States, we expanded nationwide and then entered Canada in 1997 and the United Kingdom in 1998. Through a combination of acquisitions and organic growth, we continued to increase our geographic coverage and expand our technical capabilities. Our
major acquisitions were as follows:
2006 – AcquiredPrior to 2017 we acquired Software Spectrum, Inc. (2006), and expanded our footprint in EMEA and APAC and strengthened our software and related services capabilities;
2008 – Acquired Calence, LLC in North America and(2008), MINX Limited in the United Kingdom, and enhanced our global technical expertise aroundhigher-end networking and communications technologies, as well as managed services and security;
2011 – Acquired(2008), Ensynch, Inc. (“Ensynch”) and enhanced our professional services capabilities across the complete Microsoft solution set, including cloud migration and management;
2012 – Acquired(2011), Inmac GmbH (2012) and Micro Warehouse BV (“Inmac”) and expanded our hardware capabilities into key markets in our existing European footprint, specifically in Germany and the Netherlands;
2015 – Acquired(2012), BlueMetal Architects, Inc. (“BlueMetal”), an interactive design(2015) and technology architecture firm, and strengthened our services capabilities in the area of application design, mobility and big data;
2016 –Acquired Ignia, Pty Ltd (“Ignia”) and expanded our global footprint in the areas of application design, digital solutions, cloud, mobility and business analytics, while also building on our ability to bring solutions powered by Intelligent Technology Solutions to our clients in APAC; and(2016).
Our acquisitions from 2017 through today included:
•2017 – On January 6, 2017, we acquiredAcquired Datalink Corporation (“Datalink”), a leading provider of IT services and enterprise data center solutions based in Eden Prairie, Minnesota, and strengthened our position as a leading IT solutions provider with deep technical expertise delivering data center transformation solutions to clients on premise or in the cloud. On September 26, 2017,Additionally, we acquired Caase Group B.V. (referred to herein as, “Caase.com”), a Dutch cloud service provider, and strengthened our ability to deliver Intelligent Technology Solutionscloud solutions to our clients in the Netherlands, withEMEA;
•2018 – Acquired Cardinal Solutions Group, Inc. (“Cardinal”), a view to expanding into the wider European regiondigital solutions provider and strengthened our digital innovation capabilities;
•2019 – Acquired PCM, Inc. (“PCM”), a provider of multi-vendor technology offerings, including hardware, software and services which complemented our supply chain expertise, adding scale and clients in the near future.commercial space primarily in North America;
•2020 – Acquired vNext SAS (“vNext”), a French digital consulting services and managed services provider, increasing our capacity to deliver consulting and implementation services to support clients’ digital transformation initiatives to our clients in EMEA; and
INSIGHT ENTERPRISES, INC.
•2022 - Acquired Hanu Software Solutions, Inc. and Hanu Software Solutions (India) Private Ltd. (collectively, "Hanu"), a global leading cloud technology services and solutions provider, which increased our capacity to provide cloud solutions to clients. Hanu also has a recruiting and development academy which expanded our technical expertise in India.
Our purpose is: “We build meaningful connections to help businesses run smarter.”purpose: We accelerate digital transformation by unlocking the power of people and technology. We live by our core values of Hunger, Hearthunger, heart and Harmony,harmony, which set the tone for our businessguide how we act as an organization and defineas a team, capturing who we are. are as a culture and reminding us of what we’ve promised to live up to every day.
Our core values are:
| • | | Hunger – Our insatiable desire to create new opportunities for our clients and our business is apparent in everything we do. |
| • | | Heart – We seek to impact the lives of the people we serve positively by always putting our clients, partners and teammates first. |
| • | | Harmony – We invite perspective, and we consistently celebrate each other’s unique contributions as we work together to bring the best solutions to our clients. |
Hunger – We are change agents, driven to improve every day.
Heart – We are teammates. We take care of each other, our clients and our communities.
Harmony – We are a team of individuals who seek out unique perspectives and value differences and diversity.
We believe that these values strengthen the overall Insight experience for our clients, partners and
teammates (weteammates. We refer to our customers as “clients,” our suppliers as “partners” and our employees as “teammates”
).
The worldwide total addressable market for
information technologyenterprise IT spend is forecasted to be
$3.7$4 trillion
annuallyby 2026 according to Gartner, a leading IT research and advisory company.
We believe our addressable market represents approximately $750 billion in annual sales and for the year ended December 31, 2022, our net sales of $10.4 billion represented approximately 1% of that highly diverse market. Based on our
peer analysis of
Gartner market data, we believe the top 10 most comparable global solution providers represent less than
10%20% of the
worldwide total addressable market. We believe our addressable worldwide market in the indirect sales IT channel represents approximately $612 billion in annual sales and for the year ended December 31, 2017, our net sales of $6.7 billion represented approximately 1% of that highly diverse market. We believe that we are well positioned in this highly fragmented global market with
sales locations in
2018 countries and
have the capabilities to provide clients with hardware, software provisioning and related services andour deep experience delivering IT solutions across the globe.
Our
Value PropositionAsStrategy
Our ambition is clear — we aspire to be the IT industry evolves,leading solutions integrator, setting the pace and defining a new category in our value propositionindustry. Building upon the strong foundation of our traditional technology business, we bring innovative and scalable solutions — a combination of hardware, software and services — that accelerate transformation and produce meaningful results for our clients.
To achieve our ambition, teammates are focused on our strategic objectives — to captivate clients, sell solutions, deliver differentiation, and champion our culture.
Captivate clients
Our primary goal is to captivate our clients,
continuesso they are our number-one priority. We aim to
evolve. The increased complexity acrossbecome the
technology ecosystem, combined with the continual emergence of new trends and offerings, has made it difficult for most clients to effectively manage their IT environments. We consult withpartner our clients
regardingcannot live without, by delivering exceptional value for their
IT hardware and software product and services needs anddigital transformation needs. We help our clients
define, architect, implementmake the complex simple and
managelook beyond the problems they are facing today to drive outcomes that energize future success. We help them modernize their
IT solutions.We are well positioned to participate inbusiness by offering them solutions that maximize the market as IT continues to transform. Our value drivers include:
Deep knowledge in client-relevant solution areas
History of adapting our business model to respond to new technology trends, including the cloud
Differentiated consulting, technology and managed services offerings
Ability to scale to serve clients of all sizesenable secure, end-to-end transformation solutions and across many verticalsservices.
Strong partner relationships with top market positions
Global footprint with local presence in key markets
Flexible capital structure to support future growth, including additional acquisitions4
We believe that Insight has a unique position in the market to gain profitable market share by offering Intelligent Technology Solutions that empower our clients to manage their IT environments so they can drive meaningful business outcomes today and transform their operations for tomorrow.
We believe that Insight’s unique advantages include:
Our global scale and coverage – we have the capabilities to serve clients across the globe with hardware, software provisioning and related services and with integrated technology solutions in multiple countries directly or through our partner network.
Our operational excellence and systems – we offer a broad selection of hardware and software products with access to billions of dollars in virtual inventory and efficient supply chain execution, as well as product fulfillment and logistics capabilities, management tools and technical expertise.
INSIGHT ENTERPRISES, INC.
Sell solutions
We are transforming our sales capabilities and aligning our incentives to focus on our solutions portfolio. We will continue to streamline our account coverage to match skills with client needs and propensity to buy services. We believe the key to our success is focusing on doing a finite number of things and doing them really well.
Deliver differentiation
We deliver differentiation through our unique solutions capabilities, exceptional technical talent and a compelling portfolio built on over 34 years of broad IT experience. Combined with thoughtful strategic acquisitions, differentiated expertise and deep partner relationships, we deliver an excellent client experience driving faster outcomes. Our software DNA – we understand complex licensing requirementssimple and have theknow-how to optimize our clients’ usage and compliance management through astrong portfolio of license consultingofferings and optimization services.
Our partner alignment– we have a multi-partner approachour robust roster of technical experts and have deep relationships with leading product manufacturers, software publishersindustry leaders help us deliver client value efficiently and distribution partners, as well as emerging cloud and other technology partners, to service our global portfolio of commercial and public sector clients with the integrated ITaccountability our clients expect.
Champion culture
We see our strong culture as a driver for growth. We are purpose-driven and values-led and are focused on delivering an exceptional client experience. We are building on this foundation, developing a culture of high performance, and continuing to push forward our culture of diversity and inclusion.
Solutions Expertise
We differentiate through comprehensive areas of solutions that make the most sense for their IT environments.
Our data center transformation skills– in support of our long-term strategy, in January 2017, we completed the acquisition of Datalink, a leading provider of IT servicesexpertise to meet market demand and enterprise data center solutions, adding deep technical expertise and complementary services offeringsdeliver meaningful client outcomes at scale. We tend to our internally developed solutions and increasing our addressable market opportunity in hybrid cloud and other high-growth data center categories.
Our next-generation tech skills – we quickly adapt to new technology trends in innovation, investing internally as well as through mergers and innovationacquisitions, to advance our technical capabilities. These areas of expertise, when combined and enhanced with our acquisitionservices, are how we drive digital transformation for our clients and are pivotal to our strategy of BlueMetalbecoming the leading solutions integrator.
Of our six areas of solutions expertise, our clients are currently prioritizing business outcomes that combine one or more of the following areas to drive their transformation:
1.Modern platforms/infrastructure: Adopting & building modern platforms from cloud (multicloud and hybrid) to data center to edge
INSIGHT ENTERPRISES, INC.
2.Cybersecurity: Automating and connecting those platforms securely (network, security, automation)
3.Data & Artificial Intelligence ("AI"): Innovating on top of platforms with strategic solutions delivered through reference architectures, and enhanced through our intellectual property
Insight drives significant impact across these foundational areas — which are part of our broader set of solutions expertise, that we believe are critical to our clients’ success and to our identity as a solutions integrator.
Modern Infrastructure – Architect and modernize multicloud and networking solutions to drive business transformation.
We architect and deliver modern infrastructure solutions, management, and support spanning cloud and data center platforms, modern networks, and edge technologies, to enable our clients’ businesses’ digital transformation.
Outcomes for our clients:
•A scalable infrastructure foundation for innovation.
•Increase workload agility, resiliency and flexibility.
•Improve visibility and control of data assets.
•Deliver better user and customer experiences.
•Enable purposeful digital transformation.
Cybersecurity – Mitigate risks and secure business assets.
We prioritize security in 2015, continued our evolution as thought leaders in emerging technologiesarchitecture design and deployment to cloud services and IT transformation. This way, clients can integrate security across platforms, business units and operations. We also help clients manage security initiatives that helpare required to protect their business.
Outcomes for our clients:
•Improve threat detection, containment and neutralization.
•Enhance visibility and context with fewer manual inputs.
•Minimize large scale security teams through simplified security management.
•Implement governance and maintain compliance.
•Better manage and mitigate organizational risk.
Data and AI – Leverage analytics and AI to transform business operations and user experiences.
We modernize data platforms and architectures and build data analytics and AI solutions that transform our clients’ businesses.business operations and user experiences.
Outcomes for our clients:
•Enable scalability at high speed.
•Increase visibility and data-driven decision-making.
•Optimize resources and costs via new operational efficiencies.
•Grow revenue and delight customers with new offerings.
•Improve competitive stance.
Modern Workplace – Create a productive, flexible and secure workplace.
Workplaces are changing — along with people’s need for seamless work experiences. Great companies know their people are the key factor — improving attraction and retention, providing great collaborative experiences through technology, leading through change and more.
INSIGHT ENTERPRISES, INC.
Outcomes for our clients:
•Elevate employee and user experiences.
•Increase return on workplace technology investments.
•Better protect users and business data to reduce risk.
•Boost productivity and mobile capabilities.
•Simplify IT lifecycle management.
•Enable and secure "work anywhere" operations in the hybrid work environment.
Modern Apps – Create new product experiences and transform legacy applications to drive increased business value.
The number of applications in use is growing exponentially — and using them to differentiate business identities, unlock new revenue streams and create great user experiences is critical. Clients need an experienced partner to help them migrate and modernize strategically.
Outcomes for our clients:
•Future-proof critical business applications.
•Increase innovation and organizational agility.
•Accelerate business growth and product sales.
•Optimize operations and increase productivity.
•Deliver differentiated customer experiences.
Intelligent Edge – Gather and utilize data in the most efficient way possible to enable real-time decision-making and affect pivotal outcomes.
Intelligent edge is where all of our capabilities come together. It is the combination of industry-based business outcomes, our intellectual property, our technology provider legacy, the ability to deploy tens of thousands of devices and build secure platforms. Our App developmentcapabilities andInternet-of-Things (“IoT”) expertise – we were recognized as Microsoft’s Worldwide Partner of the Year portfolio allow for IoTlarge-scale intelligent edge solutions.
Outcomes for our clients:
•Improve decision-making and business intelligence.
•Increase responsiveness to customer and market demands.
•Optimize operational processes and gain predictive capabilities.
•Create new revenue streams and drive differentiation.
•Scale and expand business operations to new areas.
Our services
Managed services - Managed Services integrates with a client’s operations and provides services ranging from reactive technical support to comprehensive 24/7 monitoring, management, and reporting as well as Mobile App Developmentservices designed to cover infrastructure security. We partner with clients to provide managed services that can increase service levels and IT efficiency, while simultaneously reducing costs. Examples of our managed services include managed storage, backup and recovery, managed cloud, network and compute, managed security, managed support and Insight Cloud Care.
Consulting services - Our consulting services help clients navigate the complexities of their IT ecosystems with confidence. Our technical experts and technology specialists are equipped with partner certifications, industry knowledge and deep expertise to guide clients along the way. Examples of our consulting services include providing guidance on data center transformation, cloud and workload alignment, security and disaster recovery, and IT optimization, automation and orchestration.
Hardware, Software and Lifecycle services – Our supply chain optimization tools and services are a differentiator for Insight. Clients face growing pressure on their IT budgets and increasing trends in eachoutsourcing of non-core functions are changing the past two yearsway clients approach procurement and combined with ourmanagement of core IT investments. We provide end-to-end
INSIGHT ENTERPRISES, INC.
global lifecycle services around hardware and software expertise, we are well-positioned to deliver holistic connected product and IoT solutions.
Our digital platform – we have customizable client portals, primarily in North America, which allow clients to streamline procurement and processes through a self-service online tool, drive standardization and optimize reconciliation. We also have abest-in-class digital marketing engine to bring scalable solutions to themid-market.
Our services solutions– we can scale to help organizations of all sizes and have well-developed services capabilities focused on four solutions areas: supply chain optimization, connected workforce, cloud and datacenter transformation and digital innovation, that represent the ways we help our clients withoptimize their IT return on investments.
•Hardware Life Cycle: We source, procure, stage, configure, integrate, test, deploy, refurbish and redeploy IT products spanning endpoints to infrastructure, regionally, or across the demands they face, as discussedglobe via the Insight footprint and our extensive engaged network of suppliers.
•Software Life Cycle: We offer software portfolio management, compliance, integration and adoption, on-premise or in more detail below.the cloud, regionally or across the globe.
Our Business Strategy
Our long-term strategy remains consistent
•Hardware Warranty and includes three components:Grow our core business;
GrowSoftware Maintenance: We offer warranty and maintenance services sales in our key solutions areas; and
Accelerate with cloud.
Grow our core business. We believe that our core business is strong and continues to present opportunities for growth. We believe that Insight is uniquely positioned to help our clients manage their business effectively today and also transform to meet their changing needs tomorrow. Our balanced portfolio of manufacturer and publisher brands, extensivee-commerce and logistics capabilities and differentiated services capabilities allow us to tailor our offerings based on the size and complexity of the needs of our clients. As a global provider of integrated solutions to business and government clients, we believe we are well-positioned relative to our competitors in several markets. Ourgo-to-market model leverages both centralized and local market sales and technical and support resources to efficiently serve and advise our clients.
In each of our geographic operating segments we are focused on driving our growth objectives by acquiring new clients and expanding our relationships with existing clients by increasing the typescovering an array of products and services they buy from us. In North America, we have a local market presence in key cities where we have invested in sales, technical and service delivery resources to drive growth with existing and new clients, particularly in the large account client space. In addition, we drive expansion in specific service/solution areas with key partners. We are also concentrating our efforts on growing our business withmid-sized and large clients in certain vertical markets, including federal government, state and local governments,K-12 education, healthcare and service providers, and have invested in both local market and centralized sales resources to drive these efforts. In EMEA, we are focused on increasing our share in themid-market and public sector by increasing sales of software and certain hardware categories across the business. We continue to expand our services capabilities in the region and to leverage strategic partner relationships and service-delivery vendors to bring software, cloud and collaboration solutions to our clients. Our APAC operating segment, which is largely comprised of software sales, is engaged in growing sales in themid-market and enterprise space and in the development of specialized software services, particularly in the areas of software license optimization and cloud.
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Grow services sales in our key solutions areas.The IT market has become more complex and clients are looking for solutions providers to help them navigate the rapidly changing environment. We believe that our core business plus our recent strategic acquisitions provide an integrated foundation that we can leverage to better serve our clients. We have identified four key solutions areas that capitalize on this foundation and include robust offerings to help our clients with the demands they face. Our services capabilities provide significantvalue-add to our clients, driving stronger client relationships and higher margins. Our key solutions areas are:
| • | | Supply Chain Optimization – We help our clientsinvest smarter so they can manage today and transform for the future. By optimizing their supply chain, we can help our clients maximize resources and do more today so they can invest in the future. |
| • | | Connected Workforce – We help our clients’ employeeswork smarter so they can manage and transform their businesses. By connecting their workforces, we help our clients create meaningful employee experiences that fuel productivity as well as attract and retain essential talent. |
| • | | Cloud and Data Center Transformation – We help our clientsrun workloads smarter so they can transform business. By defining and navigating cloud and data center platforms, we help our clients optimize and modernize their business. |
| • | | Digital Innovation – We help our clientsinnovate smarter so they can create meaningful connections with their customers. By innovating their digital business, we help our clients monetize existing offerings, create new revenue streams and drive differentiation across their customer experience. |
Accelerate with cloud.Private, public and hybrid cloud solutions provide flexible, reliable, secure and affordable solutions for delivering critical IT functions, such as email, data security, Infrastructurebe purchased as a Service (“IaaS”) and more. Cloud solutions have become more mainstream, and adoption continues to increase across markets and verticals. Key market imperatives in the adoption of cloud solutions are speed to market, flexibility, scalability and availability. We have invested in, and will continue to invest in, technical tools and resources to provide clients with the assessment, migration, integration and managed services required to simplify the cloud adoption decision, whether that decision results in a private, publicpoint solution or hybrid cloud environment.
We also continue to invest in our global cloud management platform, which serves as a marketplace for our clients to buy and manage their cloud subscriptions with options that enhance their Software as a Service (“SaaS”) and IaaS management capabilities.
Components of our cloud management platform include:
A focus on small tomedium-sized clients, providing them with the ability to learn, solve, buy, and manage cloud products and services via our online experience.
A similar online experience and capabilities for our larger enterprise clients with added IT as a Service Broker (ITaaSB) capabilities allowing larger IT organizations to centrally provide cloud offerings while maintaining the manageability and visibility they require.
Additionally, we have a strong global position in themanaged service provider and independent software vendor (ISV) market. Building on our existing capabilities in this market, we have developed a cloud portfolio for our service provider clients to resell to their customers, offering them revenue diversification with minimal investment. We also plan to expand our cloud management platform capabilities and deliver cloud portal platforms that providee-commerce and subscription management capabilities to our service provider clients.
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delivered by Insight.
Our offerings in North America and certain countries in EMEA and APAC include
a suite of IT hardware, software and services,
including cloud solutions. Our offerings in the remainder of our EMEA and APAC segments
areconsist largely
of software and certain software-related
services.services and cloud solutions. On a consolidated basis,
hardware, softwareproduct (hardware and software) and services represented approximately
58%, 32%86% and
10%, respectively, of our net sales in 2017. This compares to 54%, 37% and 9%14%, respectively, of our consolidated net sales in
2016,2022. This compares to 86% and
54%, 38% and 8%14%, respectively, of our consolidated net sales in
2015.2021 and 86% and 14%, respectively, of our consolidated net sales in 2020. On a consolidated basis, product (hardware and software) and services represented approximately 51% and 49%, respectively, of our gross profit in 2022. This compares to 51% and 49%, respectively, of our gross profit in 2021 and 52% and 48%, respectively, of our gross profit, in 2020. Additional detailed sales mix information by operating segment
including a discussion of changes in our classification of certain revenue streams during 2017, can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 and in Note
2019 to the Consolidated Financial Statements in Part II, Item 8 of this report.
Prior year results were reclassified to conform to the current year presentation, resulting in 3% of our consolidated net sales being reclassified from software to services in both 2016 and 2015. These reclassifications had no effect on consolidated total net sales.Services Solutions Offerings
We have developed solutions that integrate hardware, software and services to help businesses run smarter within our key solutions areas. Our core solutions include:
Supply Chain Optimization – Growing pressure on IT budgets and increasing trends in outsourcing ofnon-core functions are changing what clients choose to build versus buy. We provide outsourcing services our clients desire, including management of client infrastructure andend-user operations to drive IT return on investment.
| • | | Product Life Cycle: Source, procure, stage, configure, integrate, test, deploy and maintain IT products spanning endpoints to infrastructure. |
| • | | Infrastructure Management: 24x7 remote management of clients’ server/storage/network infrastructure through ourISO-certified Remote Network Operating Center (RNOC). |
Connected Workforce – The consumerization of IT, increase in the millennial population and proliferation of alternate work models is transforming the workplace. We provide our clients’ workforce with tools to enable and enhance employee productivity and retention.
| • | | Insight Managed Office: Desktop and notebook devices coupled with cloud-based productivity solutions, deployed through a modern, “over the air” deployment model, managed by Insight’s 24x7 Service Desk. In addition, we see growing demand for“Device-as-a-Service.” |
| • | | Insight Managed Mobility: Tablet and cellular-based devices, paired with cloud-based applications and Insight’s 24x7 Service Desk to deliver anend-to-end managed experience where clients can outsource their highly complex mobility environments to Insight in anas-a-service style model. |
| • | | Insight Managed Collaboration: Offerings that allow clients to outsource their highly complex voice, conferencing and collaboration/team applications, delivering cloud-based redeployment of modern technologies managed for our clients with both Insight’s onsite and remote Service Desk support professionals. |
| • | | Insight Managed Deployment: Service level agreement-based outsourcing of distributed devices and technology, or edge, deployment and support. This comprises multi-site deployments, coupled with dedicated, onsite desktop support technicians coupled with 24x7 Service Desk. |
Cloud and Data Center Transformation – Consumption-based models and technology convergence are reinventingdecades-old infrastructure business models. We optimize our clients’ public and private infrastructure to enable customer and workforce objectives best suited to their workload and business requirements.
| • | | Hybrid Cloud:On-premise converged infrastructure (private cloud) augmented byoff-premise public cloud integrated, managed and secured. |
| • | | Intelligent Network: Core WAN, LAN, wireless and security solutions to seamlessly connect Hybrid Cloud, Branch Infrastructure and end users. |
Digital Innovation – When interacting with their customers, our clients face growing digital engagement and a rapid shift toward social media. We help our clients leverage technology to better engage their customers to build loyalty and increase profitability.
| • | | Intelligent Endpoints: Digital signage, kiosk, tablet and smartphone endpoints integrated withoff-the-shelf software applications. |
| • | | Intelligent Applications: Custom-developed applications to enableclient-to-customer engagement. These applications are increasingly cloud-based and mobile-centric. |
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| • | | Modern Applications: Custom-developed mobile, cloud and IoT applications. Typically, these applications are specific to the client vertical market, e.g., healthcare, financial services or retail. |
We have invested in cloud, mobility, big data and security capabilities and expertise to enable our key solutions areas and continuously seek to identify client-relevant technology solutions.
Cloud. Cloud computing represents an evolution in the IT world. Cloud-based SaaS, whereby clients subscribe to software that is hosted either by the software publisher or a dedicated third-party hosting company, is prevalent in the Connected Workforce and Cloud and Data Center Transformation solutions highlighted above. In addition, public IaaS and converged infrastructure private cloud represent growing portions of Hybrid Cloud solutions. We help clients assess readiness, architect appropriate solutions and migrate to both public and private cloud infrastructures.
Mobility.Our clients must engage differently with their customers and fully engage their workforce whether they are at work, at home oron-the-go. We help clients do so through solutions starting with Insight Managed Mobility, anas-a-service like Enterprise Mobility Management (EMS) solution for employees, and modern customer-facing solutions, such as mobile Point of Sale (mPOS) and mobile commerce applications in the retail industry as well as mobile trading applications for brokerage customers in the financial services industry.
Big Data. Our clients are inundated with data that they struggle to interpret. We help turn this data into actionable insights with solutions such as weather-based predictive analytics to drive weekly marketing campaigns for consumer products and patient-based intake and health outcomes analysis to optimize nurse staffing. We expect the proliferation of sensors for IoT will fuel this data overload and drive further demand for these solutions.
Security. All of these solutions must be delivered without compromising customer, company or employee private information. We offer services for identity and access management,single-sign-on (SSO) and mobile-device-management (MDM) to protect end users. In addition, we provide network security and Security Incident Event Management (SIEM) solutions to secure our clients’ infrastructure.
Hardware Offerings
We offer products from hundreds of manufacturers, including such industry leaders as Cisco, HP Inc., Lenovo, Dell, Hewlett Packard Enterprise Company (“HPE”), EMC, Microsoft, NetApp, Apple and IBM. Our scale and purchasing power, combined with our efficient, high-volume and cost effective direct sales and marketing model, allow us to offer competitive prices. We believe that offering choices from multiple partners enables us to better serve our clients by providing a variety of product solutions to address their specific business needs.
In addition to our distribution facilities, we have “direct-ship” programs with many of our partners, including manufacturers and distributors, allowing us to expand our product offerings without increasing inventory, handling costs or inventory risk exposure. As a result, we are able to offer billions of dollars of products in virtual inventory in fulfilling our performance obligations to our clients. Convenience and product options among multiple brands are key competitive advantages compared to manufacturers’ direct selling programs, which are generally limited to their own brands and may not offer clients a complete orbest-in-class solution across all product categories.
Software Offerings
Our clients acquire software applications from us in the form of licensing agreements with software publishers or boxed products. We offer products from hundreds of publishers, including such industry leaders as Microsoft, Adobe, VMware, Symantec, McAfee, Citrix, IBM Software and Red Hat, as well as newer entrants, such as Box and 8x8.
As software publishers choose different models for implementing licensing agreements, businesses must evaluate the alternatives to ensure that they select the appropriate agreements and comply with the publishers’ licensing terms when purchasing and managing their software licenses. In addition to software provisioning, we offer holistic software solutions, including software licensing optimization and implementation consulting, to help our clients better understand their software needs, evaluate their existing software and provide options to optimize their assets.
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Our Information Technology Systems
We have committed significant resources to the IT systems that we own and use to manage our business and believe that our success is dependent upon our ability to provide prompt and efficient service to our clients based on the accuracy, quality and utilization of the information generated by our IT systems. Because these systems affect our ability to manage our sales, client service, partner relationships, and programs, distribution, inventories, and accounting systems and our voice and datainternal networks, we have built redundancy into certain systems, maintainsignificantly improved our system outage policiessecurity through investment in a highly skilled and procedurestenured cybersecurity team as well as implementation of some of the most up to date tools and have comprehensive data backup. processes available in the market to help harden and improve our cybersecurity defenses.
We are focused on driving improvements in sales productivity through upgradedincreased innovation and enhancements to our e-commerce and IT systems to support higher levelswith the goals of improved client satisfaction and attracting new client acquisition, as well as garnering efficiencies inclients, while increasing overall business efficiency.
In North America, EMEA and APAC we now use a common set of core IT applications to run our business.
We operate under a single, standardized IT system across North America and APAC and a separate, single IT system In 2021, we began consolidating EMEA onto the same core systems beginning with the United Kingdom. After the successful migration of our UK operations onto the global platform in all2021, the full migration of the remaining countries in our EMEA operations. We plan to migrate our EMEA operations to the same IT system usedEurope was completed in North America and APAC.
January 2022.
For a discussion of risks associated with our IT systems, see “Risk Factors
– Risks related to Our Technology, Data and Intellectual Property – Disruptions in our IT systems and voice and data networks could affect our ability to service our clients and cause us to incur additional expenses,” in Part I, Item 1A of this report.
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The IT
hardware, software and services industry is very fragmented and highly competitive. Our competition includes:
Direct marketers•Systems integrators and digital consultants such as ePlus, Presidio, World Wide Technology, EPAM, Perficient, Accenture, Atos and Capgemini;
•Solution providers, value-added resellers and direct marketers such as CDW, (North AmericaZones, Connection, SHI, Softchoice, Computacenter, Bechtle, SoftwareONE and United Kingdom), Systemax (Europe), Softchoice, Comparex, Connection, PCM, World Wide Technology, SHI, SoftwareONE, Computacenter, SCC, Bechtle, Cancom and Crayon;
National and regional resellers, including value-added resellers, specialty retailers, aggregators, distributors, and to a lesser extent, national computer retailers, computer superstores, Internet-only computer providers, consumer electronics and office supply superstores and mass merchandisers;
•Product manufacturers, such as Dell, HP Inc., IBM, Lenovo and HPE;
•Software and Cloud publishers and specialists, such as IBM,Red Hat, VMware, Crayon, Microsoft and Symantec;
Systems integrators, such as Compucom Systems, Inc.;
•National and global service providers, such as IBM Global Services and HP EnterpriseHPE Services; and
E-tailers,•Specialty retailers, aggregators, distributors and e-tailers, such as Amazon Web Services, (AWS),Best Buy for Business, Newegg Buy.com ande-Buyer Ebuyer (United Kingdom).
The competitive landscape in the industry is continually changing as various competitors expand their product and services offerings. In addition, emerging models such as cloud computing
and X as-a-service are creating new competitors and opportunities in
messaging,the shift to digital business such as: data analytics, edge computing, hybrid infrastructure,
security, collaborationmodern workplace, cybersecurity, and other
services offerings, and, asservice offerings. As with other areas, we compete
both with
solutions providers, systems integrators, value-added resellers,
hyperscale vendors and directly with
manufacturers, publishers,
or other service providersand manufacturer partners for many of these offerings.
Further, manyMany of our manufacturer and publisher partners are also our competitors, as many sell directly to business customers, particularly
largerlarge enterprise and corporate customers.
For a discussion of risks associated with the actions of our competitors, see “Risk Factors
– Risks related to Our Business, Operations and Industry – The IT hardware, software and services industry is intensely competitive, and actions of our competitors, including manufacturers and publishers of products we sell, can negatively affect our business,” in Part I, Item 1A of this report.
We partner with market leaders offering the top technology brands as well as emerging entrants in the marketplace. During 2017,2022, we purchased and resold products and software from approximately 5,400 over 6,000partners. Approximately 66%55% (based on dollar volume) of these purchases were directly from manufacturers or software publishers, with the balance purchased through distributors. Purchases from Microsoft and Techdata (a distributor)accounted for approximately 26%22% and 10%, respectively, of our aggregate purchases in 2017.2022. No other partner accounted for more than 10% of purchases in 2017.2022. Our top five partners as a group for 20172022 were Microsoft, Cisco Systems, Tech DataTechdata (a distributor), Ingram Micro (a distributor), Dell, and HP Inc.,Cisco Systems, and approximately 60% 55%of our total purchases during 20172022 came from this group of partners. Although brand names and individual products are important to our business, we believe that competitive sources of supply are available in substantially all of our product categories such that, with the exception of Microsoft, we are not dependent on any single partner for sourcing products.INSIGHT ENTERPRISES, INC.
During
2017,2022, sales of Microsoft
Dell and
Cisco SystemsDell products accounted for approximately
20%, 12%14% and 11%, respectively of our consolidated net sales. No other manufacturer’s
or publisher’s products accounted for more than 10% of our consolidated net sales in
2017.2022. Sales of product from our top five manufacturers/publishers as a group (Microsoft, Dell,
Lenovo, Cisco Systems,
and HP Inc.
and Lenovo)) accounted for approximately
59%50% of
Insight’sour consolidated net sales during
2017.2022.
We obtain incentives from certain product manufacturers, software publishers and distribution partners based typically upon theour volume of sales or purchases of their products and services. In other cases, such incentives may be in the form of participation in our partner programs, which may require specific services or activities with our clients, discounts, marketing funds, price protection or rebates. Manufacturers and publishers may also provide mailing lists, contacts or leads to us. We believe that these incentives (or partner funding) and other marketing
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assistance allow us to increase our marketing reach and strengthen our relationships with leading manufacturers and publishers.
We are focused on understanding our partners’ objectives and developing plans and programs to grow our mutual businesses. We have invested in our digital marketing capabilities over the past
twofive years.
TheseWe believe these digital marketing investments increase the effectiveness of our marketing campaigns and client interactions.
Our partners are taking notice, andWe consider that we are emerging as a leader in our industry
as we consistently outpace our competition in digital
marketing.marketing, striving to deliver an outstanding service experience to our clients. We implemented business intelligence tools that enable us to track performance in this area and demonstrate the return on our partners’ investments with us. We measure partner satisfaction regularly and hold quarterly business reviews with our largest partners to review business results,
from the prior quarter, discuss plans for the future and obtain feedback. Additionally, we host annual partner forums in North America, EMEA and APAC to articulate our plans for the upcoming year.
As we move into new service areas, we may become even more reliant on certain partner relationships. For a discussion of risks associated with our reliance on partners, see “Risk Factors
– Risks related to Our Business, Operations and Industry – We rely on our partners for product availability, competitive products to sell and marketing funds and purchasing incentives, which can change significantly in the amounts made available and the requirements year over year,” in Part I, Item 1A of this report.
Successful execution of our business strategy and strategic initiatives involves attracting, developing and retaining teammates who share our core values of hunger, heart and harmony. The experience, knowledge and dedication of our teammates help drive our operating results. Management regularly evaluates and enhances leadership training and development, teammate policies, procedures and benefits in order to maintain engaged teammates and drive client satisfaction.
Various ways that we attract, develop and retain qualified and motivated teammates include:
•Insight has continued to receive recognition as an employer of choice including as Forbes World’s Best Employers list (2022) - Insight ranked #95 overall, #12 for IT companies worldwide, #59 for Diversity (2022) and #62 for Veterans (2020); #22 for Europe Best Workplaces (2022); #3 for UK Best Workplaces (2021); #15 for Australia’s Best Places to Work (2021); #2 on Phoenix Best Places to Work – Phoenix Business Journal (2022); the Company achieved a perfect score on the Human Rights Campaign Foundation’s Corporate Equality Index; “Elite 8” on Achiever’s 50 Most Engaged Workplaces (2021); and #7 in the information technology services industry on the list of the Fortune World’s Most Admired Companies list (2021).
•Insight offers robust leadership training for teammate managers and aspiring leaders. Our training is centered around our Leadership Commitments where we enhance our leaders' skills: (1) Creating clarity; (2) Inspiring people; (3) Demonstrating thought leadership; and (4) Delivering results.
•An important part of the Company’s culture is its commitment to diversity and inclusion, which we’ve been recognized for. Insight supports seven teammate resource groups, which represent various diverse groups of teammates and boast 1,450+ active members.
•Our leaders carefully review and monitor our Teammate Pulse Survey results year over year and create action plans to increase teammate engagement.
•To support teammates and their families, a charitable foundation funded by the Company, its teammates and its partners provides financial support in crisis situations.
•Insight offers all teammates paid days off to either volunteer their time to charitable organizations in the communities where they live and work or to use for mental health days.
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As of December 31, 2017,2022, we employed 6,69713,448 teammates. Our teammates of whom 2,512by operating segment were engaged in sales related activities, 2,024 were engaged in management, support services and administration activities, 2,007 were skilled, certified consulting and service delivery professionals and 154 were engaged in distribution activities. as follows:
| | | | | | | | |
| Operating Segment | | Number of Teammates |
| North America | | 10,931 |
| EMEA | | 2,001 |
| APAC | | 516 |
Our teammates in the United States are not represented by a labor union. Our
workforceswork forces in certain foreign countries, such as Germany, have worker representative committees or work councils with which we maintain strong relationships. We believe our relations with our teammates are good, and we have never experienced a labor related work stoppage.
Our teammates by job function were as follows:
| | | | | | | | |
| Job Function | | Number of Teammates |
| Sales | | 3,765 |
| Skilled, certified consulting and service delivery professionals | | 5,774 |
| Total sales and client facing teammates | | 9,539 |
| Management, support services and administration | | 3,473 |
| Distribution | | 436 |
For a discussion of risks associated with our dependence on certain personnel, including sales personnel, see “Risk Factors –
General Risk Factors – We depend on certain key personnel,” in Part I, Item 1A of this report.
We experience some seasonal trends in our
sales of IT hardware, software and services.net sales. For example:
•software sales are typically higher in our second and fourth quarters, 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 the first quarter;
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•sales to the federal government in the United States are often stronger in our third quarter, while sales in the state and local government and education markets are stronger in our second quarter; and
•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 sales and profitability are expected to be higher in the second and fourth quarters of the year.
The majority of our backlog historically has been and continues to be open cancelable purchase
orders.orders; however, we have not experienced significant cancellations historically. Our backlog has fluctuated significantly in the past year, primarily due to the mix of products available and our client's responses to supply chain constraints. Continuing supply chain constraints were not fully alleviated in 2022 and we expect our elevated backlog in certain categories, particularly data center and infrastructure, exiting the fourth quarter of 2022 may benefit the Company's financial results in the first half of 2023. We do not believe that backlog as of any particular date is predictive of future results.
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Our Intellectual Property
We do not maintain a traditional research and development group, but we
do develop and seek to protect a rangerecognize the importance of intellectual property
and its ability to differentiate us from our competitors. As part of our business, we provide value to clients based, in part, on our technical innovations, methodologies, know-how, and other reusable proprietary assets that we protect through different forms of intellectual property protection, including trademarks,
service marks,patents, copyrights,
domain name rights,and trade
dress,secrets in the United States and select foreign jurisdictions where we believe it is appropriate to seek such legal protection. We also seek to maintain our trade secrets and
similar intellectual property, relying for such protection on applicable statutesconfidential information by non-disclosure policies and
common law rights, trade-secret protection and confidentiality and license agreements,
as applicable, with teammates, clients, partners, and
others to protectother third parties. There can be no assurance, however, that the rights obtained can be successfully enforced against infringers in every jurisdiction. Although we believe the protection afforded by our
intellectual property rights.trademarks, patents, copyrights and trade secrets has value, the rapidly changing technology in our industry and uncertainties in the legal process make our future success dependent primarily on the innovative skills, technological expertise, and management capabilities of our teammates. Our
principal trademarkInsight brand is a
valuable intangible asset that is protected using common law and registered
mark, and wetrademark rights. We also license
certain of our
proprietary intellectual property rights to third parties. We have registered
a number ofour key domain names
applied for registration of other marksand brands in the United States and in certain
internationalrelevant foreign jurisdictions, and, from time to time, filed patent
applications. We believeapplications for our
trademarks and service marks, in particular, have significant value,qualifying technical solutions. Our intellectual property assets are important to us, and we continue to invest in
thetheir promotion
of our trademarks and
service marks and in our protection of them.protection.
For a discussion of risks associated with our intellectual property, see “Risk Factors – We may not be able to protect our intellectual property adequately, and we may be subject to intellectual property infringement claims,” in Part I, Item 1A of this report.
Information about our Executive Officers
The following are our current executive officers:
Glynis A. Bryan, Chief Financial Officer, Age 64
Ms. Bryan joined Insight in December 2007 as our Chief Financial Officer. Prior to joining Insight, Ms. Bryan served as Executive Vice President and Chief Financial Officer at Swift Transportation Co., Inc. from April 2005 to May 2007. Prior to joining Swift, Ms. Bryan served as Chief Financial Officer at APL Logistics in Oakland, California and in various finance roles at Ryder System, Inc., including Chief Financial Officer of Ryder’s largest business unit, Ryder Transportation Services. Ms. Bryan is a member of the board of directors and the audit committee of Pentair, Ltd., a diversified industrial manufacturing company and of Pinnacle West Capital Corporation, a public utility holding company. In January 2018, she was appointed to the Economic Advisory Council for the Federal Reserve Bank of San Francisco.
Dee Burger, President North America, Age 53
Mr. Burger joined Insight in May 2022 as President of the North America business. Prior to joining Insight, Mr. Burger worked at Capgemini, a global leader in consulting, technology services and digital transformation, for 29 years in a diverse range of roles. His responsibilities encompassed leading integration of mergers and acquisitions, digital and cloud solutions, business applications, consulting, strategy, and transformation. Most recently, he led Capgemini's global business lines in the North America market, with prior leadership roles spanning business services and engineering, U.S. strategy and portfolio, consulting, and innovation and digital services.
Samuel C. Cowley, Senior Vice President, General Counsel and Secretary, Age 62
Mr. Cowley joined Insight in June 2016 as our Senior Vice President and General Counsel. Prior to joining Insight, Mr. Cowley served as General Counsel and Vice President, Business Development of Prestige Brands Holdings, Inc., a company that markets and distributes over-the-counter healthcare products, from February 2012 to June 2016. He previously served as Executive Vice President, Business Development and General Counsel of Matrixx Initiatives, Inc. and
INSIGHT ENTERPRISES, INC.
Executive Vice President and General Counsel of Swift Transportation Co., Inc. Prior to that, he practiced law in the business and finance groups with the law firms of Snell & Wilmer and Reid & Priest.
Rachael A. Crump, Principal Accounting Officer and Global Corporate Controller, Age 47
Ms. Crump joined Insight in December 2016 as Vice President of Finance, Controller – North America and was appointed Principal Accounting Officer and Global Corporate Controller in September 2018. Ms. Crump is a Certified Public Accountant. She began her career in public accounting in 1997 with Ernst & Young LLP. Ms. Crump has held controller positions with several multinational companies in the software, medical services and semiconductor industries. Prior to joining Insight, Ms. Crump served as the Senior Director Controller, Global Accounting at Amkor Technology, Inc., a semiconductor product packaging and test services provider, from 2006 to 2016.
Adrian Gregory, President – Insight EMEA, Age 49
Mr. Gregory joined Insight in January 2023 as EMEA President. Prior to joining the Company, he served as CEO for North Europe and APAC at Atos, an IT services and consulting company from February 2022. Mr. Gregory spent ten years in Executive positions at Atos, including serving as Senior Executive Vice President, Global Head of Financial Services & Insurance, where he led the integration of Atos Syntel in India and served as CEO of Atos UK and Ireland. Prior to Atos, he held roles at HP and Fujitsu.
James A. Morgado, Senior Vice President of Finance, Age 50
Mr. Morgado joined Insight in January 2022 as Senior Vice President of Finance. For the previous four years, he served as the Vice President of Finance for Synopsys, Inc., an enterprise software engineering company focused on electronic design automation, where he was responsible for Corporate Planning, FP&A, Treasury, Procurement and Supply Chain Finance. Prior to Synopsys, Mr. Morgado worked for Juniper Networks, Inc. in positions of escalating responsibility within Finance.
Joyce A. Mullen, President and Chief Executive Officer, Age 60
Ms. Mullen was appointed President and Chief Executive Officer and a director of Insight effective January 1, 2022. Ms. Mullen joined Insight in October 2020 as our President of the North America Region. Prior to joining Insight, Ms. Mullen spent 21 years at Dell Technologies, a technology company, in a variety of sales, service delivery, and IT solutions roles. Ms. Mullen also serves on the Board of The Toro Company (NYSE: TTC).
Sumana Nallapati, Chief Information Officer, Age 48
Ms. Nallapati joined Insight in April 2022 as Chief Information Officer. Prior to joining Insight, from January 2019 to May 2021 Ms. Nallapati served as chief digital officer at Dish Network, a satellite television company, and from June 2021 to April 2022 as Senior Vice President and chief digital officer at Everbridge, a software company. Ms. Nallapati was secretary of technology and chief information officer for the State of Colorado from 2014 to 2018.
Jennifer Vasin, Chief Human Resources Officer, Age 48
Ms. Vasin joined Insight in March 2002. She was named Chief Human Resources Officer in February 2022. Prior to that, Ms. Vasin was Senior Vice President, Human Resources from 2019 to 2022. Before joining Insight, Ms. Vasin led the HR team at Calence, a professional services
INSIGHT ENTERPRISES, INC.
consulting firm. She also worked in the airline industry in a variety of roles, including human resources leadership positions.
Our annual report on Form
10-K, quarterly reports on Form
10-Q, current reports on Form
8-K and amendments to such reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
proxy statements and the reports filed pursuant to Section 16(a) of the Exchange Act are available free of charge on our web site at www.insight.com, as soon as reasonably practicable after we electronically file them with, or furnish them to, the
Securities and Exchange Commission.SEC. The information contained on our web site is not included as a part of, or incorporated by reference into, this Annual Report on Form
10-K.
The SEC also maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.
Item 1A.Risk Factors
Risks Related to Our Business, Operations and Industry
The IT hardware, software and services industry is intensely competitive, and actions of our competitors, including manufacturers and publishers of products we sell, can negatively affect our business.Competition in the industry is based on price, product availability, speed of delivery, credit availability, quality and breadth of product lines, and, increasingly, on the ability to provide services and tailor specific solutions to meet client needs. Many of our manufacturer and publisher partners are also our competitors, as many sell directly to business customers, particularly largerlarge enterprise and corporate customers. In addition to the manufacturers and publishers of products we sell, we compete with a large number and wide variety of providers and resellers of IT hardware, software and services. We believe our industry will see further consolidation as product resellers and direct marketers combine operations or acquire or merge with other resellers, service providers and direct marketers to increase efficiency, service capabilities and market share. Moreover, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to enhance their product and service offerings. Accordingly, it is possible that new competitors or alliances among competitors may emerge and acquire significant market share.INSIGHT ENTERPRISES, INC.
The competitive landscape in which we operate continues to change as new technologies are developed. While innovation helps our business as it creates new offerings for us to sell, it can also disrupt our business model and create new and stronger competitors. For instance, while cloud-based solutions present an opportunity for us
and make up a significant part of our business and future, cloud-based solutions and technologies
that deliver technology solutionsas-a-servicedeveloped by manufacturer and publisher partners could
increase the amount of salesbe sold directly to customers rather than
throughutilizing solutions providers like us, or
such partners could
otherwise reduce the amount of hardware or software we sell, leading to a reduction in our sales and/or profitability. Accordingly, we are dependent on continued innovations by our current vendor partners and our ability to partner with new and emerging technology providers.
Generally, pricing competition is very aggressive in the industry, and we expect pricing pressures to continue. There can be no assurance that we will be able to negotiate prices as favorable as those negotiated by our competitors or that we will be able to offset the effects of price reductions with an increase in the number of clients, higher net sales, cost reductions greateror higher sales of services, which are typically at higher gross margins, or otherwise. Price reductions by our competitors that we either cannot or choose not to match could result in an erosion of our market share and/or reduced sales or, to the extent we match such reductions, could result in
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reduced operating margins or inventory impairment charges, any of which could have a material adverse effect on our business, financial condition and results of operations.
Some of our competitors in each of our operating segments may have greater technical, marketing and other resources than we do. In addition, some of these competitors may be able to respond more quickly to new or changing opportunities, technologies and client requirements. Many current and potential competitors also may have greater name recognition and engage in more extensive promotional activities, offer more attractive terms to their customers and adopt more aggressive pricing policies than we do. Additionally, some of our competitors have higher margins and/or lower operating cost structures, allowing them to price more aggressively. There can be no assurance that we will be able to compete effectively with current or future competitors or that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations.
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. We acquire products for resale both directly from manufacturers and publishers and indirectly through distributors, and the loss of a significant partner relationship could cause a disruption in the availability of products to us. ThereWe typically do not have long-term contracts with our vendor partners. As such, many of these arrangements with partners are easily terminable, and there can be no assurance that manufacturers and publishers will continue to sell or will not limit or curtail the availability of their product to resellers like us. The loss of, or change in business relationship with, any of our key vendor partners could negatively impact our business. In addition, certain manufacturers, publishers and distributors provide us with substantial incentives in the form of rebates, marketing funds
and other investments, purchasing incentives, early payment discounts, referral fees and price protections (collectively, “partner funding”). Partner funding is used to offset, among other things, inventory costs, costs of goods sold, marketing costs and other operating expenses. Certain of these funds are based on our volume of sales or purchases, growth rate of net sales,
increases in client usage, or purchases and marketing programs. If we do not meet the goals of these programs or if we are not in compliance with the terms of these programs, there could be a material negative effect on the amount of incentives offered or paid to us by manufacturers and publishers. We
continue toregularly experience
adverse partner funding program changes that reduce the incentives many partners make available to us and that change the requirements for earning such incentives. If we are unable to react timely to remediate and
effectively respond to these changes in
the partner funding programs of publishers and manufacturers, including the elimination of, or significant reductions in,
partner funding for some of the activities for which we have been compensated in the past, the changes could have a material adverse effect on our business, financial condition and results of operations. This is especially true in connection with the incentive programs of our largest partners: Microsoft, Dell, Cisco Systems, HP Inc. and Lenovo. There can be no assurance that we will continue to receive such incentives in the future.
We may not be able to keep pace with rapidly evolving technological advances and the evolving competitive marketplace in which we sell our service offerings. Our success depends on our ability to continue to develop and implement services and solutions that anticipate and respond to rapid and continuing changes in technology and market demand to serve the needs of our clients. For example, cloud, security, and digital-related solutions are continuously evolving, and there is rapid development and technological evolution in areas such as IoT, edge-computing, computer vision, advanced machine learning and AI, automation, augmented reality, blockchain and as-a-service solutions. If we do not invest sufficiently in new technologies, successfully adapt to industry developments and evolving client demand at sufficient speed and scale, we may be unable to develop or maintain a competitive advantage in the market
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and execute on our growth strategy and initiatives, which could have a material adverse effect on our business.
General economic and political conditions, including unfavorable conditions in a particular region, business or industry sector, may lead our clients to delay or forgo investments in IT hardware, software and services.Weak economic conditions generally or any broad-based reduction in IT spending, including as a result of the COVID-19 pandemic, would adversely affect our business, operating results and financial condition. A prolonged slowdown in the global economy, including the possibility of recession or financial market instability or similar crisis, or in a particular region or business or industry sector, or the tightening of credit markets, could cause our clients to have difficulty accessing capital and credit sources, delay contractual payments, or delay or forgo decisions to upgrade or add to their existing IT environments, license new software or purchase products or services (particularly with respect to discretionary spending for hardware, software and services). Such events could have a material adverse effect on our business, financial condition and results of operations. Economic or industry downturns could result in longer payment cycles, increased collection costs and defaults in excess of our expectations. A significant deterioration in our ability to collect on accounts receivable could also impact the cost or availability of financing under our accounts receivable securitization program.
Our sales to public sector clients are also impacted by government spending policies, government shutdowns, budget priorities and revenue levels. An adverse change in government spending policies (including budget cuts at the federal, state and local level), budget priorities or revenue levels could cause our public sector clients to reduce their purchases or to terminate or not renew their contracts with us. These possible actions or the adoption of new or modified procurement regulations or practices could have a material adverse effect on our business, financial position and results of operations.
Worldwide economic conditions and market volatility as a result of political leadership in certain countries and other disruptions to global and regional economies and markets, including continuing increases in inflation and interest rates, the possibility of recession, or financial market instability, may impact future business activities.External factors, such as potential terrorist attacks, acts of war, geopolitical and social turmoil or epidemics and other similar outbreaks in many parts of the world, could prevent or hinder our ability to do business, increase our costs and negatively affect our stock price. More generally, these geopolitical, social and economic conditions could result in increased volatility in the United States and worldwide in financial markets and in the economy, as well as other adverse impacts. For example, on February 24, 2022, Russian forces launched significant military actions against Ukraine, and sustained conflict and disruption in the region remains ongoing. Potential impacts related to the conflict include further market disruptions, including significant volatility in commodity prices, credit and capital markets, supply chain and logistics disruptions, adverse global economic conditions resulting from escalating geopolitical tensions, volatility and fluctuations in foreign currency exchange rates and interest rates, inflationary pressures on raw materials and heightened cybersecurity threats, all of which could adversely impact our business, particularly our European operations.
Political developments, economic instability or natural disasters impacting international trade, including continued uncertainty surrounding the Referendum on the United Kingdom’s Membership in the European Union (“EU”) (referred to as “Brexit”) and, political tensions, trade disputes and increased tariffs, particularly between the United States and China, may also negatively impact markets and cause weaker macroeconomic conditions or drive sentiment that weakens demand for our products and services. Potential adverse consequences of Brexit such as global market uncertainty and increased regulatory complexities could have a negative impact on our business, financial condition and results of operations.
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Changes in the IT industry and/or rapid changes in technology may reduce demand for the IT hardware, software and services we sell or change who makes purchasing decisions for IT hardware, software and services. Our results of operations are influenced by a variety of factors, including the condition of the IT industry, shifts in demand for, or availability of, IT hardware, software, peripherals and services, and industry innovation and the introduction of new products.products and technologies. The IT industry is characterized by rapid technological change and the frequent introduction of new products and changing delivery channels and models, which can decrease demand for current products and services and can disrupt purchasing patterns. If we fail to react in a timely manner to such changes, we may experience lower sales and, with respect to hardware, as has occurred we may have to record write-downs of obsolete inventory. In addition, in order to satisfy client demand, protect ourselves against product shortages, obtain greater purchasing discounts and react to changes in original equipment manufacturers’ terms and conditions, we may decide to carry inventory of products that may have limited or no return privileges. There can be no assurance that we will be able to avoid losses related to inventory obsolescence on these products. Additionally, if purchasing power within our clients shifts from centralized procurement functions to business units or individual end users and we are unable to react timely to any such changes, these shifts in purchasing power could have a material adverse effect on our business, financial conditions and results of operations.INSIGHT ENTERPRISES, INC.
The cloud and
“as-a-service” “as-a-service” models are transforming the IT market and introducing new products, services and competitors to the market. In many cases, these new distribution models allow enterprises to obtain the benefits of commercially licensed, internally operated software with less complexity and lower initial
set-up, operational and licensing costs, which increases competition for us. There can be no assurance that we will be able to adapt to, or compete effectively with, current or future distribution channels or competitors or that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations.
The integration and operation of acquired businesses may disrupt
Failure to provide high quality services to our business and create additional expenses, and we may not achieve the anticipated benefits of the acquisitions.Integration of an acquired business involves numerous risks, including assimilation of operations of the acquired business and difficulties in the convergence of IT systems, the diversion of management’s attention from other business concerns, risks of entering markets in which we have had no or only limited direct experience, assumption of unknown or unquantifiable liabilities, the potential loss of key teammates and/or clients difficulties in completing strategic initiatives already underway in the acquired company, and unfamiliarity with partners of the acquired company, each of which could have a material adverse effect onadversely affect our reputation, brand, business, results of operations or cash flows. Our services include professional, managed, configuration and financial condition. The continued integration activitiespartner services as well as warranties. In addition, we deliver and manage mission critical software, systems and network solutions for our clients. We also offer certain services, such as implementation and installation services and repair services, to our clients through various third party service providers engaged to perform these services on our behalf. If we or our third party service providers fail to provide high quality services to our clients or such services result in an unplanned disruption of the acquiredour clients' businesses, intothis could, among other things, result in legal claims and proceedings and liability for us. As we expand our business is difficultservices and time consuming,solutions offerings and provide increasingly complex services and solutions, we may be unableexposed to achieve expected synergiesadditional operational, regulatory and operating efficiencies overother risks. We could also incur liability for failure to comply with the long term. We cannot assure that these risks or other unforeseen factors will not offset the intended benefitsrules and regulations applicable to new services and solutions we provide to our clients. The occurrence of any of the acquisitions, in wholeaforementioned could adversely affect our reputation, brand, business, results of operations or cash flows.
We are exposed to accounts receivable risks. We extend credit to our clients for a significant portion of our net sales, typically on 30-day payment terms. We are subject to the risk that our clients may not pay for the products and services they have purchased, or may pay at a slower rate than we have historically experienced, the risk of which is heightened during periods of economic downturn or uncertainty or, in part.Our future operating results may fluctuate significantly. Our operating results are highly dependent upon our levelthe case of gross profit as a percentagepublic sector clients, during periods of net sales, which fluctuates due to numerous factors, including changes in prices from partners, changes in the amount and timing of partner funding, volumes of purchases, changes in client mix, management of our cash conversion cycle, the relative mixbudget constraints.
We rely on independent shipping companies for delivery of products and are subject to price increases or service interruptions from these carriers. We generally ship hardware products to our clients by FedEx, United Parcel Service and other commercial delivery services sold duringand invoice clients for delivery charges. If we are unable to pass on to our clients current costs and future increases in the period, general competitive conditions, and strategic product andcost of commercial delivery services, pricing and purchasing actions. Asour profitability could be adversely impacted. Additionally, strikes, inclement weather, natural disasters or other service interruptions, including as a result of significant price competition and our higher concentration of large enterprise clients, our gross margins are low, and we expect them to continue to be low in the future. Increased competition arising from industry consolidation and low demand for certain IT products and services may hinderCOVID-19 pandemic, sustained by such shippers could
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adversely impact our ability to
maintain or improve our gross margins. These low gross margins magnify the impact of variations in revenue and operating costsdeliver products on
our operating results. In addition, our expense levels are based, in part, on anticipated net sales and the anticipated amount and timing of partner funding, and a
portion of our operating expenses is relatively fixed. Therefore, we may not be able to reduce spending quickly enough to compensate for any unexpected net sales shortfall, and we may not be able to reduce our operating expenses as a percentage of revenue to mitigate any further reductions in gross margins in the future. If we cannot proportionately decrease our cost structure, our business, financial condition and results of operationstimely basis. Such events could
suffer. In addition, a reduction in the amount of credit granted to us by our partners could increase our need for and cost of working capital and have a material adverse effect on our business, financial condition and results of operations.
There are risks associated with our international operations that are different than the risks associated with our operations in the United States, and our exposure to the risks of a global market could hinder our ability to maintain and expand international operations.Outside of the United States, we have operation centers in Australia, Canada, France, Germany, India, the Netherlands, the Philippines and the United Kingdom, as well as sales offices throughout EMEA and APAC. In the regions in which we do not currently have a physical presence, we serve our clients through strategic relationships. In implementing our international strategy, we may face barriers to entry and competition from local companies and other companies that already have established global businesses, as well as the risks generally associated with conducting business internationally.
The success and profitability of international operations are subject to numerous risks and uncertainties, many of which are outside of our control, such as:
•political or economic instability;instability, including the possibility of recession or financial market instability, or acts of war, such as the Russian invasion of Ukraine and its regional and global ramifications discussed above;
INSIGHT ENTERPRISES, INC.
•changes in governmental regulation or taxation (foreign and domestic);
•currency exchange fluctuations;
•changes in import/export laws, regulations, customs, duties and customs and dutiestariffs (foreign and domestic);
•trade restrictions (foreign and domestic);
•difficulties of conducting business, managing operations, and costs of staffing in certain foreign countries;
•work stoppages or other changes in labor conditions;
•taxes and other restrictions on repatriating foreign profits back to the United States;
•extended payment terms;
•seasonal reductions in business activity in some parts of the world; and
•natural disasters, terrorism, civil unrest, public health concerns (including health epidemics or outbreaks of communicable diseases such as the COVID-19 pandemic) and other geopolitical uncertainties.
In addition, changes in policies and/or laws of the United States or foreign governments, including data privacy restrictions
such as the General Data Protection Regulation (“GDPR”) resulting in, among other changes, higher taxation, tariffs or similar protectionist laws, currency conversion limitations, limitations on business operations, or the nationalization of private enterprises could reduce the anticipated benefits of international operations and could have a material adverse effect on our business, financial condition and results of operations.
We have currency exposure arising from both sales and purchases denominated in foreign currencies, including intercompany transactions outside the United States, and we currently conduct
only limited hedging activities.
International operations also expose us to currency fluctuations as we translate the financial statements of our foreign operations to the U.S. dollar, which has been very strong in recent years in foreign currency exchange rates and which has adversely impacted our results of operations and cash flows from our operations in EMEA. In addition, some currencies may be subject to limitations on conversion into other currencies, which can limit the ability to otherwise react to rapid foreign currency devaluations. We cannot predict with precision the effect of future exchange-rate fluctuations, and significant rate fluctuations could have a material adverse effect on our business, financial condition and results of operations.
International operations also expose us
The interruption of the flow of products from our suppliers has and could continue to currency fluctuationsdisrupt our supply chain. Our business depends on the timely supply of products in order to meet the demands of our clients. Manufacturing interruption or delays, including as we translatea
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result of the financial
statementsinstability or bankruptcy of
manufacturer, labor and supply shortages, significant labor disputes such as strikes, natural disasters (which may increase in number or severity as a result of climate change), political or social unrest, pandemics (such as COVID-19) or other public health crises or other adverse occurrences affecting our
foreign operationssuppliers' facilities, could disrupt our supply chain. We have experienced and could continue to
U.S. dollars.General economic conditions, including unfavorable economic conditions inexperience product constraints due to the failure of suppliers to accurately forecast demand, or to manufacture sufficient quantities of product to meet demand (including as a particular region, business or industry sector, may lead our clients to delay or forgo investments in IT hardware, software and services. Weak economic conditions generally or any broad-based reduction in IT spendingresult of shortages of product components), among other reasons.
The COVID-19 global pandemic has adversely affectsimpacted our business operatingand, if it reemerges in severity in the future, may further adversely impact, our business, results of operations and financial condition. A prolonged slowdown inThe widespread outbreak of any other illnesses or communicable diseases could also adversely affect our business, results of operations and financial condition.
In general, the
occurrence of regional epidemics or a global
economy or similar crisis, or in a particular region or business or industry sector, or tightening of credit markets, could causepandemic, such as COVID-19, may adversely affect our
clients to have difficulty accessing capital and credit sources, delay contractual payments, or delay or forgo decisions to upgrade or add to their existing IT environments, license new software or purchase products or services (particularly with respect to discretionary spending for hardware, software and services). Such events could have a material adverse effect on our business,operations, financial condition, and results of operations.
Economic or industry downturns could result in longer payment cycles, increased collection costs and defaults in excess of our expectations. A significant deterioration in our ability to collect on accounts receivable could also impact the cost or availability of financing under our accounts receivable securitization program.Our sales to our public sector customers are also impacted by government spending policies, budget priorities and revenue levels. An adverse change
The COVID-19 outbreak resulted in government spending policies (including budget cuts atauthorities around the federal, state and local level), budget priorities or revenue levels could cause our public sector customersworld implementing various measures to try to reduce their purchasesthe spread of COVID-19, such as travel bans and restrictions, quarantines, "shelter-in-place," "stay-at-home," total lock-down orders, business limitations or shutdowns and similar orders. As a result, the COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and workforce participation, and initially created significant volatility and disruption of financial markets. 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 terminatereimplement 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 not renew their contracts with us. These possible actions or the adoption of new or modified procurement regulations or practices could have a material adverse effectagain reimplemented in responses to surges in COVID-19 cases.
The COVID-19 pandemic has adversely impacted our business
financial position and,
results of operations.In addition, there continues to be substantial uncertainty regarding the impact of the Referendum on the United Kingdom’s Membershipif it reemerges in severity in the European Union (“EU”) (referred to as “Brexit”), advising for the exit of the United Kingdom from the EU. Potential adverse consequences of Brexit such as global market uncertainty, volatility in currency exchange rates, greater restrictions on imports and exports between the United Kingdom and EU countries and increased regulatory complexities could have a negativefuture, may further adversely impact, on our business, financial condition and results of operations.
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The acquisition of Datalink has increased our outstanding debt and interest expense and decreased the availability under our financing facilities, all of which could have a material adverse effect on our results of operations and financial condition.To fund We observed a pronounced impact of COVID-19 on our acquisition2020 financial results when compared to internal expectations and minimal negative impact on our 2021 and 2022 financial results. However, prolonged supply constraints stemming from shortages of Datalinkchips and displays resulted in January 2017, we increasedsustained elevated bookings coming into and throughout the first half of 2022. While supply constraints for certain products, such as devices, have eased limitations on other products, such as infrastructure products, remain. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview – COVID-19 and Supply Chain Constraints Update” for additional information.
Additionally, our borrowings underbusiness operations, financial performance and results of operations have been and could be further adversely impacted in a number of ways, which may include, but are not limited to, the following:
•disruptions to our senior revolving credit facilityoperations, including closures of our offices and facilities; restrictions on our operations and sales, marketing and distribution efforts; and interruptions to our other important business activities;
•reduced demand for our products and services due to disruptions to the businesses and operations of our clients;
•interruptions, availability or delays in global shipping to transport our products;
•disruptions, slowdowns or stoppages in the formsupply chain for our products;
•limitations on employee resources and availability, including due to sickness, government restrictions, labor supply shortages, the desire of an incremental Term Loan A. These additional borrowings will have employees to avoid contact with large groups of people or mass transit disruptions;
•the effectability of increasing our 2018 interest expenseclients to pay for our products, services and require escalating amortization paymentssolutions;
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•a continuation or worsening of general economic conditions, including increased inflation;
•the willingness of clients in the travel, hospitality, retail and other industries significantly impacted by the pandemic to continue with current and expected projects and initiate new projects;
•a balloon paymentfluctuation in 2021. Additionally, our financing facilities haveforeign currency exchange rates or interest rates, that vary based onwhich could result from market conditions and on our leverage ratio, which increases our exposure to interest rate fluctuations and may result in greater interest expense than we have forecasted.Our financing facilities contain various covenants that we must comply with in order to avoid uncertainties;
•an occurrence of an event of default. The covenants include limitations on the payment of dividends and the requirement that we comply with maximum leverage and minimum fixed charge ratio requirements, comply with a minimum receivables requirement and meet monthly, quarterly and annual reporting requirements. Our ability to maintain compliance with our financial covenants and to make scheduled payments on our financing facilities depends on our financial and operating performance. If we were unable to maintain compliance or to repay the borrowed amounts, the lenders under our financing facilities could declare an event of default and demand payment within a specified period of time.Breachesincrease in the security of our electronic and other confidential informationcost or the difficulty to obtain debt or equity financing, which could materially adversely affect our financial condition or our ability to fund operations or future investment opportunities;
•changes to the carrying value of our goodwill and intangible assets; and
•an increase in regulatory restrictions or continued market volatility, which could hinder our ability to execute strategic business activities, including acquisitions, as well as negatively impact our stock price.
The potential effects of the COVID-19 pandemic may also impact other factors discussed in this “Risk Factors” section. The ultimate extent of the impact of the COVID-19 pandemic on our business operations, financial performance and results of operations.Weoperations, 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 dependent upon automated information technology processes. Privacy, security,highly uncertain, continuously evolving and compliance concerns have continuedcannot 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 technology has evolvedincreased inflation; supply chain constraints; labor supply issues; and how quickly and to facilitate commercewhat extent normal economic and as cross-border commerce increases. As partoperating conditions can resume.
A natural disaster or other adverse occurrence at one of our normal business activities,primary facilities could damage our business. We have warehouse and distribution facilities in the United States and Canada and in the United Kingdom and Germany. If the warehouse and distribution equipment at one of our distribution centers were to be seriously damaged, or negatively impacted, by a natural disaster or other adverse occurrence, we collectcould utilize another distribution center or third-party distributors to ship products to our clients. However, this may not be sufficient to avoid interruptions in our service and store certainmay not enable us to meet all of the needs of our clients and would cause us to incur incremental operating costs. In addition, we operate numerous sales offices which may contain both business-critical data and confidential information including information about teammates and information about partners and clients which may be entitled to protection under a number of regulatory regimes. In the course of normal and customary business practice, we may share some of this information with vendors who assist us with certain aspects of our business. Moreover, the successclients. A natural disaster or other adverse occurrence at any of our major sales offices, including any closures or restrictions on operations depends uponas a result of the secure transmission of confidential and personal data over public networks, including the use of cashless payments. Any failure on the part of us or our vendors to maintain the security of data we are required to protect, including via the penetration of our network security and the misappropriation of confidential and personal information,COVID-19 pandemic, could result in business disruption, damage to our reputation, financial obligations to third parties, fines, penalties, regulatory proceedings and private litigation with potentially large costs, and also result in deterioration in our teammates’, partners’ and clients’ confidence in us and other competitive disadvantages, and thus could have a material adverse effect onnegatively impact our business, financial condition and results of operations. In the past, we have been subjectoperations or cash flows.
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Risks Related to
information security attacks. Although we do not believe the attacks resulted in the misappropriation of sensitive data, we have been,Our Technology, Data and
expect to continue to be, subject to electronic data attacks and threats. Additionally, some of the hardware and software products we resell could have defects or otherwise be the subject of security breaches and other attacks. We would consider the consequences of such attacks to be the responsibility of the respective manufacturers and publishers of such products, however, if such circumstances were to arise, we could be subject to litigation.Intellectual Property
Disruptions in our IT systems and voice and data networks could affect our ability to service our clients and cause us to incur additional expenses. We believe that our success to date has been, and future results of operations will be, dependent in large part upon our ability to provide prompt and efficient service to our clients. Our ability to provide that level of service is largely dependent on the ease of use, accuracy, quality and utilization of our IT systems, which affectsimpacts our ability to manage our sales, client service, distribution, inventories and accounting systems, and the reliability of our voice and data networks and managed services offerings. If our current technology is determined to have a shorter usefuleconomic life or the value of our current system is impaired, or necessary improvements to our technology are significantly delayed, we could incur additional depreciation expense and/or impairment charges. The continuing development of our IT systems is crucial for our success. Accordingly, some of our IT systems are subject to ongoing IT projects designed to streamline or optimize the information systems. In addition, we recently migrated our EMEA operations to the same core IT systems and tools used in North America and APAC. There is no guarantee that we will be successful in these efforts at all times or that there will not be implementation or integration difficulties. In addition, a substantial interruption in our IT systems or in our voice and data networks, however caused, could occur and could have a material adverse effect on our business, financial condition and results of operations.INSIGHT ENTERPRISES, INC.
The failure to comply with
Cyberattacks, data incidents and breaches in the terms and conditionssecurity (i) of our commercialinformation systems and networks, (ii) of the products we sell and services we provide, and (iii) of the electronic and confidential information in our possession could materially adversely impact our financial condition, results of operations, reputation, and relationships with clients, partners, vendors, and teammates. We are dependent upon automated information technology processes. Privacy, security, and compliance concerns have continued to increase as technology has evolved to facilitate commerce and as cross-border commerce increases. As part of our normal business activities, we collect and store or have access to certain proprietary confidential, and personal information, including information about teammates and information about partners, vendors, and clients which may be entitled to protection under a number of regulatory regimes. In the course of normal and customary business practice, we may share some of this information with vendors and partners who assist us with certain aspects of our business. Moreover, the success of our operations depends upon the secure transmission of confidential and personal data over public sector contracts could result in, among other things, damages, fines or other liabilities. Salesnetworks, including the use of cashless payments. The protection and security of our network systems, our clients’ systems, applications, and platforms to commercial clients are based on stated contractual terms, the termswhich we have access, and conditions on our website or terms contained in purchase orders on a transaction by transaction basis. Sales to public sector clients are derived from sales to federal, state and local governmental departments and agencies,own information, as well as information relating to educational institutions, through open market salesour clients, partners, vendors, and various contracts and programs. Noncompliance with contract terms, particularlyteammates, is vitally important to highly regulated public sector clients,us as the compromise, loss, theft, misuse, or with government procurement regulations and other requirementsunauthorized access to such networks or information could lead to significant reputational or competitive harm, result in fines or penalties againstlitigation involving us or termination of contracts, and, in the public sector, could also result in civil, criminal, and administrative liability. With respectour business partners, expose us to our public sector clients, the government’s remedies may include suspension or debarment. In addition, almost all of our contracts have default provisions, and substantially all of our contracts in the public sector are terminable at any time for convenience of the contracting agency.We are exposed to risks from legalregulatory proceedings, and client auditscause us to incur substantial liability or expenses.
The frequency, intensity, and failure to complysophistication of cyberattacks and data security incidents has significantly increased in recent years and is constant. As with the laws and regulations applicable to our operations could adversely impact our business, results of operations or cash flows.Wemany other businesses, we are party to various legal proceedings that arise in the ordinary course of our business, which include commercial, employment, tort and other litigation. Because of our significant sales to governmental entities, we also arecontinually subject to audits by federal, state, international, national, provincial and local authorities in the ordinary course of our business. We also are subject to audits by various vendor partners and large customers, including government agencies, relating to purchases and sales under various contracts. In addition, we are subject to indemnification claims under various contracts. Current and future litigation, infringement claims, governmental proceedings and investigations, audits or indemnification claims that we face may result in substantial costs and expenses and significantly divert the attention of our management regardless of the outcome. Additionally, our operations are subject to numerous U.S. and foreign laws and regulations in a number of areas including areas of labor and employment, advertising,e-commerce, tax, import and export requirements, anti-corruption, data privacy requirements, anti-competition, and environmental, health, and safety. Compliance with these laws, regulations and similar requirements may be onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction, further increasing the cost of compliance and doing business,cyber-attacks and the risk of noncompliance.data security incidents. Due to the increased risk of these types of attacks and incidents, we expend significant resources on information technology and data security tools, measures, and processes designed to protect our networks systems, services, and the personal, confidential or proprietary information in our possession, and to ensure an effective response to any cyber-attack or data security incident. We have implementedprivacy and data security policies and proceduresin place that are designed to help ensure compliancedetect, prevent, and/or mitigate cyberattacks and data security incidents. Whether or not these policies, tools, and measures are ultimately successful, the expenditures could have an adverse impact on our financial condition and results of operations, and divert management’s attention from pursuing our strategic objectives. As newer technologies evolve, and the portfolio of the service providers we share confidential information with applicable lawsgrows, we could be exposed to increased risks from cyberattacks, data security events, and regulations, butdata breaches, including those from human error, negligence or mismanagement or from illegal or fraudulent acts.
INSIGHT ENTERPRISES, INC.
Although we take the security of our network systems and information very seriously, there can be no
guarantee against teammates, contractors, or agents violating such lawsassurance that the security measures we employ will effectively prevent unauthorized persons from obtaining unauthorized access to our systems and
regulationsinformation due to the evolving nature and intensity of cyberattacks and threats to data security, in light of new and sophisticated tools and methods used by criminals and cyberterrorists to penetrate and compromise systems, including computer viruses, malware, ransomware, phishing, misrepresentation, social engineering and forgery, which make it increasingly challenging to anticipate, harder to detect, and more difficult to adequately mitigate these risks. Any failure on the part of us or our
policiesvendors to maintain the security of our network systems and
procedures.We are exposed to accounts receivable risks.We extend creditthe proprietary, confidential, and personal data in our possession, including via the penetration of our network security and the misappropriation of proprietary, confidential and personal information, could result in costly investigations and remediation, business disruption, damage to our customers for a significant portion ofreputation, financial obligations to third parties, fines, penalties, regulatory proceedings and private litigation with potentially large costs, and also result in deterioration in our net sales, typically on30-day payment terms. We are subject to the risk that our customers may not pay for the products they have purchased, or may pay at a slower rate than we have historically experienced, the risk of which is heightened during periods of economic downturn or uncertainty or,teammates’, partners’ and clients’ confidence in the case of public sector customers, during periods of budget constraints.
We rely on independent shipping companies for delivery of products and are subject to price increases or service interruptions from these carriers.We generally ship hardware products to our customers by FedEx, United Parcel Serviceus and other commercial delivery servicescompetitive disadvantages, and invoice customers for delivery charges. If we are unable to pass on to our clients future increases in the cost of commercial delivery services, our profitability could be adversely affected. Additionally, strikes, inclement weather, natural disasters or other service interruptions by such shippers could adversely affect our ability to deliver products on a timely basis. Such eventsthus could have a material adverse effect on our business, financial condition and results of operations.
We depend on certain key personnel. We rely on key management teammates
Cyberthreats are constantly evolving, increasing the difficulty of detecting and successfully defending against them. Malicious individuals, organizations, and nation-state threat actors may attempt to executepenetrate or compromise our strategynetwork systems, the products we sell, or services we provide in order to grow profitable market share. The lossaccess, acquire, misappropriate, disclose, alter, or otherwise compromise our teammates’, clients’, and partners’ proprietary, confidential, technical business, and/or personal information in our possession or to which we have access, create system disruptions, cause system or operations shutdowns or perpetrate secondary attacks against our clients, partners, and teammates. Such individuals or organizations also may develop or deploy viruses, worms, ransomware or otherwise exploit security vulnerabilities of oneour systems or moreour product offerings, or attempt to fraudulently induce our employees, clients or others to disclose passwords or other sensitive information or unwittingly provide access to our systems, data, or client environments. Cyberthreats, cyberattacks, data security incidents, data breaches, malware and similar disruptions from unauthorized access or tampering by malicious actors or inadvertent error could disrupt the security of these leaders, or a failure to attractour systems and retain new executives, could have a material adverse effect on our business financial condition and results of operations. We also believe that our future success will be largely dependent onapplications, impair our ability to attractprovide services to our clients and retain highly qualified management, sales, service and technical teammates, and we make significant investmentsprotect the privacy of their data, resulting in the trainingunauthorized access to, acquisition, misappropriation, disclosure, alteration, or compromise of confidential, proprietary or technical business information or personal information and thereby could harm our sales account executives, architectsreputation, client relationships, business, and services engineers. Ifcompetitive position.
Like many other businesses, we
have been, are,
not ableand expect to
retain such personnel orcontinue to
train them quickly enoughbe, subject to
meet changing market conditions,cyberattacks, and data security incidents. Additionally, some of the hardware and software products we
could experience a drop in the overall quality and efficiency of our sales and services teammates, and thatresell could have
a material adverse effect on our business, financial conditiondefects, viruses, vulnerabilities, or otherwise be the subject of cyberattacks, data security events, or data breaches. We would consider the consequences of such attacks to be the responsibility of the respective manufacturers and
resultspublishers of
operations.INSIGHT ENTERPRISES, INC.
A natural disaster or other adverse occurrence at one of our primary facilities or customer data centers could damage our business.We have warehouse and distribution facilities in the United States and Canada and in the United Kingdom and Germany. If the warehouse and distribution equipment at one of our distribution centerssuch products, however, if such circumstances were to be seriously damaged by a natural disaster or other adverse occurrence, we could utilize another distribution center or third-party distributors to ship products to our customers. However, this may not be sufficient to avoid interruptions in our service and may not enable us to meet all of the needs of our customers and would cause us to incur incremental operating costs. In addition, we operate customer data centers and numerous sales offices which may contain both business-critical data and confidential information of our customers. A natural disaster or other adverse occurrence at any of the customer data centers or at any of our major sales offices could negatively impact our business, results of operations or cash flows.
Changes in, interpretations of, or enforcement trends related to tax rules and regulations may adversely affect our effective income tax rates or operating margins andarise, we may be required to pay additional tax assessments.We conduct business globallynotify clients, regulators and file tax returns in various U.S.individuals and foreign tax jurisdictions. Our effective income tax ratethereby could be adversely affected by various factors, manysubject to litigation, regulatory inquiry, loss of which are outside of our control, including:
changes inpre-tax income in various jurisdictions in which we operate that have differing statutory tax rates;
increases in corporate tax rates and the availability of deductions or credits in the United States and elsewhere;
changes in tax laws, regulations, and/or interpretations of such tax laws in multiple jurisdictions;
tax effects related to purchase accounting for acquisitions; and
resolutions of issues arising from tax examinations and any related interest or penalties.
On December 22, 2017, the U.S. government enacted comprehensive federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The Tax Act makes changes to the U.S. corporate tax rate, business-related deductions and taxation of foreign earnings, among others, that will generally be effective for taxable years beginning after December 31, 2017. By reducing the tax rate, these changes have reduced the value of our net U.S. deferred tax assets, resulting in a significantone-time charge in the current tax year. We are continuing to evaluate the Tax Act and its requirements, as well as its application to our business, and its impact on our effective tax rate. At this point, it is unclear how many U.S. states will incorporate these federal law changes, or portions thereof, into their local laws. Our implementation of new practices and processes designed to comply with, and benefit from, the Tax Act and its rules and regulations could require us to make substantial changes to our business practices.
The determination of our worldwide provision for income taxes and other tax liabilities requires estimation, judgment and complex calculations in situations where the ultimate tax determination may not be certain. Our determination of tax liabilities is always subject to review or examination by tax authorities in various jurisdictions. Any adverse outcome of such review or examination could have a material adverse effect on our financial condition and results of operations.
reputational harm.
We may not be able to protect our intellectual property adequately, and we may be subject to intellectual property infringement claims. To protect our intellectual property, we rely on copyright, trademark and trade secret laws, unpatented proprietaryknow-how, and patents, as well as confidentiality, invention assignment,non-solicitation andnon-competition agreements. There can be no assurance that these measures will afford us sufficient protection of our intellectual property, and it is possible that third parties may copy or otherwise obtain and use our proprietary information without authorization or otherwise infringe on our intellectual property rights. The disclosure of our trade secrets could impair our competitive position and could have a material adverse effect on our business, financial condition and results of operations. In addition, our registered trademarks and trade names are subject to challenge by third parties. This may affectimpact our ability to continue using those marks and names. Likewise, many businesses are actively investing in, developing and seeking protection for intellectual property in the areas of search, indexing,e-commerce and otherWeb-related technologies, as well as a variety ofon-line
INSIGHT ENTERPRISES, INC.
business models and methods, all of which are in addition to traditional research and development efforts for IT products and application software, and
non-practicing entities continue to invest in acquiring patent portfolios for the purpose of turning the portfolios into income-generating assets, whether through licensing campaigns or litigation. If there is a determination that we have infringed the proprietary rights of others, we could incur substantial monetary liability, be forced to stop selling infringing products or providing infringing services, be required to enter into costly royalty or licensing agreements, if available, or be prevented from using the rights, which could force us to change our business practices or hardware, software or services offerings in the future. These types of claims and challenges could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Regulatory and Legal Matters
We are exposed to risks from legal proceedings and client audits and failure to comply with the laws and regulations applicable to our operations could adversely impact our business, results of operations or cash flows. We are party to various legal proceedings that arise in the ordinary course of our business, which include commercial, employment, tort and other litigation. Because of our significant sales to governmental entities, we also are subject to audits by federal, state, international, national, provincial and local authorities in the ordinary course of our business. We also are subject to and currently engaged in audits by various vendor partners and large clients, including government agencies, relating to purchases and sales under various contracts. In addition, we are subject to indemnification claims under various contracts. Current and future litigation, infringement claims, governmental proceedings and investigations, audits or indemnification claims that we face may result in substantial costs and expenses and significantly divert the attention of our management regardless of the outcome. Additionally, our operations are subject to numerous U.S. and foreign laws and regulations in a number of areas including areas of labor and employment, advertising, e-commerce, tax, import and export requirements, anti-corruption, data privacy requirements, including data privacy restrictions such as the GDPR or the California Consumer Privacy Act (“CCPA”), data breach notification laws, and certain data security regulations, anti-competition, and environmental, health, and safety. Compliance with these laws, regulations and similar requirements may be onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction, further increasing the cost of compliance and doing business, and the risk of noncompliance. We have implemented policies and procedures designed to help ensure compliance with applicable laws and regulations, but there can be no guarantee against teammates, contractors, or agents violating such laws and regulations or our policies and procedures.
The failure to comply with the terms and conditions of our commercial and public sector contracts could result in, among other things, damages, fines or other liabilities. Sales to commercial clients are based on stated contractual terms, the terms and conditions on our website or terms contained in purchase orders on a transaction by transaction basis. Sales to public sector clients are derived from sales to federal, state and local governmental departments and agencies, as well as to educational institutions, through open market sales and various contracts and programs. Noncompliance with contract terms, or stated terms and conditions on our website, particularly to highly regulated public sector clients, or with government procurement regulations and other requirements could result in fines or penalties against us or termination of contracts, and, in the public sector, could also result in civil, criminal, and administrative liability. With respect to our public sector clients, the government’s remedies may include suspension or debarment. In addition, almost all of our contracts have default provisions, and substantially all of our contracts in the public sector are terminable at any time for convenience of the contracting agency.
INSIGHT ENTERPRISES, INC.
Item 1B. | Unresolved Staff Comments |
Changes in, interpretations of, or enforcement trends related to tax rules and regulations may adversely affect our effective income tax rates or operating margins and we may be required to pay additional tax assessments. We conduct business globally and file tax returns in various U.S. and foreign tax jurisdictions. Our effective income tax rate could be adversely affected by various factors, many of which are outside of our control, including:
•changes in pre-tax income in various jurisdictions in which we operate that have differing statutory tax rates;
•increases in corporate tax rates and the availability of deductions or credits in the United States and elsewhere;
•changes in tax laws, regulations, and/or interpretations of such tax laws in multiple jurisdictions, including but not limited to U.S. federal and state regulations or interpretations and enforcement trends;
•tax effects related to acquisition accounting; and
•resolutions of issues arising from tax examinations and any related interest or penalties.
The determination of our worldwide provision for income taxes and other tax liabilities requires estimation, judgment and complex calculations in situations where the ultimate tax determination may not be certain. Our determination of tax liabilities is always subject to review or examination by tax authorities in various jurisdictions. Any adverse outcome of such review or examination could have a material adverse effect on our financial condition and results of operations.
Risks Related to Our Indebtedness
We have a substantial amount of indebtedness, which could have important consequences to our business. We have a substantial amount of indebtedness. As of December 31, 2022, we had $637.9 million of total long-term debt outstanding, as defined by U.S. generally accepted accounting principles (“GAAP”), and an additional $301.3 million of obligations outstanding under our inventory financing agreements. At December 31, 2022, $346.2 million of our outstanding debt relates to the Notes that are convertible at the option of the holders and as a result are classified as a current liability. We also have the ability to borrow an additional $1.5 billionunder our senior secured credit facility. Our substantial indebtedness could have important consequences, that could have a material adverse effect on our business, financial condition and results of operations, including the following:
•requiring us to dedicate a substantial portion of our cash flow from operations to debt service payments on our and our subsidiaries’ debt, which reduces the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes;
•requiring us to comply with restrictive covenants in our senior secured debt facility, which limits the manner in which we conduct our business;
•limiting our flexibility in planning for, or reacting to, changes in the industry in which we operate;
•placing us at a competitive disadvantage compared to any of our less-leveraged competitors;
•increasing our vulnerability to both general and industry-specific adverse economic conditions; and
•limiting our ability to obtain additional debt or equity financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements and increasing our cost of borrowing.
INSIGHT ENTERPRISES, INC.
The conditional conversion feature of the Notes, which has been triggered, may adversely affect our financial condition and operating results. In the event the conditional conversion feature of the Notes continues to be triggered, holders of Notes will be entitled to convert the Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, we would be required to settle the principal portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders of Notes do not elect to convert their Notes, we are required under applicable accounting rules to reclassify all of the outstanding principal of the Notes as a current rather than long-term liability, which has and could continue to result in a material reduction of our net current assets.
We are subject to counterparty risk with respect to the Call Spread Transactions. The option counterparties are financial institutions or affiliates of financial institutions, and we are subject to the risk that one or more of such option counterparties may default under the Call Spread Transactions. Our exposure to the credit risk of the option counterparties will not be secured by any collateral. If any option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the Call Spread Transaction. Our exposure will depend on many factors but, generally, the increase in our exposure will be correlated to the increase in our common stock market price and in the volatility of the market price of our common stock. In addition, upon a default by the option counterparty, we may suffer adverse tax consequences and dilution with respect to our common stock.
Our acquisition strategy may increase our outstanding debt and interest expense and decrease the availability under our financing facilities, all of which could have a material adverse effect on our results of operations and financial condition. To fund our acquisition initiatives, we increase our total borrowings from time to time, such as with the PCM acquisition. These additional borrowings have the effect of increasing our future interest expenses and require escalating amortization payments. Additionally, certain of our financing facilities have interest rates that vary based on market conditions and on utilization, which increases our exposure to interest rate fluctuations and may result in greater interest expense than we have forecasted.
Our financing facilities contain covenants that we must comply with in order to avoid an occurrence of an event of default. The covenants include, among other things, limitations on the payment of dividends and compliance with certain minimum fixed charge ratio and minimum receivables requirements, as well as meeting monthly, quarterly and annual reporting requirements. Our ability to maintain compliance with our financial covenants and to make scheduled payments on our financing facilities depends on our financial and operating performance. If we were unable to maintain compliance or to repay the borrowed amounts, the lenders under our financing facilities could declare an event of default and demand payment within a specified period of time.
We may face risk associated with the discontinuation of and transition from London Interbank Offered Rate (LIBOR) as a benchmark interest rate.We may face risk associated with the discontinuation of and transition from London Interbank Offered Rate (LIBOR) as a benchmark interest rate. We have outstanding U.S. Dollar denominated debt with variable interest rates based on LIBOR, and it is anticipated that LIBOR for all U.S. Dollar debtors will be discontinued as of the year ending 2023. The expected discontinuation of LIBOR for all U.S. Dollar debtors will require lenders and their borrowers to transition from LIBOR to an alternative benchmark interest rate, which could have an impact on and risk to the Company if not completed in a timely manner. The Company’s current material loan documents include an alternative benchmark interest rate for U.S. Dollars based initially on the Secured Overnight Financing Rate. At this time, however, it is not possible to predict the effect of any changes to LIBOR, any phase out of LIBOR or any establishment of alternative benchmark rates in the future. While various bodies, including governmental agencies, are seeking to identify an alternative rate to replace LIBOR, including the Secured Overnight Financing Rate, there is uncertainty regarding which alternative reference rate will replace LIBOR. Any new benchmark rate will likely not replicate
INSIGHT ENTERPRISES, INC.
LIBOR exactly, which could impact our contracts which terminate after 2023. In addition, any changes to benchmark rates in the future may have an uncertain impact on our cost of funds and our access to the capital markets, which could impact our results of operations and cash flows.
General Risk Factors
Our future operating results may fluctuate significantly. Our operating results are highly dependent upon our level of gross profit as a percentage of net sales, which fluctuates due to numerous factors, including changes in prices from partners, changes in the amount and timing of partner funding, volumes of purchases, changes in client mix, management of our cash conversion cycle, the relative mix of products and services sold during the period, general competitive conditions, and strategic product and services pricing and purchasing actions. As a result of significant price competition, our high mix of hardware sales, and our higher concentration of large enterprise clients, our gross margins have been relatively low. We expect our gross margins to improve as our mix of services and solutions increase. Increased competition arising from industry consolidation and low demand for certain IT products and services may hinder our ability to maintain or improve our gross margins. These low gross margins magnify the impact of variations in revenue and operating costs on our operating results. In addition, our expense levels are based, in part, on anticipated net sales and the anticipated amount and timing of partner funding, and a portion of our operating expenses are relatively fixed. Therefore, we may not be able to reduce spending quickly enough to compensate for any unexpected net sales shortfall, and we may not be able to reduce our operating expenses as a percentage of revenue to mitigate any further reductions in gross margins in the future. If we cannot proportionately decrease our cost structure, our business, financial condition and results of operations could be impacted. In addition, a reduction in the amount of credit granted to us by our partners could increase our need for and cost of working capital and have a material adverse effect on our business, financial condition and results of operations.
We depend on certain key management personnel and our ability to attract, train and retain skilled teammates to satisfy client demand, including highly skilled technical resources with experience in key digital areas. We rely on key management to execute our strategy to grow profitable market share. The loss of one or more of these leaders, or a failure to attract and retain new executives, could have a material adverse effect on our business, financial condition and results of operations. We also believe that our future success will be largely dependent on our ability to attract, train and retain highly qualified management, sales, service and technical teammates, and we make significant investments in the development of our leadership team, sales executives, solution architects, services engineers, project managers and other IT resources. If we are not able to retain such personnel or to train them quickly enough to meet changing market conditions, we could experience a drop in the overall quality and efficiency of our sales and services teammates, and that could have a material adverse effect on our business, financial condition and results of operations.
Additionally, competition for skilled and non-skilled workers is intense and there are risks of sustained labor shortages in various regions. In some jurisdictions in which we operate, there is increasing demand for qualified resources to fill open positions. Our business has experienced and may continue to experience teammate attrition, which may cause us to incur increased costs to hire new teammates with the desired management and technical skills. Costs associated with recruiting, training and retaining teammates are significant. If we are unable to hire or deploy resources with the needed technical skill set or if we are unable to adequately equip our teammates with the skills needed, this could have a material adverse effect on our business. Furthermore, if we are unable to maintain an environment for teammates that is competitive and appealing, it could have an adverse effect on engagement and retention, and a material adverse effect on our business.
INSIGHT ENTERPRISES, INC.
The acquisition, integration and operation of acquired businesses may disrupt our business and create additional expenses, and we may not achieve the anticipated benefits of the acquisitions. In connection with our strategic initiatives, we regularly acquire new businesses to expand our technical capabilities, product and service offerings and client base and to realize cost savings. All acquisitions entail various risks such as difficulties in realizing the benefits of the acquired business, exposure to unexpected liabilities, difficulties in retaining key employees and adverse client reactions. In addition, integration of an acquired business involves numerous risks, including assimilation of operations of the acquired business and difficulties in the convergence of IT systems, the diversion of management’s attention from other business concerns, risks of entering markets in which we have had no or only limited direct experience, assumption of unknown or unquantifiable liabilities, the potential loss of key clients, difficulties assimilating and retaining teammates of those businesses into our culture and organizational structure, difficulties in completing strategic initiatives already underway in the acquired company, and unfamiliarity with partners of the acquired company, each of which could have a material adverse effect on our business, results of operations and financial condition. The continued integration activities of the acquired businesses into our business are difficult and time consuming, and we may be unable to achieve expected synergies and operating efficiencies over the long term. We cannot assure that these risks or other unforeseen factors will not offset the intended benefits of the acquisitions, in whole or in part.
Future sales of the Company’s common stock or equity-linked securities in the public market could lower the market price for our common stock. In the future, we may sell additional shares of our common stock or equity-linked securities to raise capital. In addition, a substantial number of shares of our common stock is reserved for issuance upon the exercise of stock options, upon vesting of restricted stock units, upon conversion of the Notes and upon exercise of the warrants that were issued in connection with the Call Spread Transactions. We cannot predict the size of future issuances or the effect, if any, that they may have on the market price for our common stock. The issuance and sale of substantial amounts of common stock or equity-linked securities, or the perception that such issuances and sales may occur, could adversely affect the market price of our common stock and impair our ability to raise capital through the sale of additional equity or equity-linked securities.
Item 1B. Unresolved Staff Comments
Item 2. Properties
Our principal executive
offices areoffice is located in
Tempe,Chandler, Arizona.
At December 31, 2022, we owned or leased approximately 2.1 million square feet of office and warehouse space, and, while approximately 77% of the square footage is in the United States, we own or lease office and warehouse facilities in Canada and in 10 countries in EMEA and we lease office facilities in 6 countries in APAC. We believe that our facilities are suitable and adequate for our present purposes, and we anticipate that we will be able to extend our existing leases on terms satisfactory to us or, if necessary, to locate substitute facilities on acceptable terms.
At December 31, 2017, we owned or leased approximately 1.4 million square feet of office and warehouse space, and, while approximately 69% of the square footage is in the United States, we own or lease office and warehouse facilities in Canada and in 10 countries in EMEA and we lease office facilities in five countries in APAC.Information about significant sales, distribution, services and administration facilities in use as of December 31, 20172022 is summarized in the following table:
INSIGHT ENTERPRISES, INC.
| | | | | | | | | | | | | | | | | | | | |
| Operating Segment | | Location | | Primary Activities | | Own or Lease |
| North America | | Chandler, Arizona, USA | | Executive Office, Sales and Administration, Network Operations Center and Client Support Center | | Own |
| | Addison, Illinois, USA | | Sales and Administration | | Lease |
| | Eden Prairie, Minnesota, USA | | Sales, Services and Administration | | Lease |
| | Hanover Park, Illinois, USA | | Services, Distribution and Administration | | Lease |
| | Lewis Center, Ohio, USA | | Services, Distribution and Administration | | Own |
| | Worthington, Ohio, USA | | Distribution | | Lease |
| | Plano, Texas, USA | | Sales and Administration | | Lease |
| | Liberty Lake, Washington, USA | | Sales and Administration | | Lease |
| | Tampa, Florida, USA | | Sales and Administration | | Lease |
| | Conway, Arkansas, USA | | Sales and Administration | | Lease |
| | Fort Worth, Texas, USA | | Services, Distribution and Administration | | Lease |
| | Edmonton, Alberta, Canada | | Sales, Distribution and Administration | | Lease |
| | Winnipeg, Manitoba, Canada | | Sales and Administration | | Lease |
| | Montreal, Quebec, Canada | | Sales and Administration | | Own |
| | Montreal, Quebec, Canada | | Distribution | | Lease |
| | | | | | |
Operating Segment
EMEA | | Location
Sheffield, United Kingdom | | Primary Activities
| | Own or Lease
|
North America
| | Tempe, Arizona, USA | | Executive Offices, Sales and Administration and Network Operations Center | | Own |
| | Tempe, Arizona, USASheffield, United Kingdom | | Client Support CenterDistribution | | OwnLease |
| | Addison, Illinois, USAUxbridge, United Kingdom | | Sales and Administration | | Lease |
| | Eden Prairie, Minnesota, USAFrankfurt, Germany | | Sales Services and Administration | | Lease |
| | Hanover Park, Illinois, USAFrankfurt, Germany | | Services, Distribution and Administration | | Lease |
| | Plano, Texas, USAVélizy, France | | Sales and Administration | | Lease |
| | Austin, Texas, USAApeldoorn, Netherlands | | Sales and Administration | | Lease |
| | Liberty Lake, Washington, USA | | Sales and Administration | | Lease |
| | Tampa, Florida, USA | | Sales and Administration | | Lease |
| | Conway, Arkansas, USA | | Sales and Administration | | Lease |
| | Winnipeg, Manitoba, Canada | | Sales and Administration | | Lease |
| | Montreal, Quebec, Canada | | Sales and Administration | | Own |
| | Montreal, Quebec, Canada | | Distribution | | Lease |
| | | |
EMEA
| | Sheffield, United Kingdom | | Sales and Administration | | Own |
| | Sheffield, United Kingdom | | Distribution | | Lease |
| | Uxbridge, United Kingdom | | Sales and Administration | | Lease |
| | Garching, Germany | | Sales and Administration | | Lease |
| | Frankfurt, Germany | | Sales and Administration | | Lease |
| | Frankfurt, Germany | | Distribution | | Lease |
| | Vélizy, France | | Sales and Administration | | Lease |
| | | |
APAC | | Sydney, New South Wales, Australia | | Sales and Administration | | Lease |
| | Perth, Australia | | Sales and Administration | | Lease |
| | Auckland, New Zealand | | Sales and Administration | | Lease |
| | Hong Kong | | Sales and Administration | | Lease |
| | Shanghai, China | | Sales and Administration | | Lease |
| | Manila, Philippines | | Operations Center | | Lease |
In addition to those listed above, we have leased sales offices in various cities across North America, EMEA and APAC.
These properties are not included in the table above. Substantially all of our owned properties secure our senior revolving credit facility (“revolving facility”). A portion of the client support center that we own in Tempe, Arizona included in the table above is currently leased to Revana, formerly known as Direct Alliance Corporation, a discontinued operation that was sold to a third party in 2006. For additional information on
property and equipment and operating leases, see
Note 7Notes 4 and 9 to the Consolidated Financial Statements in Part II, Item 8 of this report.
For additional information on the sale of our Tempe, Arizona and Woodbridge, Illinois properties in 2021, see Note 3 to the Consolidated Financial Statements in Part II, Item 8 of this report.
INSIGHT ENTERPRISES, INC.
Item 3. Legal Proceedings
For a discussion of legal proceedings, see “Legal Proceedings” in Note
1716 to the Consolidated Financial Statements in Part II, Item 8 of this report, which is incorporated by reference herein.
Item 4. | Mine Safety Disclosures |
Item 4. Mine Safety Disclosures
INSIGHT ENTERPRISES, INC.
PART II
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock trades under the symbol “NSIT” on The Nasdaq Global Select Market.
The following table shows, for the calendar quarters indicated, the high and low sales prices per share for our common stock as reported on The Nasdaq Global Select Market. | | | | | | | | |
| | | Common Stock | |
| Year 2017 | | High Price | | | Low Price | |
Fourth Quarter | | $ | 46.68 | | | $ | 35.26 | |
Third Quarter | | | 47.95 | | | | 37.91 | |
Second Quarter | | | 53.19 | | | | 39.67 | |
First Quarter | | | 46.00 | | | | 35.44 | |
Year 2016 | | | | | | | | |
Fourth Quarter | | $ | 41.81 | | | $ | 28.15 | |
Third Quarter | | | 32.77 | | | | 24.23 | |
Second Quarter | | | 29.39 | | | | 23.31 | |
First Quarter | | | 28.96 | | | | 18.26 | |
As of February 15, 2018,10, 2023, we had 35,836,32033,807,565 shares of common stock outstanding held by 5643 stockholders of record. This figure does not include an estimate of the number of beneficial holders whose shares are held of record by brokerage firms and clearing agencies.
We have never paid a cash dividend on our common stock, and we currently do not intend to pay any cash dividends in the foreseeable future. Our
senior secured revolving
credit facility
and our accounts receivable securitization financing facility contain restrictions oncontains certain covenants that, if not met, restrict the payment of cash dividends.
Issuer Purchases of Equity Securities
We did not
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | (a)
Total
Number
of Shares
Purchased | | (b)
Average
Price
Paid per
Share | | (c)
Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs | | (d)
Approximate
Dollar Value
of Shares
that May
Yet Be
Purchased
Under
the Plans or
Programs |
| October 1, 2022 through October 31, 2022 | | — | | | $ | — | | | — | | | $ | 300,000,000 | |
| November 1, 2022 through November 30, 2022 | | 334,108 | | | 99.30 | | | 334,108 | | | 266,823,076 | |
| December 1, 2022 through December 31, 2022 | | 504,423 | | | 98.60 | | | 504,423 | | | 217,086,968 | |
| | 838,531 | | | | | 838,531 | | | |
On May 6, 2021, we announced that our Board of Directors had authorized the repurchase
sharesof 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,
duringincluding the
quarter ended$50,000,000 that remained available from the prior authorization. As of December 31,
2017.2022, approximately $217.1 million remained available for repurchases under this share repurchase plan.
In accordance with the share repurchase plan, 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 number 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.
See further information on our share repurchase programs in Note
1615 to the Consolidated Financial Statements in Part II, Item 8 of this report.
INSIGHT ENTERPRISES, INC.
Stock Price Performance Graph
Set forth below is a graph comparing the percentage change in the cumulative total stockholder return on our common stock with the cumulative total return of the Nasdaq US Benchmark TR Index (Market Index) and the Nasdaq US Benchmark Computer Hardware TR Index (Industry Index). The graph assumes that $100 was invested on December 31,
20122017 in our common stock and in each of the two Nasdaq indices, and that, as to such indices, dividends were reinvested. We have not, since our inception, paid any cash dividends on our common stock. Historical stock price performance shown on the graph is not necessarily indicative of future price performance.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Dec. 31,
2012 | | | Dec. 31,
2013 | | | Dec. 31,
2014 | | | Dec. 31,
2015 | | | Dec. 31,
2016 | | | Dec. 31,
2017 | |
Insight Enterprises, Inc. Common Stock (NSIT) | | $ | 100.00 | | | $ | 130.74 | | | $ | 149.05 | | | $ | 144.62 | | | $ | 232.82 | | | $ | 220.44 | |
| | | | | | |
Nasdaq US Benchmark TR Index (Market Index) | | | 100.00 | | | | 133.48 | | | | 150.12 | | | | 150.84 | | | | 170.46 | | | | 206.91 | |
| | | | | | |
Nasdaq US Benchmark Computer Hardware TR Index (Industry Index) | | | 100.00 | | | | 117.65 | | | | 159.48 | | | | 145.20 | | | | 167.36 | | | | 240.72 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dec. 31,
2017 | | Dec. 31,
2018 | | Dec. 31,
2019 | | Dec. 31,
2020 | | Dec. 31,
2021 | | Dec. 31,
2022 |
| Insight Enterprises, Inc. Common Stock (NSIT) | $ | 100.00 | | | $ | 106.00 | | | $ | 184.00 | | | $ | 199.00 | | | $ | 278.00 | | | $ | 262.00 | |
| Nasdaq US Benchmark TR Index (Market Index) | 100.00 | | | 95.00 | | | 124.00 | | | 150.00 | | | 189.00 | | | 152.00 | |
| Nasdaq US Benchmark Computer Hardware TR Index (Industry Index) | 100.00 | | | 94.00 | | | 172.00 | | | 305.00 | | | 412.00 | | | 303.00 | |
Item 6. [Reserved]
INSIGHT ENTERPRISES, INC.
Item 6. | Selected Financial Data |
The following selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements and the Notes thereto in Part II,
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Item 8 and “Management’s7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this report. The selected consolidated financial data presented below under the captions “Consolidated Statements of Operations Data” and “Consolidated Balance Sheet Data” as of and for each of the years in the five-year period ended December 31, 2017 is derived from our audited consolidated financial statements. The consolidated financial statements as of December 31, 2017 and 2016, and for each of the years in the three-year period ended December 31, 2017, which have been audited by KPMG LLP, our independent registered public accounting firm, are included in Part II, Item 8 of this report. | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
| | | (in thousands, except per share data) | |
Consolidated Statements of Operations Data (1) | | | | | | | | | | | | | | | | | | | | |
Net sales | | $ | 6,703,623 | | | $ | 5,485,515 | | | $ | 5,373,090 | | | $ | 5,316,229 | | | $ | 5,144,347 | |
Costs of goods sold | | | 5,785,053 | | | | 4,742,413 | | | | 4,656,758 | | | | 4,603,826 | | | | 4,445,460 | |
| | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 918,570 | | | | 743,102 | | | | 716,332 | | | | 712,403 | | | | 698,887 | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Selling and administrative expenses | | | 723,328 | | | | 585,243 | | | | 584,906 | | | | 576,967 | | | | 564,910 | |
Severance and restructuring expenses | | | 9,002 | | | | 4,580 | | | | 4,907 | | | | 4,433 | | | | 12,740 | |
Loss on sale of foreign entity | | | 3,646 | | | | — | | | | — | | | | — | | | | — | |
Acquisition-related expenses | | | 3,329 | | | | 4,447 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Earnings from operations | | | 179,265 | | | | 148,832 | | | | 126,519 | | | | 131,003 | | | | 121,237 | |
Non-operating (income) expense: | | | | | | | | | | | | | | | | | | | | |
Interest income | | | (1,209 | ) | | | (1,066 | ) | | | (783 | ) | | | (1,062 | ) | | | (1,230 | ) |
Interest expense | | | 19,174 | | | | 8,628 | | | | 7,224 | | | | 6,019 | | | | 6,337 | |
Net foreign currency exchange loss (gain) | | | 855 | | | | 522 | | | | (393 | ) | | | 327 | | | | 194 | |
Other expense, net | | | 1,347 | | | | 1,290 | | | | 1,295 | | | | 1,347 | | | | 1,412 | |
| | | | | | | | | | | | | | | | | | | | |
Earnings before income taxes | | | 159,098 | | | | 139,458 | | | | 119,176 | | | | 124,372 | | | | 114,524 | |
Income tax expense | | | 68,415 | | | | 54,768 | | | | 43,325 | | | | 48,688 | | | | 43,503 | |
| | | | | | | | | | | | | | | | | | | | |
Net earnings | | $ | 90,683 | | | $ | 84,690 | | | $ | 75,851 | | | $ | 75,684 | | | $ | 71,021 | |
| | | | | | | | | | | | | | | | | | | | |
Net earnings per share: | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 2.54 | | | $ | 2.35 | | | $ | 2.00 | | | $ | 1.84 | | | $ | 1.65 | |
| | | | | | | | | | | | | | | | | | | | |
Diluted | | $ | 2.50 | | | $ | 2.32 | | | $ | 1.98 | | | $ | 1.83 | | | $ | 1.64 | |
| | | | | | | | | | | | | | | | | | | | |
Shares used in per share calculations: | | | | | | | | | | | | | | | | | | | | |
Basic | | | 35,741 | | | | 36,102 | | | | 37,984 | | | | 41,062 | | | | 43,012 | |
| | | | | | | | | | | | | | | | | | | | |
Diluted | | | 36,207 | | | | 36,438 | | | | 38,275 | | | | 41,358 | | | | 43,289 | |
| | | | | | | | | | | | | | | | | | | | |
INSIGHT ENTERPRISES, INC.
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
| | | (in thousands) | |
Consolidated Balance Sheet Data | | | | | | | | | | | | | | | | | | | | |
Working capital | | $ | 804,369 | | | $ | 544,943 | | | $ | 543,534 | | | $ | 565,559 | | | $ | 526,423 | |
Total assets | | | 2,685,651 | | | | 2,219,300 | | | | 2,014,017 | | | | 1,947,838 | | | | 1,868,611 | |
Short-term debt, including capital leases and other financing obligations(2) | | | 16,592 | | | | 480 | | | | 1,535 | | | | 766 | | | | 217 | |
Long-term debt, including capital leases and other financing obligations(2) | | | 296,576 | | | | 40,251 | | | | 89,000 | | | | 62,535 | | | | 66,949 | |
Stockholders’ equity | | | 843,469 | | | | 713,443 | | | | 685,742 | | | | 721,231 | | | | 716,918 | |
Cash dividends declared per common share | | | — | | | | — | | | | — | | | | — | | | | — | |
(1) | Our consolidated statements of operations data includes results of the following acquisitions from their respective dates of acquisition: Caase.com from September 26, 2017, Datalink from January 6, 2017, Ignia from September 1, 2016 and BlueMetal from October 1, 2015. |
(2) | Excludes obligations under our inventory financing facility of $319.5 million, $154.9 million, $106.3 million, $122.8 million and $115.3 million as of December 31, 2017, 2016, 2015, 2014 and 2013, respectively. We do not include these obligations in total debt because we have not in the past incurred, and in the future do not expect to incur, any interest payments due under this facility. These amounts are classified separately as accounts payable-inventory financing facility on our consolidated balance sheets. See Note 5 to the Consolidated Financial Statements in Part II, Item 8 of this report. |
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with the Consolidated Financial Statements and notes thereto included in Part II, Item 8 of this report. Our actual results could differ materially from those contained in forward-looking statements due to a number of factors, including those discussed in “Risk Factors” in Part I, Item 1A and elsewhere in this report. Additionally, any references
Overview
Today, every business needs to
be a technology business. We help our
“core”clients accelerate their digital journey to modernize their business
exclude Datalink’s results subsequent toand maximize the
Datalink acquisition.Overview
value of technology. We are a Fortune 500 global IT provider helping businesses of all sizes – from small and medium sized firms to worldwide enterprises, governments, schools and health care organizations – define, architect, implement and manage Intelligent Technology SolutionsTMserve 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 transformation and meet the needs of our clients through a comprehensive portfolio of solutions, far-reaching partnerships and 34 years of broad IT expertise. We empoweramplify our solutions and services with global scale, local expertise and our e-commerce experience, enabling our clients to managerealize their IT environments so they can drive meaningful business outcomes today and transform their operations for tomorrow.digital ambitions at every opportunity. Our offerings in North America and certain countries in EMEA and APAC include hardware, software and services.services, including cloud solutions. Our offerings in the remainder of our EMEA and APAC segments areconsist largely of software and certain software-related services.
services and cloud solutions.
Full year
20172022 financial and operational highlights included the following:
In North America:
| • | | We completed the acquisition of Datalink on January 6,2017 and completed the IT systems and back office integration activities bymid-year. We achieved expense synergies ahead of our expectations and are pleased with the overall financial results of the business in its first year as part of Insight; |
•We gained hardware market share from competitors according to third-party data, reflecting stronggenerated growth in data center solutions as well as devices;earnings from operations of 25% on a consolidated basis with growth in our North America and APAC reporting segments.
•We continued our focus on tight expense control across the business.
In EMEA:
We continued to transform into a cloud and solutions business, invested in technical andpre-sales and service delivery teammates focused on cloud technologies and grew our services net sales by 15%;
We sold ournon-strategic business13% on a consolidated basis with growth in Russia;
We were named #1 in Microsoft Azure consumption in the region for 2017; and
We acquired Caase.com in the third quarter, which further enhances our technical capabilities around Office 365North America and Azure in the region.APAC reporting segments.
In APAC:
•We generated double digit gross profit growth; andcash flows from operations of $98.1 million.
We invested significantly•In June 2022 we acquired Hanu primarily to support cloudour North America service offerings and services salesto expand our center of excellence presence in Australia, which we expect will improveIndia.
•In January 2022 our growth trends in 2018.global team completed the onboarding of EMEA clients, partners and teammates onto Insight common core IT systems, tools and processes.
On a consolidated basis, for the year ended December 31, 2017, our net2022:
•Net sales of $6.7$10.4 billion increased 22%11% compared to 2016. This increase reflects growth2021.
•Gross profit of 20% in our core business and the addition of Datalink to our results of operations beginning January 6, 2017. As a result, for the first time in the Company’s history, net sales from the provision of services approximated 10%. Our gross profit$1.6 billion increased faster than sales, increasing by 24%, or $175.5 million,13% compared to 2016,2021, also up 24%16% year over year excluding the effects of fluctuating foreign currency exchange rates.
•Consolidated gross margin improvedincreased approximately 2040 basis points to 13.7%a record 15.7% of net sales in 2017.2022. This increase reflects solid growth inhigher services net sales and gross profitat higher margins than in our core business combined with the addition of Datalink. Selling and administrative expenses increased $138.1 million, or 24%, in 2017 compared to 2016. Theprior year over year change reflects the addition of Datalink and an increase of 5%expansion in selling and administrative expenses in our core business. We reported earningsproduct margin for software.
•Earnings from operations of $179.3increased to $413.7 million in 2017, an increase of 20%2022, up 25% compared to the prior year, which represented 2.7%4.0% of net sales, consistent with the prior year. sales.
•Our effective tax rate in 20172022 was 43.0%25.1%, driven by the effects of U.S. federal tax reform enacted in December 2017. This higher tax rate in 2017which compares to our effective tax rate of 39.3%25.0% in 2016 and 36.4% in 2015. 2021.
•Net earnings and diluted net earnings per share were $90.7$280.6 million and $2.50,$7.66, respectively, in 2017.2022. In 2016,2021, we reported net earnings of $84.7$219.3 million and diluted net earnings per share of $2.32. In 2015, we reported net earnings of $75.9 million and diluted net earnings per share of $1.98.INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
$5.95.
The results of operations for
20172022 include the following items:
the results of the acquisitions of Caase.com and Datalink, from their respective acquisition dates;
the loss on the sale of our Russia business totaling $3.6 million;
transaction costs totaling $3.3 million, $2.5 million net of tax, associated with the acquisitions of Caase.com and Datalink;
•severance and restructuring expenses of $9.0$4.2 million, $7.3$3.2 million net of tax; and
incremental income tax expense related to U.S. federal tax reform of $13.4 million.
The results of operations for 2016 include the following items:
the results of the acquisition of Ignia effective September 1, 2016;
transaction costs totaling $4.4 million, $4.2 million net of tax, associated with the acquisitions of Ignia and Datalink;
severance and restructuring expenses of $4.6 million, $3.3 million net of tax;
a gain of $338,000 on the sale of our Bloomingdale, Illinois real estate; and
•the repurchase of approximately 1.9 million1,109,000 shares of the Company’s common stock for $50an aggregate of $107.9 million.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The results of operations for
20152021 include the following items:
the results of the acquisition of BlueMetal effective October 1, 2015;
•severance and restructuring expenses of $4.9$6.4 million, $4.3$5.0 million net of tax;
an impairment loss•a restructuring gain from the sale of $800,000 to further reduce the carrying amountproperties of our previously owned real estate in Bloomingdale, Illinois to its estimated fair value less costs to sell;$8.0 million, $6.0 million net of tax; and
•the repurchase of approximately 3.3 million497,000 shares of the Company’s common stock for $91.8an aggregate of $50.0 million.
Throughout the “Overview” and “Results of Operations” sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we refer to changes in net sales, gross profit, selling and administrative expenses and earnings from operations on a consolidated basis and in North America, EMEA and APAC excluding the effects of fluctuating foreign currency exchange rates. In computing these amounts and percentages, we compare the current period amount as translated into U.S. dollars under the applicable accounting standards to the prior period amount in local currency translated into U.S. dollars utilizing the weighted average translation rate for the current period.
Net of tax amounts referenced above were computed using the statutory tax rate for the taxing jurisdictions in the operating segment in which the related expenses were recorded, adjusted for the effects of valuation allowances on net operating losses in certain jurisdictions.
During
2017,2022, we
used $305.4generated $98.1 million
inof cash from operating activities
and primarily utilized cash to purchase property and equipment, including
approximately $186.9the finalization of our corporate headquarters in Chandler, AZ. We had net borrowings of $244.7 million
net of cash and cash equivalents acquired, utilized to fund the acquisitions of Datalink and Caase.com.under our senior secured revolving credit facility (the “ABL facility”). We ended the year with
$105.8$163.6 million of cash and cash equivalents and
$307.9$637.9 million of debt outstanding under our long-term debt
facilities.facilities, including $346.2 million related to the Notes that are classified as a current liability at December 31, 2022.
Details about segment results of operations can be found in Note
2019 to the Consolidated Financial Statements in Part II, Item 8 of this report.
Our discussion and analysis of financial condition and results of operations is intended to assist in the understanding of our consolidated financial statements, including the changes in certain key items in those consolidated financial statements from year to year and the primary factors that contributed to those changes, as well as how certain critical accounting estimates affect our consolidated financial statements.
COVID-19 and Supply Chain Constraints Update
On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. The pandemic has negatively impacted the global economy, disrupted global supply chains and reduced workforce participation. While we have experienced minimal negative impact of COVID-19 on our 2021 and 2022 financial results, prolonged supply constraints stemming from shortages of chips and displays resulted in sustained elevated bookings coming into and throughout the first half of 2022. While supply constraints for certain products, such as devices, have eased limitations on other products, such as data center and infrastructure products continue to result in elevated backlog. We expect our elevated backlog for data center and infrastructure products may benefit our results in the first half 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
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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. See "Risk Factors" in Part I, Item 1A of this report for additional risks we face due to the COVID-19 pandemic.
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of net sales for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | |
| | 2022 | | 2021 |
| Net sales | 100.0 | % | | 100.0 | % |
| Costs of goods sold | 84.3 | | | 84.7 | |
| Gross profit | 15.7 | | | 15.3 | |
| Operating expenses: | | | |
| Selling and administrative expenses | 11.7 | | | 11.8 | |
| Severance and restructuring expenses and acquisition-related expenses | — | | | — | |
| Earnings from operations | 4.0 | | | 3.5 | |
| Non-operating expense, net | 0.4 | | | 0.4 | |
| Earnings before income taxes | 3.6 | | | 3.1 | |
| Income tax expense | 0.9 | | | 0.8 | |
| Net earnings | 2.7 | % | | 2.3 | % |
Our gross profit across the business and related to product versus services sales are, and will continue to be, impacted by partner incentives, which can change significantly in the amounts made available and the related product or services sales being incentivized by the partner. 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 unable to shift our focus and respond to them. For a discussion of risks associated with our reliance on partners, see “Risk Factors – Risks related to Our Business, Operations and Industry – We rely on our partners for product availability, competitive products to sell and marketing funds and purchasing incentives, which can change significantly in the amounts made available and the requirements year over year,” in Part I, Item 1A of this report.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
2022 Compared to 2021
Net Sales. Net sales increased 11%, or $1.0 billion, in 2022 compared to 2021. Net sales of products (hardware and software) and net sales of services increased 10% and 13%, respectively, in 2022 compared to 2021. Our net sales by operating segment for 2022 and 2021 were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | % Change |
| North America | $ | 8,484,392 | | | $ | 7,520,323 | | | 13 | % |
| EMEA | 1,712,521 | | | 1,704,051 | | | — | % |
| APAC | 234,278 | | | 211,739 | | | 11 | % |
| Consolidated | $ | 10,431,191 | | | $ | 9,436,113 | | | 11 | % |
Our net sales by offering category for North America for 2022 and 2021 were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | North America | | |
| Sales Mix | | 2022 | | 2021 | | % Change |
| Hardware | | $ | 5,738,586 | | | $ | 5,163,225 | | | 11 | % |
| Software | | 1,552,715 | | | 1,315,412 | | | 18 | % |
| Services | | 1,193,091 | | | 1,041,686 | | | 15 | % |
| | | $ | 8,484,392 | | | $ | 7,520,323 | | | 13 | % |
Net sales in North America increased 13%, or $964.1 million, in 2022 compared to 2021. This increase reflects increases in all sales categories. Net sales of hardware, software and services increased 11%, 18% and 15%, respectively, year over year. The increases year over year were primarily the result of the following:
•The increase in hardware net sales was due to higher volume of sales to large enterprise and corporate clients. This increase reflects higher sales of devices in the first half of 2022 as supply constraints for devices eased and higher sales of data center and infrastructure products in the latter part of 2022.
•The increase in software net sales was primarily due to higher volume of software licensing. This increase was partially offset by the continued trend toward higher sales of cloud solution offerings that are recorded on a net sales recognition basis in the services net sales category.
•The increase in services net sales was primarily due to higher volume of sales of Insight Delivered services and the continued trend toward higher sales of cloud solution offerings.
Our net sales by offering category for EMEA for 2022 and 2021, were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | EMEA | | |
| Sales Mix | | 2022 | | 2021 | | % Change |
| Hardware | | $ | 654,381 | | | $ | 676,815 | | | (3 | %) |
| Software | | 857,516 | | | 825,361 | | | 4 | % |
| Services | | 200,624 | | | 201,875 | | | (1 | %) |
| | $ | 1,712,521 | | | $ | 1,704,051 | | | — | % |
Net sales in EMEA was relatively flat (increased 12% excluding the effects of fluctuating foreign currency exchange rates), or $8.5 million, in 2022 compared to 2021. Net sales of
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
software was up 4%, year over year, offset by decreases in hardware and services net sales of 3% and 1%, respectively, year to year. The changes were primarily the result of the following:
•The increase in software net sales was due to higher volume of software net sales, partially offset by the continued trend toward higher sales of cloud solution offerings that are recorded on a net sales recognition basis in the services net sales category.
•The decrease in hardware net sales was primarily due to fluctuations in foreign currency exchange rates compared to the prior year.
•The decrease in services net sales was primarily due to fluctuations in foreign currency exchange rates compared to the prior year, partially offset by higher volume of sales of Insight Delivered services and higher sales of cloud solution offerings that are recorded on a net sales recognition basis in the services net sales category.
Our net sales by offering category for APAC for 2022 and 2021, were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | APAC | | |
| Sales Mix | | 2022 | | 2021 | | % Change |
| Hardware | | $ | 57,928 | | | $ | 49,470 | | | 17 | % |
| Software | | 86,661 | | | 89,844 | | | (4 | %) |
| Services | | 89,689 | | | 72,425 | | | 24 | % |
| | | $ | 234,278 | | | $ | 211,739 | | | 11 | % |
Net sales in APAC increased 11% (increased 18% excluding the effects of fluctuating foreign currency rates), or $22.5 million, in 2022 compared to 2021. Net sales of hardware and services increased 17% and 24%, respectively, year over year, partially offset by a decrease in software net sales of 4 %, year to year. The changes were primarily the result of the following:
•The increase in services net sales was due to higher volume of Insight Delivered services and higher sales of cloud solution offerings that are recorded on a net sales recognition basis in the services net sales category.
•The increase in hardware net sales was due to higher volume of net sales to enterprise and commercial clients.
•The decrease in software net sales was primarily due to the impact of fluctuating foreign currency exchange rates compared to the prior year combined with the continued trend toward higher sales of cloud solution offerings that are recorded on a net sales recognition basis in the services net sales category.
Net sales by category for North America, EMEA and APAC were as follows for 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | North America | | EMEA | | APAC |
| Sales Mix | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| Hardware | | 68 | % | | 69 | % | | 38 | % | | 40 | % | | 25 | % | | 23 | % |
| Software | | 18 | % | | 17 | % | | 50 | % | | 48 | % | | 37 | % | | 43 | % |
| Services | | 14 | % | | 14 | % | | 12 | % | | 12 | % | | 38 | % | | 34 | % |
| | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Gross Profit. Gross profit increased 13%, or $189.0 million, in 2022 compared to 2021, with gross margin increasing approximately 40 basis points to 15.7% of net sales. Our gross profit and gross profit as a percent of net sales by operating segment for 2022 and 2021 were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | % of Net
Sales | | 2021 | | % of Net
Sales |
| North America | $ | 1,328,333 | | | 15.7 | % | | $ | 1,135,450 | | | 15.1 | % |
| EMEA | 247,269 | | | 14.4 | % | | 258,862 | | | 15.2 | % |
| APAC | 60,965 | | | 26.0 | % | | 53,245 | | | 25.1 | % |
| Consolidated | $ | 1,636,567 | | | 15.7 | % | | $ | 1,447,557 | | | 15.3 | % |
North America’s gross profit increased 17% in 2022 compared to 2021. As a percentage of net sales, gross margin expanded by approximately 60 basis points year over year. The year over year net increase in gross margin was primarily attributable to the following:
•A net increase in product margin, which includes partner funding and freight, of 31 basis points year over year. This increase was primarily due to higher margins on both hardware and software net sales compared to prior year. The expanded margins on hardware are due in part to a shift away from devices towards higher margin infrastructure sales in the latter part of 2022.
•An expansion in services margin year over year of 24 basis points was due to higher margins generated from increased cloud solution offerings, software maintenance and on Insight Core services, (consisting of Insight Delivered and managed services), partially offset by a decline in margins from hardware warranty.
EMEA’s gross profit decreased 4% (increased 6% excluding the effects of fluctuating foreign currency exchange rates), in 2022 compared to 2021. As a percentage of net sales, gross margin decreased 80 basis points to 14.4%, reflecting a 38 basis point reduction in product margin and a 37 basis point decline in services margin. The decrease in gross profit is primarily due to fluctuations in foreign currency exchange rates compared to the prior year, particularly in the Great British Pound and Euro compared to the U.S. Dollar.
APAC’s gross profit increased 14% (increased 22% excluding the effects of fluctuating foreign currency exchange rates), in 2022 compared to 2021. As a percentage of net sales, gross margin increased by approximately 90 basis points year over year. The expanded gross margin for APAC in 2022 compared to 2021 was due primarily to changes in sales mix to services net sales with higher margins than product net sales.
Our overall gross margins expanded in 2022 compared to 2021, as expected. We believe this trend could continue into future periods as we focus on selling solutions and increasing our services net sales.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Operating Expenses.
Selling and Administrative Expenses. Selling and administrative expenses increased $99.5 million in 2022 compared to 2021. Selling and administrative expenses decreased approximately 10 basis points as a percentage of net sales in 2022 compared to 2021. The overall net increase in expenses reflects a $68.4 million increase in personnel costs, including teammate benefits expenses primarily related to increases in overall teammate headcount and increases in variable compensation in the current year. Travel and entertainment costs increased $6.7 million as previous responses to COVID-19 were relaxed and other expenses, including service contract related costs increased $24.9 million, year over year. The increase in other expenses is primarily due to transformation costs incurred and paid to third parties in 2022 with no comparable activity in 2021. Transformation costs are costs we are incurring to transform our business to help us achieve our strategic objectives, including becoming a leading solutions integrator. We expect to continue to incur further transformation costs in 2023; however, these costs are unique in nature and are not expected to recur in the longer term.
Severance and Restructuring Expenses. During 2022, we recorded severance expense, net of adjustments, totaling $4.2 million. During 2021, we recorded gains on sale of properties due to restructuring of $8.0 million. These gains were partially offset in 2021, as we recorded severance expense, net of adjustments, totaling $6.4 million.
Acquisition-related Expenses. During 2022, we incurred $2.0 million in direct third-party costs primarily related to the acquisition of Hanu. See Note 20 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of our Hanu acquisition. During 2021, we did not incur any acquisition-related expenses.
Earnings from Operations. Earnings from operations increased 25%, or $81.6 million, year over year, in 2022 compared to 2021. Our earnings from operations and earnings from operations as a percentage of net sales by operating segment were as follows for 2022 and 2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | % of Net
Sales | | 2021 | | % of Net
Sales |
| North America | $ | 350,436 | | | 4.1 | % | | $ | 268,813 | | | 3.6 | % |
| EMEA | 44,264 | | | 2.6 | % | | 46,918 | | | 2.8 | % |
| APAC | 19,000 | | | 8.1 | % | | 16,330 | | | 7.7 | % |
| Consolidated | $ | 413,700 | | | 4.0 | % | | $ | 332,061 | | | 3.5 | % |
North America’s earnings from operations increased 30%, or $81.6 million, year over year, in 2022 compared to 2021. As a percentage of net sales, earnings from operations increased by approximately 50 basis points to 4.1%. The increase in earnings from operations was primarily driven by an increase in gross profit in excess of increases in selling and administrative expenses and severance and restructuring expenses.
EMEA’s earnings from operations decreased 6% (increased 4% excluding the effects of fluctuating foreign currency exchange rates), or $2.7 million, year to year, in 2022 compared to 2021. As a percentage of net sales, earnings from operations decreased by approximately 20 basis points to 2.6%. The decrease in earnings from operations was primarily driven by fluctuations in foreign currency exchange rates compared to the prior year, particularly in the Great British Pound and Euro compared to the U.S. Dollar.
APAC’s earnings from operations increased 16% (increased 24% excluding the effects of fluctuating foreign currency exchange rates), or $2.7 million, year over year, in 2022 compared to 2021. As a percentage of net sales, earnings from operations increased by approximately 40 basis points to 8.1%. The increase in earnings from operations reflects an increase in gross profit, partially offset by an increase in selling and administrative expenses in 2022 compared to 2021.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Non-Operating (Income) Expense.
Interest Expense, net. Interest expense, net primarily relates to borrowings under our financing facilities and imputed interest under our inventory financing facilities and the Notes, partially offset by interest income generated from interest earned on cash and cash equivalent bank balances. Interest expense decreased 3%, or $1.0 million, in 2022 compared to 2021 primarily due to having no imputed interest in 2022 under the Notes and higher interest income earned in 2022. This was partially offset by the higher interest rates and higher average daily balances under our ABL facility and increased imputed interest under our inventory financing facilities. There was no imputed interest under the Notes in 2022 compared $10.7 million in 2021. Imputed interest under our inventory financing facilities increased $0.2 million due to higher average daily balances in 2022 compared to 2021. The increases were a result of expanded use of the inventory financing facilities. For a description of our various financing facilities, see Notes 7 and 8 to our Consolidated Financial Statements in Part II, Item 8 of this report.
Other (Income) Expense, Net. Other (income) expense, net, consists primarily of foreign currency exchange gains and losses. Foreign currency exchange gains and losses result from foreign currency transactions, including foreign currency derivative contracts and intercompany balances that are not considered long-term in nature. The change in net foreign currency exchange gains/losses is due primarily to the underlying changes in the applicable exchange rates, partially mitigated by our use of foreign exchange forward contracts to offset the effects of fluctuations in foreign currencies on certain of our non-functional currency assets and liabilities.
Income Tax Expense. Our effective tax rate for 2022 was 25.1% compared to 25.0% in 2021. The marginal increase in the tax rate was primarily due to reduced tax benefits on share-based compensation in 2022 as compared to 2021, as well as nonrecurring benefits in 2021 related to tax credits. These increases were partially offset by the one-time solar tax credit claimed in 2022 on our recently completed headquarters and an increase in the deduction for foreign derived intangible income.
The effective tax rate in 2022 was higher than the federal statutory rate of 21.0% primarily due to state income taxes and higher taxes on earnings in foreign jurisdictions. These increases were offset partially by tax credits and the foreign derived intangible income deduction. See Note 11 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of income tax expense.
2021 Compared to 2020
For a comparison of our results of operations for the fiscal years ended December 31, 2021 and 2020, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on February 18, 2022.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources
The following table sets forth certain consolidated cash flow information for 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Net cash provided by operating activities | $ | 98,106 | | | $ | 163,711 | |
| Net cash used in investing activities | (137,841) | | | (21,074) | |
| Net cash provided by (used in) financing activities | 114,007 | | | (161,385) | |
Foreign currency exchange effect on cash, cash equivalent and restricted cash balances | (14,531) | | | (5,857) | |
| Increase (decrease) in cash, cash equivalents and restricted cash | 59,741 | | | (24,605) | |
| Cash, cash equivalents and restricted cash at beginning of period | 105,977 | | | 130,582 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 165,718 | | | $ | 105,977 | |
Cash and Cash Flow
•Our primary uses of cash during 2022 were to fund working capital requirements, to repurchase shares of our common stock, to acquire Hanu and to purchase property and equipment, including for the final build out of our corporate headquarters.
•Operating activities generated $98.1 million in cash in 2022, compared to $163.7 million in 2021.
•We received proceeds from the sale of assets, including our properties held for sale, of $1.3 million in 2022, compared to $31.0 million in 2021.
•We had net repayments under our inventory financing facilities of $8.3 million in 2022 compared to net repayments of $14.4 million in 2021.
•Net borrowings under our ABL facility were $244.7 million in 2022. Net repayments under our ABL facility were $87.0 million in 2021.
•Capital expenditures were $70.9 million in 2022 compared to $52.1 million in 2021.
•During 2022, we repurchased an aggregate of $107.9 million of our common stock, pursuant to a repurchase program approved in May 2021 and subsequently increased in September 2022. This compares to $50.0 million repurchased during 2021.
We anticipate that cash flows from operations, together with the funds available under our financing facilities, will be adequate to support our cash and working capital requirements for operations as well as other strategic investments over the next 12 months and beyond. We expect existing cash and cash flows from operations to continue to be sufficient to fund our operating cash activities and cash commitments for investing and financing activities, such as capital expenditures, strategic acquisitions, repurchases of our common stock, debt repayments and repayment of our inventory financing facilities for the next 12 months. We do not expect holders of the Notes will convert their Notes in the near term. We 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 operating activities.
•Cash flow from operating activities in 2022 was $98.1 million, a decrease in cash generation compared to 2021.The decrease in cash flow from operating activities was primarily driven by the lower increase in accounts payable and higher increase in accounts receivable in 2022 compared to 2021, partially offset by a decrease in inventory in 2022 compared to the prior year. The relatively lower increase in accounts payable compared to the prior year is due to the impact of our ability to delay payments to certain vendors in 2021 combined with growth in the fourth quarter
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
of 2021 when compared to the same period in 2020, with no growth in the fourth quarter of 2022.
Our consolidated cash flow operating metrics for the quarters ended December 31, 2022 and 2021 were as follows:
| | | | | | | | | | | |
| | 2022 | | 2021 |
Days sales outstanding in ending accounts receivable (“DSOs”) (a) | 120 | | | 105 | |
| Days inventory outstanding (“DIOs”) (b) | 12 | | | 14 | |
Days purchases outstanding in ending accounts payable (“DPOs”) (c) | (92) | | | (88) | |
| Cash conversion cycle (days) (d) | 40 | | | 31 | |
(a)Calculated as the balance of accounts receivable, net at the end of the period divided by daily net sales. Daily net sales is calculated as net sales for the quarter divided by 92 days.
(b)Calculated as average inventories divided by daily costs of goods sold. Average inventories is calculated as the sum of the balances of inventories at the beginning of the period plus inventories at the end of the period divided by two. Daily costs of goods sold is calculated as costs of goods sold for the quarter divided by 92 days.
(c)Calculated as the sum of the balances of accounts payable – trade and accounts payable – inventory financing facilities at the end of the period divided by daily costs of goods sold. Daily costs of goods sold is calculated as costs of goods sold for the quarter divided by 92 days.
(d)Calculated as DSOs plus DIOs, less DPOs.
•Our cash conversion cycle was 40 days in the quarter ended December 31, 2022, an increase of 9 days when compared to the fourth quarter of 2021.
•The changes in our cash conversion cycle compared to the same period in the prior year resulted from the net effect of a fifteen day increase in DSOs partially offset by a four day increase in DPOs and a two day decrease in DIOs.
•The changes in our cash conversion cycle year over year were primarily the result of:
•the impact to DSOs of an increase in other receivables including multi year transactions and changes in client mix (e.g., clients with longer payment terms);
•the benefit to DPOs of changes in vendor mix partially offset by deferral of payments in the prior year; and
•the benefit to DIOs of the impact of easing supply constraints.
•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 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 $1.6 billion and $1.4 billion in the fourth quarter of 2022 and 2021, respectively. Adjusting our cash conversion cycle calculation by adding netted costs to both daily net sales and daily costs of goods sold results in a reduction to our cash conversion cycle from 40 days to 28 days in the fourth quarter of 2022 and no change in the fourth quarter of 2021, which we believe provides a more accurate reflection of our cash flow operating metrics.
•We expect that cash flow from operations will be used, at least partially, to fund working capital as we typically pay our partners on average terms that are shorter than the average terms we grant to our clients in order to take advantage of supplier discounts.
•We intend to use cash generated in 2023 in excess of working capital needs, given current market conditions, to pay down our ABL facility and our inventory financing facilities.
•We expect that in 2023 our cash flows from operations will continue to normalize as we anticipate sequential growth and given the fact that our business mix has returned to previous levels.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Net cash used in investing activities.
•We acquired Hanu for approximately $68.2 million, net of cash and cash equivalents acquired and excluding earn outs and hold backs in 2022.
•We received proceeds from the sale of assets, including our properties held for sale, of $1.3 million and $31.0 million in 2022 and 2021, respectively.
•Capital expenditures were $70.9 million and $52.1 million in 2022 and 2021, respectively. The majority of the capital expenditures in 2022 and 2021 were used for our global corporate headquarters and to fund technology related projects.
•We expect total capital expenditures in 2023 to be in the range of $55.0 to $60.0 million.
Net cash provided by (used in) financing activities.
•During 2022, we had net borrowings on our long-term debt under our ABL facility of $244.7 million and had net repayments under our inventory financing facilities of $8.3 million.
•During 2021, we had net repayments on our long-term debt under our ABL facility of $87.0 million and had net repayments under our inventory financing facilities of $14.4 million.
•In 2022, we also funded $107.9 million of repurchases of our common stock, compared to $50.0 million purchased during 2021.
2021 Compared to 2020
For a comparison of our cash flows for the fiscal years ended December 31, 2021 and 2020, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on February 18, 2022.
Financing Facilities
As of December 31, 2022, our long-term debt balance includes $291.6 million outstanding under our $1.8 billion ABL facility. As of December 31, 2022, the current portion of our long-term debt relates to the Notes, our finance leases and other financing obligations.
•Our objective is to pay our debt balances down while retaining adequate cash balances to meet overall business objectives.
•Our convertible senior notes are subject to certain events of default and certain acceleration clauses. As of December 31, 2022, 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 December 31, 2022, we were in compliance with all such covenants.
•While the ABL facility has a stated maximum amount, the actual availability under the ABL facility is limited by a minimum accounts receivable and inventory requirement. As of December 31, 2022, eligible accounts receivables and inventory were sufficient to permit access to the full $1.8 billion under the ABL facility.
We also have agreements with financial intermediaries to facilitate the purchase of inventory from certain suppliers under certain terms and conditions. These amounts are classified separately as accounts payable - inventory financing facilities in our consolidated balance sheets.
Notes 7 and 8 to the Consolidated Financial Statements in Part II, Item 8 of this report also include: a description of our financing facilities; amounts outstanding; amounts available and weighted average borrowings and interest rates during the year.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Cash Requirements From Contractual Obligations
At December 31, 2022, our contractual obligations for continuing operations primarily consist of $301.3 million under our inventory financing facilities due in 2023 and payments of $91.4 million under operating leases primarily due in 2023 through 2026. Our ABL facility matures in 2027 and the $350.0 million principal amount due on the Notes mature in 2025.
Undistributed Foreign Earnings
Cash and cash equivalents held by foreign subsidiaries may be subject to U.S. income taxation upon repatriation to the United States. Certain of our foreign earnings were deemed distributed as a result of the Tax Cuts and Jobs Act of 2017; however, for years subsequent to 2017, we continue to assert indefinite reinvestment of foreign earnings for certain of our foreign subsidiaries. As of December 31, 2022, we had approximately $138.2 million in cash and cash equivalents in our foreign subsidiaries, the majority of which reside in Canada and the Netherlands. Certain of these cash balances will be remitted to the U.S. by paying down intercompany payables generated in the ordinary course of business or through dividend distributions.
Off-Balance Sheet Arrangements
We have entered into off-balance sheet arrangements, which include guarantees and indemnifications. These arrangements are discussed in Note 16 to the Consolidated Financial Statements in Part II, Item 8 of this report. We believe that none of our off-balance sheet arrangements have, or are reasonably likely to have, a material current or future effect on our financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources.
Acquisitions
Our strategy includes the possible acquisition of or investments in other businesses to expand or complement our operations or to add certain services capabilities. The magnitude, timing and nature of any future acquisitions or investments will depend on a number of factors, including the availability of suitable candidates, the negotiation of acceptable terms, our financial capabilities and general economic and business conditions. Financing for future transactions would result in the utilization of cash, incurrence of additional debt, issuance of stock or some combination of the three. See Note 20 to the Consolidated Financial Statements in Part II, Item 8 of this report for a discussion of our acquisition of Hanu on June 1, 2022.
Inflation
We have historically not been adversely affected by inflation, as technological advances and competition within the IT industry have generally caused the prices of the products we sell to decline and product life cycles tend to be short. This requires our growth in unit sales to exceed the decline in prices in order to increase our net sales. We believe that most price increases could be passed on to our clients, as prices charged by us are not set by long-term contracts; however, as a result of competitive pressure, there can be no assurance that the full effect of any such price increases could be passed on to our clients.
Critical Accounting Estimates
Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).GAAP. For a summary of significant accounting policies, see Note 1 to the Consolidated Financial Statements in Part II, Item 8 of this report. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses. We base our estimates on historical experience and on various other
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results, however, may differ from our estimates. Members of our senior management have discussed the critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors.
We consider the following to be our critical accounting estimates used in the preparation of our consolidated financial statements:
Sales Recognition
Sales are recognized when title and risk of loss are passed to the client, there is persuasive evidence of an arrangement for sale, delivery has occurred and/or services have been rendered, the sales price is fixed or determinable and collectibility is reasonably assured. Our standard sales terms are F.O.B. shipping point or equivalent, at which time title and risk of loss have passed to the client. However, because we either (i) have a general practice of covering client losses while products are in transit despite title and risk of loss contractually transferring at the point of shipment or (ii) have specifically stated F.O.B. destination contractual terms with the client, delivery is not deemed to have occurred until the point in time when the product is received by the client. We make provisions for estimated product returns that we expect to occur under our return policy based upon historical return rates.
We leverage drop-shipment arrangements with many
Description
For each of our partnersproduct and suppliersservices offerings, the determination needs to deliver productsbe made as to our clients without havingwhether we are the principal or the agent in the transaction. This determination leads to physically holdhow the inventory at our warehouses, thereby increasing efficiency and reducing costs. We recognize revenue for drop-shipment arrangements on aeach offering is recognized, either gross, basis when the product is received by the client. We recognize revenue on a gross basis aswhere we are the principal in the transaction, becauseor net, where we are the agent in the transaction. This determination is made by assessing whether or not we control the transaction asproduct or service prior to delivery to the primary obligor for product fulfillment in the arrangement,client.
Judgments and Uncertainties
If we assume inventory risk if the product is returned by the client, we set the pricetake control of the product chargedor service prior to delivery to the client, then we are the principal in the transaction. If we do not take control of the product or service prior to delivery to the client, we assume credit riskare the agent in the transaction. The determination of whether we take control of products or services prior to delivery to the client can be judgmental and depends upon the specific facts and circumstances for each transaction. Key assumptions used in our estimates for transactions where we have determined we are the amounts invoiced,agent are the consistency of transactions with multiple performance obligations and we work closelyconsistency of transactions involving security software. Based on our current methodology to recognize net sales, the amount of reported net sales is not highly sensitive to changes in these key assumptions. For example, a 5% change in one of our key assumptions would not materially affect our reported net sales.
Effect if actual results differ from assumptions
We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to recognize net sales. However, if actual results are not consistent with our
clientsestimates or assumptions, it could have a material effect on our reported net sales, timing of revenue recognition and our results of operations. We have not made any material changes in accounting methodology or key assumptions used to
determine their hardware and software specifications.Revenue is recognized from softwarerecognize net sales when clients acquireduring the rightpast three fiscal years. We have not made any material adjustments to use or copy software under license, butour financial statements as a result of actual results not being consistent with our estimates in no case priorthe past three fiscal years.
See Note 1 to the
commencementConsolidated Financial Statements in Part II, Item 8 of
the termthis report for further discussion of
the initial software license agreement, provided that all other revenue recognition criteria have been met (i.e., evidence of the arrangement exists, the fee is fixed or determinable and collectibility of the fee is probable).We sell certain third-party service contracts and software maintenance and cloud orsoftware-as-a-service subscription products for which we are not the primary obligor. These sales do not meet the criteria for grossour accounting policies related to sales recognition and thus, are recorded onfor a net sales recognition basis. As we enter into contracts with third-party service providers or vendors and our clients, we evaluate whether the subsequent sales of such services should be recorded as gross sales or net sales. We determine whether we act as a principal in the transaction and assume the risks and rewards of ownership or if we are simply acting as an agent or broker. Under gross sales recognition, the selling price is recorded in sales and our cost to the third-party service provider or vendor is recorded in costs of goods sold. Under net sales recognition, the cost to the third-party service provider or vendor is recorded as a reduction to sales, resulting in net sales equal to the gross profit on the transaction, and there are no costs of goods sold.
We recognize revenue for sales of services ratably over the time period over which the service will be provided if there is no discernible pattern of recognition of the cost to perform the service. Billings for such services that are made in advance of the related revenue recognized are recorded as deferred revenue and recognized as revenue ratably over the billing coverage period. Revenue from certain arrangements that allow for the use of a product or service over a period of time without taking possession of software are also accounted for ratably over the time period over which the service will be provided.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
We recognize revenue for professional services engagements that are on a time and materials basis based upon hours incurred as the services are performed and amounts are earned. Net sales for these service engagements are not a significant portiondetailed description of our consolidated net sales.
Additionally, we sell certain professionalproduct and services contracts on a fixed fee basis. Revenues for fixed fee professional services contracts are recognized based on the ratio of costs incurred to total estimated costs. Net sales for these service contracts are not a significant portion of our consolidated net sales.
In certain arrangements, we may provide a combination of hardware and software products as well as services. Services that are performed by us in conjunction with hardware and software sales that are completed in our facilities prior to shipment of the product are recognized upon delivery, when title passes to the client, for the hardware sale. Net sales of services that are performed at client locations are primarily service-only contracts and are recorded as sales when the services are performed. The total consideration for an arrangement with multiple deliverables is allocated to all deliverables that represent a separate unit of accounting using the relative selling price method.
offerings.
Description
We receive payments and credits from partners, including consideration pursuant to volume sales incentive programs, volume purchase incentive programs and shared marketing expense programs. Partner funding received pursuant to volume sales incentive programs is recognized as it is earned as a reduction to costs of goods sold. Partner funding received pursuant to volume purchase incentive programs is allocated as a reduction to inventories based on the applicable incentives earned from each partner and is recorded in costs of goods sold as the related inventory is sold. Partner funding received pursuant to shared marketing expense programs is recorded as it is earned as a reduction of the related selling and administrative expenses in the period the program takes place if the consideration represents a reimbursement of
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
specific, incremental, identifiable costs. Partner funding received pursuant to certain services delivered is recorded as services net sales. Consideration that exceeds the specific, incremental, identifiable costs is classified as a reduction of costs of goods sold. Changes
Judgements and Uncertainties
We make period-end estimates about the anticipated achievement levels under the various partner programs in order to accrue amounts earned. These estimates and assumptions primarily include whether we have met key net sales targets under the various partner programs. Based on our current methodology to recognize partner funding, the amount of reported net sales and gross profit is not highly sensitive to changes in key assumptions around achievement levels. For example, a revised assessment of the achievement level for any individual partner program would not materially affect our reported net sales or gross profit.
Effect if actual results differ from assumptions
We have not made any material changes in the methodology or key assumptions used to evaluate estimates of anticipated achievement levels under individual partner programs during the past three fiscal years. We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to recognize partner funding. However, if our actual results are not consistent with our assumptions it could have a material effect on our results of operations and our cash flows.We have not made any material adjustments to our financial statements as a result of actual results for partner funding not being consistent with our estimates in the past three fiscal years. See Note 1 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of our accounting policies related to partner funding.
Valuation of Long-Lived Assets Including Purchased Intangible Assets and
Goodwill
We review property, plant and equipment and purchased intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. If such events or changes in circumstances indicate a possible impairment, our asset impairment review assesses the recoverability of the assets based on the estimated undiscounted future cash flows expected to result from the use of the asset or the asset group plus net proceeds expected from disposition of the asset or the asset group (if any) and compares that value to the carrying value. Such impairment test is based on the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the carrying value exceeds the undiscounted future cash flows, an impairment loss is recognized for the difference between fair value and the carrying amount. This approach uses our estimates of future market growth, forecasted net sales and costs, expected periods the assets will be utilized and appropriate discount rates.
Description
We perform an annual review of our goodwill in the fourth quarter of every
year and between annual testsyear. We continually assess if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying
value. We continuallyvalue and assess whether any indicators of impairment
exist, and that assessment requires a significant amount of judgment.exist. Events or circumstances that could trigger an impairment review include a significant adverse change in legal factors or in the business climate, unanticipated competition, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, significant declines in our stock price for a sustained period or significant underperformance relative to expected historical or projected future cash flows or results of operations. Any adverse change in these factors, among others, could have a significant effect on the recoverability of goodwill and could have a material effect on our consolidated financial statements.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The goodwill impairment test is performed at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a “component”). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available
Judgements and
management of the segment regularly reviews the operating results of that component. When two or more components of an operating segment have similar economic characteristics, the components may be aggregated and deemed a single reporting unit. An operating segment shall be deemed to be a reporting unit if all of its components are similar, if none of its components is a reporting unit, or if the segment comprises only a single component. Insight has three reporting units, which are equivalent to our operating segments.Uncertainties
We may first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform a quantitative goodwill impairment test. Otherwise, the goodwill impairment test is not required. In completing a quantitative test for a potential impairment of goodwill, we compare the estimated fair value of each reporting unit in which the goodwill resides to its book value, including goodwill. Our reporting units are our operating segments. Management must apply judgment in determining the estimatedreporting units and in estimating the fair value of our reporting units. Multiple valuation techniques can be used to assess the fair value of the reporting unit, including the market and income approaches. All of these techniques include the use of estimates and assumptions that are inherently uncertain. Changes in these estimates and assumptions could materially affectimpact the determination of fair value or goodwill impairment, or both. These estimates and assumptions primarily include, but are not limited to, an appropriate control premium in excess of the market capitalization of the Company, future market
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
growth, forecasted sales and costs and appropriate discount rates. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates. Management evaluates the merits of each significant assumption, both individually and in the aggregate, used to determine the fair value of the reporting units. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If the carrying amount of the reporting unit exceeds its fair value, then an impairment charge is recognized for the amount by which the carrying value exceeds the fair value. To ensure the reasonableness of the estimated fair values of our reporting units, we perform a reconciliation of our total market capitalization to the estimated fair value of all of our reporting units.See further information
Based on qualitative assessments performed in most recent years a quantitative assessment has not been determined to be necessary for any of our reporting units. As such, the carrying valueamount of reported goodwill is not sensitive to changes in key assumptions. Effect if Actual Results Differ from Assumptions
We have not made any material changes in the methodology or key assumptions used to evaluate impairment of goodwill during the past three fiscal years. Our assessments in the past three fiscal years have been qualitative assessments and no quantitative assessments have been deemed necessary. Additionally, during the three years ended December 31, 2022, 2021 and 2020 we analyzed each of our reporting units and determined that no impairment charge was necessary.
See Note
31 to the Consolidated Financial Statements in Part II, Item 8 of this
report.report for further discussion of our accounting policies related to goodwill.
Income Taxes
In December 2017, U.S.
Description
We record a provision for income taxes which reflects a mix of earnings in the jurisdictions in which we operate. Our provision for income taxes primarily reflects a combination of income earned and taxed in the various US federal
and state, as well as foreign, jurisdictions. Our annual effective tax
reform was enacted as part ofrate is based on our income, the
Tax Act. The changejurisdiction(s) in
which the income is earned and subjected to taxation, the tax laws in those various jurisdictions and any tax law
required a remeasurementchanges which may occur, increases or decreases in permanent differences between book and tax items, and accruals or adjustments of
our deferredaccruals for unrecognized tax
balances. In addition, the change in tax law included provisions requiring mandatory deemed repatriation of undistributed foreign earnings. Due to the enactment date and complexities of the new law, we have not completed our accounting related to these items. In accordance with Staff Accounting Bulletin 118, issued on December 22, 2017, we have concluded that the U.S. income taxes attributable to the remeasurement of U.S. deferred income taxes, the mandatory deemed repatriation provision and the state tax effects of these items are provisional amounts.benefits or valuation allowances.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We consider
past operating results,all available positive and negative evidence, including future
market growth, forecasted earnings, historical andreversals of existing taxable temporary differences, projected
future taxable income,
the mix of earnings in the jurisdictions in which we operate, prudent and feasible tax planningtax-planning strategies and
statutory tax law changes in determining the need for a valuation allowance.results of recent operations. If we were to determine that it is more likely than not that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period such determination is made.
Likewise, if we later determine that it is more likely than not that all or part of the net deferred tax assets would be realized, then all or part of the previously provided valuation allowance would be reversed.INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
We establishrecord liabilities for potentially unfavorable outcomes associated with uncertain tax positions taken on specific tax matters.matters using a two-step process, which include recognition and measurement. These liabilities are based on management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. There may be differences between the anticipated and actual outcomes of these matters that may result in subsequent recognition or derecognition of a tax position based on all the available information at the time. If material adjustments are warranted, it could affect our effective tax rate. Judgements and Uncertainties
The determination of our provision and evaluation of our tax positions requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. Changes in tax laws and rates could affect recorded assets and liabilities in the future. Changes in projected earnings could affect the recorded valuation allowances in the future. Our calculations related to income taxes contain uncertainties due to judgment used to calculate tax liabilities in
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
the application of complex tax regulations across the tax jurisdictions where we operate. Our analysis of unrecognized tax benefits contains uncertainties based on judgment used to apply the more likely than not recognition and measurement thresholds. Based on our current methodology to record valuation allowances and reserve for uncertain tax positions, the amount of reported income tax expense is not sensitive to changes in any individual key assumption.
Effect if Actual Results Differ from Assumptions
We have not made any material changes in accounting methodology or key assumptions used to recognize income taxes and related reserves during the past three fiscal years. We do not believe there is a reasonable likelihood there will be a material change in the tax related balances or valuation allowances. However, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. To the extent we prevail in matters for which unrecognized tax benefit liabilities have been established or are required to pay amounts in excess of recorded unrecognized tax benefit liabilities, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would require use of our cash and generally result in an increase in our effective tax rate in the period of resolution. A favorable tax settlement would generally be recognized as a reduction in our effective tax rate in the period of resolution.
Additional information about
recent U.S. federal tax reform, the valuation allowance and uncertain tax positions can be found in Note 11 to the Consolidated Financial Statements in Part II, Item 8 of this report.
Contingencies
From time to time, we are subject to potential claims and assessments from third parties. We are also subject to various government agency, client and partner audits. We continually assess whether or not such claims have merit and warrant accrual. An accrual is made if it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Such estimates are subject to change and may affect our results of operations and our cash flows. Additional information about contingencies can be found in Note 17 to the Consolidated Financial Statements in Part II, Item 8 of this report.
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of net sales for the years ended December 31, 2017, 2016 and 2015:
| | | | | | | | | | | | |
| | | 2017 | | | 2016 | | | 2015 | |
Net sales | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Costs of goods sold | | | 86.3 | | | | 86.5 | | | | 86.7 | |
| | | | | | | | | | | | |
Gross profit | | | 13.7 | | | | 13.5 | | | | 13.3 | |
Operating expenses: | | | | | | | | | | | | |
Selling and administrative expenses | | | 10.8 | | | | 10.7 | | | | 10.9 | |
Severance and restructuring expenses, loss on sale of foreign entity and acquisition-related expenses | | | 0.2 | | | | 0.1 | | | | 0.0 | |
| | | | | | | | | | | | |
Earnings from operations | | | 2.7 | | | | 2.7 | | | | 2.4 | |
Non-operating expense, net | | | 0.3 | | | | 0.2 | | | | 0.2 | |
| | | | | | | | | | | | |
Earnings before income taxes | | | 2.4 | | | | 2.5 | | | | 2.2 | |
Income tax expense | | | 1.0 | | | | 1.0 | | | | 0.8 | |
| | | | | | | | | | | | |
Net earnings | | | 1.4 | % | | | 1.5 | % | | | 1.4 | % |
| | | | | | | | | | | | |
During the year ended December 31, 2017, our consolidated net sales from the provision of services was approximately 10% of net sales. Accordingly, for the year ended December 31, 2017, we began reporting, on the face of our consolidated statement of operations, net sales from the provision of services and the related costs of goods sold separately from net sales of products and the related costs of goods. For comparability purposes, the presentation of net sales and costs of goods sold for the years ended December 31, 2016 and 2015 has been revised to conform to the current year presentation. These changes in presentation had no effect on previously reported total net sales, total costs of goods sold or gross profit amounts.
In conjunction with this change in presentation, because fees earned from activities reported net are considered services revenues, we reclassified certain revenue streams for which we act as the agent in the transaction to net sales from services. Previously, we included these net revenue streams within our software and, to a lesser extent, hardware sales mix categories based on the type of product being sold (e.g., fees earned for the sale of software maintenance and certain software licenses were included in software sales and fees earned for the sale of certain third-party provided training were included in hardware sales when we historically disclosed and analyzed our sales mix). For comparability purposes, the sales mix among our hardware, software and services categories for the years ended December 31, 2016 and 2015 have been reclassified to conform to the current year presentation. Such reclassifications had no effect on previously reported net sales amounts.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Our gross profit across the business and related to product versus services sales are, and will continue to be, impacted by partner incentives, which can change significantly in the amounts made available and the related product or services sales being incentivized by the partner. These changes could impact our results of operations to the extent we are unable to remediate and respond to them.
2017 Compared to 2016
Net Sales. Net sales increased 22%, or $1.2 billion, in 2017 compared to 2016. Net sales of products (hardware and software) increased 21% and net sales of services increased 36% in 2017 compared to 2016 (as reclassified). Our net sales by operating segment for 2017 and 2016 were as follows (dollars in thousands):
| | | | | | | | | | | | |
| | | 2017 | | | 2016 | | | % Change | |
North America | | $ | 5,181,734 | | | $ | 3,971,828 | | | | 30 | % |
EMEA | | | 1,355,416 | | | | 1,338,560 | | | | 1 | % |
APAC | | | 166,473 | | | | 175,127 | | | | (5 | %) |
| | | | | | | | | | | | |
Consolidated | | $ | 6,703,623 | | | $ | 5,485,515 | | | | 22 | % |
| | | | | | | | | | | | |
Net sales in North America increased 30%, or $1.2 billion, in 2017 compared to 2016, including 17% year over year growth in our core business driven by higher volume of sales from new and existing clients, and the addition of Datalink, which reported $524.3 million in net sales in 2017. Net sales of hardware, software and services increased 37%, 14% and 40%, respectively, year over year. The improvement in net sales in the hardware category reflects higher volume of sales to large enterprise clients and was due primarily to strong growth in data center solutions as well as client devices. Strong growth in our core business was complemented by the addition of Datalink, which accounted for approximately 29% of the year over year growth in the hardware category. The increase in the software category was also affected by the acquisition of Datalink, which accounted for approximately 70% of the year over year increase. The increase in services net sales reflects the addition of Datalink to our business, offset partially by declines in technical services projects in our core business in 2017 compared to 2016. Services net sales during 2017 also reflected the continued trend toward higher sales of cloud-based offerings and a higher mix of software maintenance sales that are recorded on a net sales recognition basis, with net sales equal to the gross profit on the transaction. Our net sales by offering category for North America for 2017 and 2016 (as reclassified), were as follows (dollars in thousands):
| | | | | | | | | | | | |
| | | North America | |
Sales Mix | | 2017 | | | 2016 | | | % Change | |
| | | | | | (As Reclassified) | | | | |
| | | | | | | | | | | | |
Hardware | | $ | 3,352,355 | | | $ | 2,454,889 | | | | 37 | % |
Software | | | 1,310,118 | | | | 1,146,808 | | | | 14 | % |
Services | | | 519,261 | | | | 370,131 | | | | 40 | % |
| | | | | | | | | | | | |
| | $ | 5,181,734 | | | $ | 3,971,828 | | | | 30 | % |
| | | | | | | | | | | | |
In North America, fees earned from activities reported on a net basis of $270,000 and $87,984,000 that were previously reported as part of our hardware and software product categories, respectively, in 2016, were reclassified to services to conform to the current year presentation.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Net sales in EMEA increased 1%, or $16.9 million, in 2017 compared to 2016. Excluding the effects of fluctuating foreign currency exchange rates, net sales increased 2% in 2017 compared to 2016. Net sales of hardware and services were up 11% and 15%, respectively, year over year, while net sales of software declined 7% year to year. The increase in hardware net sales was due primarily to higher volume sales of client devices, storage and networking solutions to public sector clients. The increase in services net sales was due primarily to increased sales of license consulting services and partner delivered services to new and existing clients across the region. In addition, a higher volume of sales of software maintenance and cloud subscription products that are recorded on a net sales recognition basis, with net sales equal to the gross profit on the transaction, are included in the services category. The decrease in software net sales was driven by a single significant transaction during the prior year period affecting the year over year comparison. Our net sales by offering category for EMEA for 2017 and 2016 (as reclassified), were as follows (dollars in thousands):
| | | | | | | | | | | | |
| | | EMEA | |
Sales Mix | | 2017 | | | 2016 | | | % Change | |
| | | | | | (As Reclassified) | | | | |
Hardware | | $ | 536,500 | | | $ | 481,505 | | | | 11 | % |
Software | | | 710,452 | | | | 762,427 | | | | (7 | %) |
Services | | | 108,464 | | | | 94,628 | | | | 15 | % |
| | | | | | | | | | | | |
| | $ | 1,355,416 | | | $ | 1,338,560 | | | | 1 | % |
| | | | | | | | | | | | |
In EMEA, fees earned from activities reported on a net basis of $48,586,000 that were previously reported as part of our software product category in 2016 were reclassified to services to conform to the current year presentation.
Net sales in APAC decreased 5%, or $8.7 million, in 2017 compared to 2016. Excluding the effects of fluctuating foreign currency exchange rates, net sales decreased 7% in 2017 compared to 2016. Increases in hardware and services net sales year over year were offset by a decrease in software net sales during 2017 compared to 2016, resulting from the timing of a single client agreement in the public sector that historically transacted in the fourth quarter but instead transacted in the first quarter of 2018 this year. The growth in hardware net sales was primarily due to our continued expansion of hardware offerings in this market. The growth in services net sales resulted from the contributions of Ignia, as well as a higher volume of sales of software maintenance and cloud subscriptions products that are recorded on a net sales recognition basis in 2017 compared to 2016. Our net sales by offering category for APAC for 2017 and 2016 (as reclassified), were as follows (dollars in thousands):
| | | | | | | | | | | | |
| | | APAC | |
Sales Mix | | 2017 | | | 2016 | | | % Change | |
| | | | | | (As Reclassified) | | | | |
Hardware | | $ | 27,907 | | | $ | 18,916 | | | | 48 | % |
Software | | | 101,412 | | | | 132,718 | | | | (24 | %) |
Services | | | 37,154 | | | | 23,493 | | | | 58 | % |
| | | | | | | | | | | | |
| | $ | 166,473 | | | $ | 175,127 | | | | (5 | %) |
| | | | | | | | | | | | |
In APAC, fees earned from activities reported on a net basis of $9,000 and $10,991,000 that were previously reported as part of our hardware and software product categories, respectively, in 2016, were reclassified to services to conform to the current year presentation.
Net sales by category for North America, EMEA and APAC were as follows for 2017 and 2016 (as reclassified):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | North America | | | EMEA | | | APAC | |
Sales Mix | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Hardware | | | 65 | % | | | 62 | % | | | 40 | % | | | 36 | % | | | 17 | % | | | 11 | % |
Software | | | 25 | % | | | 29 | % | | | 52 | % | | | 57 | % | | | 61 | % | | | 76 | % |
Services | | | 10 | % | | | 9 | % | | | 8 | % | | | 7 | % | | | 22 | % | | | 13 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross Profit. Gross profit increased 24%, or $175.5 million, in 2017 compared to 2016, with gross margin increasing approximately 20 basis points to 13.7% of net sales. Our gross profit and gross profit as a percent of net sales by operating segment for 2017 and 2016 were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | |
| | | 2017 | | | % of Net
Sales | | | 2016 | | | % of Net
Sales | |
North America | | $ | 691,677 | | | | 13.3 | % | | $ | 525,481 | | | | 13.2 | % |
EMEA | | | 190,310 | | | | 14.0 | % | | | 185,687 | | | | 13.9 | % |
APAC | | | 36,583 | | | | 22.0 | % | | | 31,934 | | | | 18.2 | % |
| | | | | | | | | | | | | | | | |
Consolidated | | $ | 918,570 | | | | 13.7 | % | | $ | 743,102 | | | | 13.5 | % |
| | | | | | | | | | | | | | | | |
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
North America’s gross profit in 2017 increased 32% compared to 2016, and as a percentage of net sales, gross margin increased by approximately 10 basis points year over year. The year over year increase in gross margin was primarily attributable to a net increase in product margin, which includes partner funding and freight, of 30 basis points year over year. The net increase in product margin was due primarily to improvements in hardware and software product margin during 2017 compared to 2016 due to the acquisition of Datalink, which includes sales of data center products at higher gross margins then in our core business. The positive effect of the Datalink acquisition was partially offset by lower product margin in our core business due to a higher mix of business with large enterprise clients, where margins tend to be lower than other client groups. Services margin improvement year over year of 11 basis points was driven by an increase in margin generated by sales of warranty services during 2017 compared to 2016, which was driven by the acquisition of Datalink. These increases in margin were offset partially by a decrease in margin from lower fees from enterprise software agreements of 23 basis points during 2017 compared to 2016. The year over year comparison was also affected by a $2.2 million insurance settlement recognized during 2016 as a reduction of cost of sales due to the nature of the related insured loss previously recorded.
EMEA’s gross profit in 2017 increased 2% compared to 2016. Excluding the effects of fluctuating foreign currency exchange rates, gross profit was up 4% in 2017 compared to 2016. As a percentage of net sales, gross margin increased by approximately 10 basis points year over year. The year over year improvement in gross margin was primarily attributable to a 60 basis point increase in services margin due to a higher volume of higher margin services net sales during 2017 compared to 2016 as well as the positive effect on services margin that resulted from the higher volume of sales that were recorded on a net sales recognition basis in 2017 compared to 2016. The improvement in gross margin resulting from higher margin services net sales was partially offset by a net decrease in product margin, which includes partner funding and freight, of 50 basis points during 2017 compared to 2016. The decline in product margin primarily resulted from lower margins on large enterprise and public sector deals transacted during 2017.
APAC’s gross profit increased 15% in 2017 compared to 2016, with gross margin increasing to 22.0% in 2017 from 18.2% in 2016. Excluding the effects of fluctuating foreign currency exchange rates, gross profit increased 13% in 2017 compared to 2016. The improvement in gross margin in 2017 compared to 2016 was due primarily to the positive effect on services margin that results from the higher volume of sales that are recorded on a net sales recognition basis, an increase in the mix of higher margin services net sales and the margin contribution from increases in hardware net sales during 2017 compared to 2016.
Operating Expenses.
Selling and Administrative Expenses. Selling and administrative expenses increased $138.1 million in 2017 compared to 2016. Selling and administrative expenses increased approximately 10 basis points as a percentage of net sales in 2017 compared to 2016.
Selling and administrative expenses as a percent of net sales by operating segment for 2017 and 2016 were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | |
| | | 2017 | | | % of Net
Sales | | | 2016 | | | % of Net
Sales | |
North America | | $ | 530,792 | | | | 10.2 | % | | $ | 401,316 | | | | 10.1 | % |
EMEA | | | 164,305 | | | | 12.1 | % | | | 160,269 | | | | 12.0 | % |
APAC | | | 28,231 | | | | 17.0 | % | | | 23,658 | | | | 13.5 | % |
| | | | | | | | | | | | | | | | |
Consolidated | | $ | 723,328 | | | | 10.8 | % | | $ | 585,243 | | | | 10.7 | % |
| | | | | | | | | | | | | | | | |
North America’s selling and administrative expenses increased 32%, or $129.5 million, in 2017 compared to 2016, and increased approximately 10 basis points year over year as a percentage of net sales to 10.2% of net sales in 2017. The increase in expenses reflects the addition of Datalink to our North America business effective January 2017 and an increase in selling and administrative expenses in our core business of approximately 5% compared to 2016. The addition of Datalink was the primary driver for the $62.4 million increase in salaries and wages, contract labor and teammate benefit expenses for 2017 compared to 2016, as well as year over year increases in travel and entertainment, facilities and marketing expenses. Depreciation and amortization expense also increased approximately $6.0 million year over year, as amortization expense of $11.5 million, associated with the intangible assets acquired from Datalink, was offset partially by the year over year effect of intangible assets acquired in previous acquisitions being fully amortized in the third quarter of 2016. Additionally, increased sales and gross profit in 2017 compared to 2016, resulted in a $37.0 million increase in variable compensation year over year.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
EMEA’s selling and administrative expenses increased 3%, or $4.0 million, in 2017 compared to 2016, and increased approximately 10 basis points to 12.1% of net sales in 2017. Excluding the effects of fluctuating foreign currency exchange rates, selling and administrative expenses increased 4% compared to 2016. The increase in expenses was primarily driven by a $3.1 million increase in salaries and wages and teammate benefits expenses due to increased headcount. This year over year increase in selling and administrative expenses was offset partially by a decrease in amortization expense during 2017 compared to 2016, as intangible assets acquired in previous acquisitions were fully amortized in the third quarter of 2016.
APAC’s selling and administrative expenses increased 19%, or $4.6 million, in 2017 compared to 2016, and increased approximately 350 basis points to 17.0% of net sales in 2017. Excluding the effects of fluctuating foreign currency exchange rates, selling and administrative expenses increased 16% compared to 2016. The year over year increase was primarily driven by increased selling and administrative expenses as a result of the acquisition of Ignia, effective September 1, 2016, which accounted for over half of the year over year increase in selling and administrative expenses. Additionally, salaries and wages expenses increased as we invested to support growth in cloud and services sales.
Severance and Restructuring Expenses. During 2017, North America, EMEA and APAC recorded severance expense, net of adjustments, totaling $4.0 million, $4.9 million and $104,000, respectively. The North America charges related to severance actions taken to realign roles and responsibilities subsequent to the acquisition of Datalink in January 2017, as well as a headcount reduction as part of cost reduction initiatives in the fourth quarter of 2017. The EMEA charges primarily related to headcount reductions in France, Germany and the Netherlands as part our cost reduction and restructuring initiatives in EMEA. The APAC charges primarily related to severance actions taken subsequent to the acquisition of Ignia. Current period charges were offset by adjustments for changes in estimates of previous accruals as cash payments were made during 2017. During 2016, North America, EMEA and APAC recorded severance expense, net of adjustments, totaling $3.0 million, $1.5 million and $118,000, respectively. See Note 8 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of severance and restructuring activities.
Acquisition-related Expenses. During 2017, we incurred $3.2 million in direct third-party transaction costs related to the acquisition of Datalink in North America and $106,000 in such costs related to the acquisition of Caase.com in EMEA. Comparatively, during 2016, we incurred $4.3 million in such costs related to the acquisition of Datalink in North America and $169,000 in such costs related to the acquisition of Ignia in APAC. See Note 21 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of acquisitions.
Non-Operating (Income) Expense.
Interest Income. Interest income for 2017 and 2016 was generated from interest earned on cash and cash equivalent bank balances. The slight increase in interest income year over year is primarily due to higher interest rates earned on such balances and to higher average interest-bearing cash and cash equivalent balances during 2017.
Interest Expense. Interest expense primarily relates to borrowings under our financing facilities and imputed interest under our inventory financing facility. Interest expense increased 122%, or $10.5 million, in 2017 compared to 2016 due primarily to borrowings under our Term Loan A (“TLA”) as well as higher borrowing rates and higher average daily balances under our other financing facilities, in 2017 compared to 2016, while imputed interest under our inventory financing facility increased $3.3 million from 2016 to 2017 to $6.7 million. For a description of our various financing facilities, see Notes 5 and 6 to the Consolidated Financial Statements in Part II, Item 8 of this report.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Net Foreign Currency Exchange Gains/Losses. These gains/losses result from foreign currency transactions, including foreign currency derivative contracts and intercompany balances that are not considered long-term in nature. The change in net foreign currency exchange gains/losses is due primarily to the underlying changes in the applicable exchange rates, partially mitigated by our use of foreign exchange forward contracts to offset the effects of fluctuations in foreign currencies on certain of ournon-functional currency assets and liabilities.
Other Expense, Net. Other expense, net, consists primarily of bank fees associated with our cash management activities and was relatively flat in 2017 compared to 2016.
Income Tax Expense.Our effective tax rate for 2017 was 43.0% compared to 39.3% in 2016. The increase in the tax rate from 2016 to 2017 was primarily due to the effect of U.S. federal tax reform that was enacted in December 2017, which accounted for 8.4% of our effective tax rate. The effective tax rate in 2017 was higher than the federal statutory rate of 35.0% primarily due to the effect of U.S. federal tax reform enacted during the fourth quarter of 2017, as previously noted, as well as state income taxes, net of federal income tax benefits, and increases in the valuation allowances in certain foreign jurisdictions. These increases in our effective tax rate in 2017 were offset partially by lower taxes on earnings in foreign jurisdictions. See Note 11 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of income tax expense.
2016 Compared to 2015
As previously noted, the sales mix among our hardware, software and services categories for the years ended December 31, 2016 and 2015 have been reclassified to conform to changes made to the current year presentation, as reflected in the following results of operations discussion for these periods. These changes in classification had no effect on previously reported total net sales, total costs of goods sold or gross profit amounts.
Net Sales. Net sales increased 2%, or $112.4 million, in 2016 compared to 2015. Net sales of products (hardware and software) increased 1% and net sales of services increased 14% in 2016 (as reclassified) compared to 2015 (as reclassified). Our net sales by operating segment for 2016 and 2015 were as follows (dollars in thousands):
| | | | | | | | | | | | |
| | | 2016 | | | 2015 | | | % Change | |
North America | | $ | 3,971,828 | | | $ | 3,823,528 | | | | 4 | % |
EMEA | | | 1,338,560 | | | | 1,371,137 | | | | (2 | %) |
APAC | | | 175,127 | | | | 178,425 | | | | (2 | %) |
| | | | | | | | | | | | |
Consolidated | | $ | 5,485,515 | | | $ | 5,373,090 | | | | 2 | % |
| | | | | | | | | | | | |
Net sales in North America increased 4%, or $148.3 million, in 2016 compared to 2015. Net sales of hardware and services (as reclassified) increased 5% and 12%, respectively, year over year, while net sales of software (as reclassified) decreased 1% year to year. The improvement in net sales in the hardware category was due primarily to higher sales of client devices, servers and storage products. The increase in services net sales reflects the BlueMetal acquisition in October 2015 as well as organic growth in technical services projects. Services net sales during 2016 also reflected the continued trend toward higher sales of cloud-based offerings and a higher mix of software maintenance sales that are recorded on a net sales recognition basis, with net sales equal to the gross profit on the transaction. Our net sales by offering category for North America for 2016 (as reclassified) and 2015 (as reclassified), were as follows (dollars in thousands):
| | | | | | | | | | | | |
| | | North America | | | | |
Sales Mix | | 2016 | | | 2015 | | | % Change | |
| | | (As Reclassified) | | | (As Reclassified) | | | | |
Hardware | | $ | 2,454,889 | | | $ | 2,336,764 | | | | 5 | % |
Software | | | 1,146,808 | | | | 1,157,168 | | | | (1 | %) |
Services | | | 370,131 | | | | 329,596 | | | | 12 | % |
| | | | | | | | | | | | |
| | $ | 3,971,828 | | | $ | 3,823,528 | | | | 4 | % |
| | | | | | | | | | | | |
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
In North America, fees earned from activities reported on a net basis of $270,000 and $87,984,000 that were previously reported as part of our hardware and software product categories, respectively, in 2016, and fees earned from activities reported on a net basis of $24,000 and $74,101,000 that were previously reported as part of our hardware and software product categories, respectively, in 2015, were reclassified to services to conform to the current year presentation.
Net sales in EMEA decreased 2%, or $32.6 million, in 2016 compared to 2015. Excluding the effects of fluctuating foreign currency exchange rates, net sales increased 4% in 2016 compared to 2015. Net sales of software (as reclassified) were up 1% year over year, while net sales of hardware and services (as reclassified) were down 9% and 1%, respectively, year to year. The increase in software net sales in 2016 compared to 2015 was driven by increased volume with large enterprise clients. The decrease in services net sales was due primarily to the relative impact year over year of the volume of sales of software maintenance and cloud subscription products that are recorded on a net sales recognition basis, offset partially by increased sales of license consulting services and partner delivered third-party services to new and existing clients across the region. Our net sales by offering category for EMEA for 2016 (as reclassified) and 2015 (as reclassified), were as follows (dollars in thousands):
| | | | | | | | | | | | |
| | | EMEA | | | | |
| | | Years Ended December 31, | | | | |
Sales Mix | | 2016 | | | 2015 | | | % Change | |
| | | (As Reclassified) | | | (As Reclassified) | | | | |
Hardware | | $ | 481,505 | | | $ | 531,308 | | | | (9 | %) |
Software | | | 762,427 | | | | 756,373 | | | | 1 | % |
Services | | | 94,628 | | | | 83,456 | | | | 13 | % |
| | | | | | | | | | | | |
| | $ | 1,338,560 | | | $ | 1,371,137 | | | | (2 | %) |
| | | | | | | | | | | | |
In EMEA, fees earned from activities reported on a net basis of $48,586,000 and $43,388,000 that were previously reported as part of our software product category in 2016 and 2015, respectively, were reclassified to services to conform to the current year presentation.
Net sales in APAC decreased 2%, or $3.3 million, in 2016 compared to 2015. Excluding the effects of fluctuating foreign currency exchange rates, net sales in 2016 remained flat compared to 2015. An increase in services and hardware net sales year over year was offset by a decrease in software net sales during 2016 compared to 2015. Our net sales by offering category for APAC for 2016 (as reclassified) and 2015 (as reclassified), were as follows (dollars in thousands):
| | | | | | | | | | | | |
| | | APAC | | | | |
Sales Mix | | 2016 | | | 2015 | | | % Change | |
| | | (As Reclassified) | | | (As Reclassified) | | | | |
Hardware | | $ | 18,916 | | | $ | 14,327 | | | | 32 | % |
Software | | | 132,718 | | | | 149,607 | | | | (11 | %) |
Services | | | 23,493 | | | | 14,491 | | | | 62 | % |
| | | | | | | | | | | | |
| | $ | 175,127 | | | $ | 178,425 | | | | (2 | %) |
| | | | | | | | | | | | |
In APAC, fees earned from activities reported on a net basis of $9,000 and $10,991,000 that were previously reported as part of our hardware and software product categories, respectively, in 2016, and fees earned from activities reported on a net basis of $6,000 and $8,439,000 that were previously reported as part of our hardware and software product categories, respectively, in 2015, were reclassified to services to conform to the current year presentation.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Net sales by category for North America, EMEA and APAC were as follows for 2016 (as reclassified) and 2015 (as reclassified):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | North America | | | EMEA | | | APAC | |
Sales Mix | | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Hardware | | | 62 | % | | | 61 | % | | | 36 | % | | | 39 | % | | | 11 | % | | | 8 | % |
Software | | | 29 | % | | | 30 | % | | | 57 | % | | | 55 | % | | | 76 | % | | | 84 | % |
Services | | | 9 | % | | | 9 | % | | | 7 | % | | | 6 | % | | | 13 | % | | | 8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross Profit. Gross profit increased 4%, or $26.8 million, in 2016 compared to 2015, with gross margin increasing approximately 20 basis points to 13.5% of net sales. Our gross profit and gross profit as a percent of net sales by operating segment for 2016 and 2015 were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | |
| | | 2016 | | | % of Net
Sales | | | 2015 | | | % of Net
Sales | |
North America | | $ | 525,481 | | | | 13.2 | % | | $ | 501,563 | | | | 13.1 | % |
EMEA | | | 185,687 | | | | 13.9 | % | | | 186,287 | | | | 13.6 | % |
APAC | | | 31,934 | | | | 18.2 | % | | | 28,482 | | | | 16.0 | % |
| | | | | | | | | | | | | | | | |
Consolidated | | $ | 743,102 | | | | 13.5 | % | | $ | 716,332 | | | | 13.3 | % |
| | | | | | | | | | | | | | | | |
North America’s gross profit in 2016 increased 5% compared to 2015, and as a percentage of net sales, gross margin increased by approximately 10 basis points year over year. The year over year increase in gross margin was primarily attributable to increases in supplier discounts year over year as we took advantage of early pay discounts offered by certain of our partners, which generated a 6 basis point improvement in margin year over year. During 2016, we also recognized a $2.2 million insurance settlement as a reduction of cost of sales due to the nature of the related insured loss previously recorded. The insurance settlement accounted for 6 basis points of the year over year margin expansion during 2016 compared to 2015. Although an increase in higher margin consulting services sales generated a 15 basis point improvement in gross margin year over year, the increase was partially offset by a decline in margin generated by sales of warranty services of 12 basis points year to year.
EMEA’s gross profit remained flat in 2016 compared to 2015. Excluding the effects of fluctuating foreign currency exchange rates, gross profit was up 7% in 2016 compared to 2015. As a percentage of net sales, gross margin increased by approximately 30 basis points year over year. The year over year increase in gross margin was primarily attributable to the positive effect on gross margin that results from the higher volume of sales that are recorded on a net sales recognition basis within the net sales line item. Changes in the mix and size of transactions and an increase in partner funding earlier in 2016 also contributed to the margin improvement during 2016 compared to 2015. In addition, we recognized an increase in margin resulting from higher fees from enterprise software agreements during 2016 compared to 2015.
APAC’s gross profit increased 12% in 2016 compared to 2015, with gross margin increasing to 18.2% in 2016 from 16.0% in 2015. Excluding the effects of fluctuating foreign currency exchange rates, gross profit increased 14% in 2016 compared to 2015. The improvement in gross margin in 2016 compared to 2015 was due primarily to the positive effect on margin that results from the higher volume of sales that are recorded on a net sales recognition basis, an increase in the mix of higher margin services net sales, higher partner funding and an increase in hardware sales during 2016 compared to 2015.
Operating Expenses.
Selling and Administrative Expenses. Selling and administrative expenses increased $337,000 in 2016 compared to 2015. Selling and administrative expenses decreased approximately 20 basis points as a percentage of net sales in 2016 compared to 2015.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Selling and administrative expenses as a percent of net sales by operating segment for 2016 and 2015 were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | |
| | | 2016 | | | % of Net
Sales | | | 2015 | | | % of Net
Sales | |
North America | | $ | 401,316 | | | | 10.1 | % | | $ | 396,603 | | | | 10.4 | % |
EMEA | | | 160,269 | | | | 12.0 | % | | | 165,879 | | | | 12.1 | % |
APAC | | | 23,658 | | | | 13.5 | % | | | 22,424 | | | | 12.6 | % |
| | | | | | | | | | | | | | | | |
Consolidated | | $ | 585,243 | | | | 10.7 | % | | $ | 584,906 | | | | 10.9 | % |
| | | | | | | | | | | | | | | | |
North America’s selling and administrative expenses increased 1%, or $4.7 million, in 2016 compared to 2015, but decreased approximately 30 basis points year to year as a percentage of net sales to 10.1% of net sales in 2016. Teammate benefits expense, including healthcare expenses, increased $6.0 million year over year due to an increase in healthcare claims, and variable compensation increased $4.6 million as a result of the increase in net sales and gross profit year over year. These increases in expenses during 2016 compared to 2015 were partially offset by a decline in the provision for losses on accounts receivable of $3.4 million in 2016 compared to 2015 due to favorable collection results and a decrease in salaries and wages and contract labor of $2.7 million resulting from cost reduction initiatives implemented earlier in 2016 across our North America business. Our results for 2015 included anon-cash charge of $800,000 to reduce the carrying amount of our real estate held for sale to its estimated fair value less costs to sell.
EMEA’s selling and administrative expenses decreased 3%, or $5.6 million, in 2016 compared to 2015, and decreased approximately 10 basis points to 12.0% of net sales in 2016. Excluding the effects of fluctuating foreign currency exchange rates, selling and administrative expenses increased 3% compared to the prior year. The increase in expenses (excluding the effects of fluctuating foreign currency exchange rates) was primarily driven by increased salaries and wages and teammate benefits expenses attributed to higher average cost per head in conjunction with our investments in sales and services related headcount to support services and cloud growth across the region.
APAC’s selling and administrative expenses increased 6%, or $1.2 million, in 2016 compared to 2015, and increased approximately 90 basis points to 13.5% of net sales in 2016. Excluding the effects of fluctuating foreign currency exchange rates, selling and administrative expenses increased 7% compared to the prior year. The year over year increase is primarily driven by higher variable compensation as a result of the increase in gross profit year over year and increased selling and administrative expenses as a result of the acquisition of Ignia, a business technology consulting and managed services provider, effective September 1, 2016.
Severance and Restructuring Expenses. During 2016, North America, EMEA and APAC recorded severance expense, net of adjustments, totaling $3.0 million, $1.5 million and $118,000, respectively. The North America charges related to a headcount reduction as part of cost reduction initiatives early in 2016 noted previously, while the EMEA charges related to significant restructuring activities, primarily in the United Kingdom, Germany and France, as we worked to reduce our selling and administrative expenses in EMEA. Current period charges were offset by adjustments for changes in estimates of previous accruals as cash payments were made during 2016. During 2015, North America and EMEA recorded severance expense, net of adjustments, totaling $1.1 million and $3.8 million, respectively. APAC did not record any severance expense in 2015. See Note 8 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of severance and restructuring activities.
Acquisition-related Expenses. During 2016, we incurred $169,000 in direct third-party transaction costs related to the acquisition of Ignia and $4.3 million in such costs related to the acquisition of Datalink that was completed on January 6, 2017. See Note 21 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of acquisitions.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Non-Operating (Income) Expense.
Interest Income. Interest income for 2016 and 2015 was generated from interest earned on cash and cash equivalent bank balances. The increase in interest income year over year is primarily due to higher interest rates earned on such balances and to higher average interest-bearing cash and cash equivalent balances during 2016.
Interest Expense. Interest expense primarily relates to borrowings under our financing facilities and imputed interest under our inventory financing facility. Interest expense increased 19% in 2016 compared to 2015 due primarily to higher borrowing rates and higher average daily balances under our debt facilities in 2016 compared to 2015, while imputed interest under our inventory financing facility remained flat from 2015 to 2016 at $3.4 million. For a description of our various financing facilities, see Notes 5 and 6 to the Consolidated Financial Statements in Part II, Item 8 of this report.
Net Foreign Currency Exchange Gains/Losses. These gains/losses result from foreign currency transactions, including foreign currency derivative contracts and intercompany balances that are not considered long-term in nature. The change in net foreign currency exchange gains/losses is due primarily to the underlying changes in the applicable exchange rates, partially mitigated by our use of foreign exchange forward contracts to offset the effects of fluctuations in foreign currencies on certain of ournon-functional currency assets and liabilities.
Other Expense, Net. Other expense, net, consists primarily of bank fees associated with our cash management activities.
Income Tax Expense.Our effective tax rate for 2016 was 39.3% compared to 36.4% in 2015. The increase in the tax rate from 2015 to 2016 was primarily due to the effect of a change in tax law that was enacted in December 2016 related to the taxation of foreign currency translation gains or losses arising from qualified business units and the effect ofnon-deductible acquisition-related expenses incurred in 2016. The effective tax rate in 2016 was higher than the federal statutory rate of 35.0% primarily due to the increases in the valuation allowances in certain foreign jurisdictions and state taxes in the United States as well as the tax law change during the fourth quarter of 2016 and the effect ofnon-deductible acquisition-related expenses incurred in 2016, as noted previously. These increases in our effective tax rate in 2016 were offset partially by lower taxes on earnings in foreign jurisdictions. See Note 11 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of income tax expense.
Liquidity and Capital Resources
The following table sets forth certain consolidated cash flow information for 2017, 2016 and 2015 (in thousands):
| | | | | | | | | | | | |
| | | 2017 | | | 2016 | | | 2015 | |
Net cash (used in) provided by operating activities | | $ | (305,426 | ) | | $ | 96,128 | | | $ | 181,102 | |
Net cash used in investing activities | | | (204,645 | ) | | | (21,185 | ) | | | (57,637 | ) |
Net cash provided by (used in) financing activities | | | 397,121 | | | | (58,230 | ) | | | (83,328 | ) |
Foreign currency exchange effect on cash and cash equivalent balances | | | 15,899 | | | | (1,809 | ) | | | (16,683 | ) |
| | | | | | | | | | | | |
(Decrease) increase in cash and cash equivalents | | | (97,051 | ) | | | 14,904 | | | | 23,454 | |
Cash and cash equivalents at beginning of year | | | 202,882 | | | | 187,978 | | | | 164,524 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 105,831 | | | $ | 202,882 | | | $ | 187,978 | |
| | | | | | | | | | | | |
Cash and Cash Flow
Our primary uses of cash during 2017 were to fund working capital requirements, pay down our debt balances, fund capital expenditures and acquire Caase.com and Datalink. Operating activities used $305.4 million in cash in 2017. Both the 2017 and 2016 results are affected by individually significant transactions at each year end, whereby a single significant receivable was collected from a client in the fourth quarter of the year for which the related payment to the supplier was due and paid in January of the following year, as discussed in more detail below. During 2017, we had net combined borrowings on our long-term debt facilities of $269.3 million and acquired Caase.com and Datalink for $6.0 million and $180.9 million, respectively, net of cash and cash equivalents acquired. Capital expenditures were $19.2 million in 2017, a 57% increase from 2016, reflecting higher IT investments in our core ERP systems ande-commerce and digital marketing platforms year over year. Cash and cash equivalent balances in 2017 were positively affected by $15.9 million as a result of foreign currency exchange rates.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
We anticipate that cash flows from operations, together with the funds available under our financing facilities, will be adequate to support our cash and working capital requirements for operations as well as other strategic investments over the next 12 months. 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, repurchases of our common stock and debt repayments, for at least the next 12 months.
Net cash (used in) provided by operating activities. Cash flows from operating activities reflect our net earnings, adjusted fornon-cash items such as depreciation, amortization, stock-based compensation expense and write-offs and write-downs of assets, as well as changes in asset and liability balances. Net earnings for 2017 was also adjusted for the loss on sale of our Russia business, which included anon-cash charge for the release of our cumulative translation adjustment balance upon sale of the foreign entity. As noted previously, our net sales grew 22% in 2017 and in particular, our North America net sales grew 30%. This level of growth required significant working capital investments as we experienced higher demand for inventory positions with key clients and, at the same time, our accounts receivable balances began to age as collection efforts did not keep up with the growth. The 2017 results also reflect the collection of a single significant receivable from a client in the fourth quarter of 2016 for which the related payment to the supplier of approximately $160 million was due and paid in January 2017, as noted previously. Further impacting our operating cash flows was the fact that we report cash flows associated with trade payables financed under our inventory financing facility in the financing section of our statement of cash flows. In 2017, and most notably in the fourth quarter, we expanded the use of that facility with certain vendors. Had we not leveraged the facility during 2017, the net borrowings under our inventory financing facility of $141.0 million that are reflected as cash flows provided by financing activities would have been included within trade payables, which are reflected in the operating activities section of our statement of cash flows. The increase in inventories was primarily attributable to an increase in inventory levels at December 31, 2017 to support specific client engagements. The decrease in deferred revenue was a result of revenue recognition in 2017 on a number of larger client transactions in North America for which monies had been collected from clients prior to December 31, 2016, in advance of meeting the criteria for revenue recognition.
In 2016, the increases in accounts receivable and accounts payable reflected increased sales and associated costs of goods sold, respectively, in 2016 compared to 2015. However, the 2016 results were also affected by a single significant receivable collected from a client in the fourth quarter of 2016 for which the related payment to the supplier of approximately $160 million was due and paid in January 2017, as noted previously. In the fourth quarter of 2015, we had a similar experience with a significant receivable collected in the quarter for which the payment to the supplier of approximately $60 million was not made until the first quarter of 2016. Excluding the effects of these two individually significant timing differences, cash flow from operations would have been nominal for 2016. Additionally, the increase in accounts payable reflected as cash provided by operating activities in 2016 was affected by the increased use of our inventory financing facility in 2016 to facilitate the purchase of inventory from various suppliers. Increases in accounts payable under this facility were reflected as cash provided by financing activities, as discussed below. Had these purchases been made without using the inventory financing facility during 2016, the net borrowings under our inventory financing facility of $48.6 million that were reflected as cash flows from financing activities would have been reflected as an increase in accounts payable, which would have been an increase in cash provided by operating activities. We used more working capital in the fourth quarter of 2016 compared to the fourth quarter of 2015, as our sales growth was weighted to the last two months of the current year. The $50.1 million increase in other assets was primarily a result of our deferral of costs for certain payments made or payable to partners at December 31, 2016, in advance of our being able to recognize the related revenue. The $28.9 million increase in inventories was primarily attributable to an increase in inventory levels at December 31, 2016, to support specific client engagements and hardware sale transactions in transit to clients as of December 31, 2016 such that delivery was not deemed to have occurred until the product was received by the client in early January 2017.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
In 2015, the increases in accounts receivable and accounts payable reflected increased sales and associated costs of goods sold, respectively, in 2015 compared to 2014. However, the 2015 results were also affected by the single significant receivable collected from a client in the fourth quarter of 2015 for which the related payment to the supplier of approximately $60 million was due and paid in January 2016, as noted previously. The increase in other assets was primarily a result of our deferral of costs for certain payments made or payable to partners at December 31, 2015, in advance of our being able to recognize the related revenue. As a result, cash flows from operating activities in 2015 exceeded our historical average annual cash flow generation of $80 million to $120 million.
Our consolidated cash flow operating metrics for the quarters ended December 31, 2017, 2016 and 2015 were as follows:
| | | | | | | | | | | | |
| | | 2017 | | | 2016 | | | 2015 | |
Days sales outstanding in ending accounts receivable (“DSOs”)(a) | | | 94 | | | | 90 | | | | 87 | |
Days inventory outstanding (“DIOs”) (b) | | | 13 | | | | 12 | | | | 10 | |
Days purchases outstanding in ending accounts payable (“DPOs”)(c) | | | (72 | ) | | | (88 | ) | | | (77 | ) |
| | | | | | | | | | | | |
Cash conversion cycle (days)(d) | | | 35 | | | | 14 | | | | 20 | |
| | | | | | | | | | | | |
(a) | Calculated as the balance of accounts receivable, net at the end of the period divided by daily net sales. Daily net sales is calculated as net sales for the quarter divided by 92 days. |
(b) | Calculated as average inventories (excluding inventories not available for sale) divided by daily costs of goods sold. Average inventories is calculated as the sum of the balances of inventories at the beginning of the period plus inventories at the end of the period divided by two. Daily costs of goods sold is calculated as costs of goods sold for the quarter divided by 92 days. |
(c) | Calculated as the sum of the balances of accounts payable – trade and accounts payable – inventory financing facility at the end of the period divided by daily costs of goods sold. Daily costs of goods sold is calculated as costs of goods sold for the quarter divided by 92 days. |
(d) | Calculated as DSOs plus DIOs, less DPOs. |
Our cash conversion cycle was 35 days in the fourth quarter ended December 31, 2017, compared to 14 days in the fourth quarter of 2016. Our 2016 cash conversion cycle was below our target range of 20 to 25 days as a result of unusually high DPOs associated with the $160 million payment timing difference in North America at the end of the prior year period, as discussed below. Our 2017 cash conversion cycle was above our target range due to the increases in our inventory and accounts receivable balances noted above. We expect working capital trends to return to normalized levels and have action plans in place to improve our cash flow efficiency in 2018.
Our cash conversion cycle was 14 days in the fourth quarter ended December 31, 2016, a decrease of six days from the fourth quarter of 2015, due primarily to an 11 day increase in DPOs driven by a single significant payment to a supplier in North America that was due and paid in January 2017. Although the payment to the supplier was not due until afteryear-end, we collected on the accounts receivable from the client in the fourth quarter of 2016 under normal credit terms. Both the 2016 and 2015 results are affected by individually significant transactions at each year end; however, the magnitude of the 2016 transaction had a greater effect on DPOs. The computation of DPOs for the quarter ended December 31, 2016 includes a payable to a supplier of $160 million, and the computation of DPOs for the quarter ended December 30, 2015 includes a payable to a supplier of $60 million, both of which do not have corresponding accounts receivable outstanding as of the end of the respective periods.
Our cash conversion cycle was 20 days in the fourth quarter ended December 31, 2015, a decrease of four days from the fourth quarter of 2014, due primarily to an increase in DPOs in North America driven by a single significant payment to a supplier that was due and paid in January 2016, after the resolution of certain invoicing issues with the supplier. Although we did not pay the supplier until afteryear-end, we collected on the accounts receivable from the client in the fourth quarter of 2015 under normal credit terms.
We expect that cash flow from operations will be used, at least partially, to fund working capital as we typically pay our partners on average terms that are shorter than the average terms we grant to our clients in order to take advantage of supplier discounts. We intend to use cash generated in 2018 in excess of working capital needs to support our capital expenditures for the year, to repurchase shares of our common stock and to pay down our debt balances. We also may use cash to fund potential acquisitions.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Net cash used in investing activities. Capital expenditures of $19.2 million, $12.3 million and $13.4 million in 2017, 2016 and 2015, respectively, were primarily related to technology and facility enhancements. We expect total capital expenditures in 2018 to be between $15.0 million and $20.0 million, primarily for technology-related upgrade projects and the integration of prior acquisitions.
During 2017 we acquired Caase.com and Datalink for $6.0 million and $180.9 million, respectively, net of cash and cash equivalents acquired. During 2016, we acquired Ignia for $10.8 million, net of cash acquired, and during 2015, we acquired BlueMetal for $44.2 million, net of cash acquired.
Net cash provided by (used in) financing activities. During 2017, we had net combined borrowings on our long-term debt under our revolving facility, TLA and accounts receivable securitization facility (“ABS facility”) of $269.3 million and had net borrowings under our inventory financing facility of $141.0 million. During 2016, we made net combined repayments on our long-term debt under our revolving facility and our ABS facility of $49.5 million and had net borrowings under our inventory financing facility of $48.6 million. In 2016, we also funded $50.0 million of repurchases of our common stock. During 2015, we had net combined borrowings on our long-term debt under our revolving facility and our ABS facility of $28.0 million and made net repayments under our inventory financing facility of $16.5 million. In 2015, we also funded $91.8 million of repurchases of our common stock.
Financing Facilities
As of December 31, 2017, our long-term debt balance includes $25.0 million outstanding under our $250.0 million ABS facility and $117.5 million outstanding under our $350.0 million revolving facility. In connection with the acquisition of Datalink on January 6, 2017, we amended our revolving facility to expand the facility by $175.0 million in the form of a TLA that requires amortization payments in years one through five. As of December 31, 2017, we had $166.3 million outstanding under our TLA. See Note 6 to the Consolidated Financial Statements in Part II, Item 8 of this report for a description of our amendment to our revolving facility in connection with our acquisition of Datalink.
As of December 31, 2017, the current portion of our long-term debt relates to our capital leases and other financing obligations as well as the amortization payments due in 2018 under our TLA. Our objective is to pay our debt balances down while retaining adequate cash balances to meet overall business objectives.
While the ABS facility has a stated maximum amount, the actual availability under the ABS facility is limited by the quantity and quality of the underlying accounts receivable. As of December 31, 2017, qualified receivables were sufficient to permit access to the full $250.0 million under the ABS facility.
Our consolidated debt balance that can be outstanding at the end of any fiscal quarter under our revolving facility, our TLA and our ABS facility is limited by certain financial covenants, particularly a maximum leverage ratio. The maximum leverage ratio is calculated as aggregate debt outstanding divided by the sum of the Company’s trailing twelve month net earnings (loss) plus (i) interest expense, excludingnon-cash imputed interest on our inventory financing facility, (ii) income tax expense (benefit), (iii) depreciation and amortization,(iv) non-cash stock-based compensation, (v) extraordinary ornon-recurringnon-cash losses or expenses and (vi) certain cash restructuring and acquisition-related charges and synergies, not to exceed a specified cap (“adjusted earnings”). The maximum leverage ratio permitted under the facilities was increased to 3.50 times trailing twelve-month adjusted earnings in connection with the acquisition of Datalink in January 2017. We anticipate that we will be in compliance with our maximum leverage ratio requirements, which will decrease to 3.25 in 2018, over the next four quarters. However, a significant drop in the Company’s adjusted earnings would limit the amount of indebtedness that could be outstanding at the end of any fiscal quarter to a level that would be below the Company’s consolidated maximum facility amounts. Based on the maximum permitted leverage ratio as of December 31, 2017, the Company’s debt balance that could have been outstanding under our revolving facility, TLA and ABS facility was the full amount of the maximum borrowing capacity of $766.3 million.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Our revolving facility, our TLA and our ABS facility contain various covenants customary for transactions of this type, including limitations on the payment of dividends and the requirement that we comply with maximum leverage and minimum fixed charge ratio requirements, comply with a minimum receivable requirement and meet monthly, quarterly and annual reporting requirements. If we fail to comply with these covenants, the lenders would be able to demand payment within a specified time period. At December 31, 2017, we were in compliance with all such covenants. Further, the terms of the ABS facility identify various circumstances that would result in an “amortization event” under the facility. As of December 31, 2017, no such “amortization event” had occurred.
We also have an agreement with a financial intermediary to facilitate the purchase of inventory from various suppliers under certain terms and conditions. These amounts are classified separately as accounts payable - inventory financing facility in our consolidated balance sheets.
The aggregate availability for vendor purchases under our inventory financing facility is $325,000,000. From time to time and at our option, we may request to increase the aggregate amount available under the inventory financing facility by up to an aggregate of $25,000,000, subject to customary conditions. The facility matures on June 23, 2021. Additionally, the facility may be renewed under certain circumstances described in the agreement for successive12-month periods. Interest does not accrue on accounts payable under this facility provided the accounts payable are paid within stated vendor terms (typically 60 days).
Notes 5 and 6 to the Consolidated Financial Statements in Part II, Item 8 of this report also include: a description of our financing facilities; amounts outstanding; amounts available and weighted average borrowings and interest rates during the year.
Undistributed Foreign Earnings
Cash and cash equivalents held by foreign subsidiaries are generally subject to U.S. income taxation upon repatriation to the United States. As a result of the U.S. federal tax reform enacted in December 2017, all undistributed foreign earnings are deemed distributed. We provided for U.S. income and withholding taxes on the earnings deemed distributed from all of our foreign subsidiaries during 2017. As of December 31, 2017, we had approximately $87.1 million in cash and cash equivalents in certain of our foreign subsidiaries. As of December 31, 2017, the majority of our foreign cash resides in the Netherlands, Canada and Australia. 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 though actual dividend distributions.
Off-Balance Sheet Arrangements
We have entered intooff-balance sheet arrangements, which include guaranties and indemnifications. These arrangements are discussed in Note 17 to the Consolidated Financial Statements in Part II, Item 8 of this report. We believe that none of ouroff-balance sheet arrangements have, or are reasonably likely to have, a material current or future effect on our financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Contractual Obligations
At December 31, 2017, our contractual obligations for continuing operations were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | Payments due by period | |
| | | Total | | | Less than
1 Year | | | 1-3
Years | | | 3-5
Years | | | More than
5 Years | |
Long-term debt(a) | | $ | 308,750 | | | $ | 13,125 | | | $ | 64,375 | | | $ | 231,250 | | | $ | — | |
Capital lease obligations, including interest payments | | | 5,436 | | | | 3,620 | | | | 1,816 | | | | — | | | | — | |
Inventory financing facility(b) | | | 319,468 | | | | 319,468 | | | | — | | | | — | | | | — | |
Operating lease obligations(c) | | | 75,499 | | | | 18,601 | | | | 28,739 | | | | 16,136 | | | | 12,023 | |
Severance and restructuring obligations(d) | | | 4,640 | | | | 4,640 | | | | — | | | | — | | | | — | |
Other contractual obligations(e) | | | 40,418 | | | | 12,631 | | | | 20,519 | | | | 5,074 | | | | 2,194 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 754,211 | | | $ | 372,085 | | | $ | 115,449 | | | $ | 252,460 | | | $ | 14,217 | |
| | | | | | | | | | | | | | | | | | | | |
(a) | Reflects the $25.0 million outstanding at December 31, 2017 under our ABS facility as due in June 2019, the date at which the facility matures, $117.5 million outstanding at December 31, 2017 under our revolving facility as due in June 2021, the date at which the facility matures, and $166.3 million outstanding at December 31, 2017 under our TLA. The TLA requires amortization payments of 5%, 7.5%, 10%, 12.5% and 15% of the original principal balance in years one through five, respectively, to be paid quarterly through March 31, 2021, with the remaining balance of $107.2 million due at maturity on June 23, 2021. See further discussion in Note 6 to the Consolidated Financial Statements in Part II, Item 8 of this report. |
(b) | As of December 31, 2017, this amount has been included in our contractual obligations table above as being due in less than 1 year due to the30- to120-day stated vendor terms. See further discussion in Note 5 to the Consolidated Financial Statements in Part II, Item 8 of this report. |
(c) | Amounts in the table above excludenon-cancellable rental income of approximately $1.6 million due in less than one year and a total of approximately $1.6 million due in years one through three. |
(d) | As a result of approved severance and restructuring plans, we expect future cash expenditures related to employee termination benefits. See further discussion in Note 8 to the Consolidated Financial Statements in Part II, Item 8 of this report. |
(e) | The table above includes: |
| I. | Estimated interest payments of $603,000 in 2018 and $301,000 in the first six months of 2019, based on the current debt balance at December 31, 2017 of $25.0 million under our ABS facility, multiplied by the floating interest rate applicable at December 31, 2017 of 2.41% per annum. |
| II. | Estimated interest payments of $4.1 million in 2018, 2019 and 2020 and $2.1 million in the first six months of 2021, based on the current debt balance at December 31, 2017 of $117.5 million under our revolving facility, multiplied by the floating interest rate applicable at December 31, 2017 of 3.49% per annum. |
| III. | Estimated interest payments of $5.7 million in 2018, $5.2 million in 2019, $4.5 million in 2020 and $2.0 million in the first six months of 2021, based on the current debt balance at December 31, 2017 of $166.3 million under our TLA, multiplied by the floating interest rate applicable at December 31, 2017 of 3.57% per annum. |
| IV. | Amounts totaling $197,000 through 2018 for other contractual obligations. |
| V. | We estimate that we will owe $7.5 million in future years in connection with the obligations to perform asset-retirement activities that are conditional on a future event. |
The table above excludes $4.3 million of unrecognized tax benefits, including $287,000 related to accrued interest, as we are unable to reasonably estimate the ultimate amount or timing of settlement. See further discussion in Note 11 to the Consolidated Financial Statements in Part II, Item 8 of this report.
Although we set purchase targets with our partners tied to the amount of supplier reimbursements we receive, we have no material contractual purchase obligations with our partners.
Acquisitions
Our strategy includes the possible acquisition of or investments in other businesses to expand or complement our operations or to add certain services capabilities. The magnitude, timing and nature of any future acquisitions or investments will depend on a number of factors, including the availability of suitable candidates, the negotiation of acceptable terms, our financial capabilities and general economic and business conditions. Financing for future transactions would result in the utilization of cash, incurrence of additional debt, issuance of stock or some combination of the three. See Note 21 to the Consolidated Financial Statements in Part II, Item 8 of this report for a discussion of our acquisitions of Caase.com on September 26, 2017 and Datalink on January 6, 2017 and the amendment to our revolving facility to fund, in part, the acquisition of Datalink.
INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Inflation
We have historically not been adversely affected by inflation, as technological advances and competition within the IT industry have generally caused the prices of the products we sell to decline and product life cycles tend to be short. This requires our growth in unit sales to exceed the decline in prices in order to increase our net sales. We believe that most price increases could be passed on to our clients, as prices charged by us are not set by long-term contracts; however, as a result of competitive pressure, there can be no assurance that the full effect of any such price increases could be passed on to our clients.
Recently Issued Accounting Standards
The information contained in Note 1 to the Consolidated Financial Statements in Part II, Item 8 of this report concerning a description of recent accounting pronouncements, including our expected dates of adoption and the estimated effects on our results of operations and financial condition, is incorporated by reference herein.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information contained in Note 12 to the Consolidated Financial Statements in Part II, Item 8 of this report concerning a description of market risk management, including interest rate risk and foreign currency exchange risk, is incorporated by reference herein.
INSIGHT ENTERPRISES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Item 8. Financial Statements and Supplementary Data
Item 8. | Financial Statements and Supplementary Data |
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Insight Enterprises, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Insight Enterprises, Inc. and subsidiaries (the
“Company”)Company) as of December 31,
20172022 and
2016,2021, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31,
2017,2022, and the related notes (collectively, the
“consolidatedconsolidated financial
statements”)statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
20172022 and
2016,2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31,
2017,2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the Company’s internal control over financial reporting as of December 31, 2017,2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2018,16, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for its convertible debt instrument in 2022 due to the adoption of the FASB’s Accounting Standards Update No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of revenue recognition
As discussed in Note 1 to the consolidated financial statements, the Company recognizes revenue when it satisfies a performance obligation by transferring control of a product or service or by arranging for the sales of a vendor’s product or service to a client. The Company measures revenue based on the consideration received in a contract with a client, and excludes any sales incentives and amounts collected on behalf of third parties. The Company offers hardware and software products, as well as services. Given the number of product and service offerings, significant judgment is exercised by the Company in recognizing revenue, including the following decisions:
▪Determining the point in time when a customer takes control of hardware.
▪Determining the point in time when the customer acquires or renews the right to use or copy software under license and control transfers to the customer.
▪Evaluating the Company as either a principal or an agent for hardware and software products and services, and the related recognition of revenue from the customer on a gross or a net basis.
▪Determining an appropriate pattern of revenue recognition for service performance obligations.
We identified the evaluation of revenue recognition as a critical audit matter because the audit effort to evaluate the Company’s revenue recognition judgments, including those noted above, was extensive and required a high degree of auditor judgment.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the revenue recognition process, including controls related to the timing and pattern of revenue recognition and gross versus net revenue recognition. As part of testing the Company’s internal controls, we also involved information technology (IT) professionals with specialized skills and knowledge, who assisted in testing of general IT controls over significant systems and the evaluation of system interface controls and automated controls designed to determine the existence, accuracy, and completeness of revenue. We evaluated the Company’s significant accounting policies related to its product and service offerings by reviewing the terms of certain vendor and customer contracts and comparing the policies to the revenue recognition standard. We selected a sample of revenue transactions and performed the following for each selection:
▪Obtained evidence of a contract with the customer.
▪Compared the amounts recognized and timing of revenue recognition to underlying documentation, including purchase orders, shipping documentation, and evidence of payment, if applicable.
▪Evaluated the Company’s application of their accounting policies to determine the timing and amount of revenue to be recognized.
▪Tested the presentation of revenue as gross or net by comparing the Company’s gross or net presentation to the attributes of the underlying vendor support and the Company’s accounting policy.
/s/ KPMG LLP
We have served as the Company’s auditor since 1990.
February
23, 201816, 2023
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Insight Enterprises, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Insight Enterprises, Inc.
’s and
subsidiariessubsidiaries' (the
“Company”)Company) internal control over financial reporting as of December 31,
2017,2022, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2017,2022, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”)(PCAOB), the consolidated balance sheets of the Company as of December 31,
20172022 and
2016,2021, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31,
2017,2022, and the related notes (collectively, the
“consolidatedconsolidated financial
statements”)statements), and our report dated February
23, 201816, 2023 expressed an unqualified opinion on those consolidated financial statements.
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
item 9A(a),Management’sManagement's Annual Report on Internal Control overOver Financial Reporting.Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
February
23, 201816, 2023
INSIGHT ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
| | | | | | | | |
| ASSETS | | December 31, | |
| | | 2017 | | | 2016 | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 105,831 | | | $ | 202,882 | |
Accounts receivable, net | | | 1,814,560 | | | | 1,436,742 | |
Inventories | | | 194,529 | | | | 148,203 | |
Inventories not available for sale | | | 36,956 | | | | 68,619 | |
Other current assets | | | 152,467 | | | | 127,159 | |
| | | | | | | | |
Total current assets | | | 2,304,343 | | | | 1,983,605 | |
| | |
Property and equipment, net | | | 75,252 | | | | 70,910 | |
Goodwill | | | 131,431 | | | | 62,645 | |
Intangible assets, net | | | 100,778 | | | | 20,707 | |
Deferred income taxes | | | 17,064 | | | | 52,347 | |
Other assets | | | 56,783 | | | | 29,086 | |
| | | | | | | | |
| | $ | 2,685,651 | | | $ | 2,219,300 | |
| | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable—trade | | $ | 899,075 | | | $ | 1,070,259 | |
Accounts payable—inventory financing facility | | | 319,468 | | | | 154,930 | |
Accrued expenses and other current liabilities | | | 175,860 | | | | 151,895 | |
Current portion of long-term debt | | | 16,592 | | | | 480 | |
Deferred revenue | | | 88,979 | | | | 61,098 | |
| | | | | | | | |
Total current liabilities | | | 1,499,974 | | | | 1,438,662 | |
| | |
Long-term debt | | | 296,576 | | | | 40,251 | |
Deferred income taxes | | | 717 | | | | 900 | |
Other liabilities | | | 44,915 | | | | 26,044 | |
| | | | | | | | |
| | | 1,842,182 | | | | 1,505,857 | |
| | | | | | | | |
Commitments and contingencies | | | | | | | | |
| | |
Stockholders’ equity: | | | | | | | | |
Preferred stock, $0.01 par value, 3,000 shares authorized; no shares issued | | | — | | | | — | |
Common stock, $0.01 par value, 100,000 shares authorized; 35,829 and 35,484 shares issued and outstanding in 2017 and 2016, respectively | | | 358 | | | | 355 | |
Additionalpaid-in capital | | | 317,155 | | | | 309,650 | |
Retained earnings | | | 550,220 | | | | 459,537 | |
Accumulated other comprehensive loss – foreign currency translation adjustments | | | (24,264 | ) | | | (56,099 | ) |
| | | | | | | | |
Total stockholders’ equity | | | 843,469 | | | | 713,443 | |
| | | | | | | | |
| | $ | 2,685,651 | | | $ | 2,219,300 | |
| | | | | | | | |
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 163,637 | | | $ | 103,840 | |
| Accounts receivable, net | 3,272,371 | | | 2,936,732 | |
| Inventories | 265,154 | | | 328,101 | |
| Other current assets | 199,506 | | | 199,638 | |
| Total current assets | 3,900,668 | | | $ | 3,568,311 | |
| Property and equipment, net | 204,260 | | | 176,263 | |
| Goodwill | 493,033 | | | 428,346 | |
| Intangible assets, net | 204,998 | | | 214,788 | |
| Other assets | 309,622 | | | 301,372 | |
| $ | 5,112,581 | | | $ | 4,689,080 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable—trade | $ | 1,785,076 | | | $ | 1,779,854 | |
| Accounts payable—inventory financing facilities | 301,314 | | | 311,878 | |
| Accrued expenses and other current liabilities | 433,789 | | | 423,489 | |
| Current portion of long-term debt | 346,228 | | | 36 | |
| Total current liabilities | 2,866,407 | | | 2,515,257 | |
| Long-term debt | 291,672 | | | 361,570 | |
| Deferred income taxes | 32,844 | | | 47,073 | |
| Other liabilities | 283,590 | | | 255,953 | |
| 3,474,513 | | | 3,179,853 | |
| 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; 34,009 and 34,897 shares issued and outstanding in 2022 and 2021, respectively | 340 | | | 349 | |
| Additional paid-in capital | 327,872 | | | 368,282 | |
| Retained earnings | 1,368,658 | | | 1,167,690 | |
| Accumulated other comprehensive loss – foreign currency translation adjustments | (58,802) | | | (27,094) | |
| Total stockholders’ equity | 1,638,068 | | | 1,509,227 | |
| $ | 5,112,581 | | | $ | 4,689,080 | |
| | | |
See accompanying notes to consolidated financial statements.
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
Net sales: | | | | | | | | | | | | |
Products | | $ | 6,038,744 | | | $ | 4,997,263 | | | $ | 4,945,547 | |
Services | | | 664,879 | | | | 488,252 | | | | 427,543 | |
| | | | | | | | | | | | |
Total net sales | | | 6,703,623 | | | | 5,485,515 | | | | 5,373,090 | |
| | | | | | | | | | | | |
Costs of goods sold: | | | | | | | | | | | | |
Products | | | 5,512,402 | | | | 4,571,462 | | | | 4,513,353 | |
Services | | | 272,651 | | | | 170,951 | | | | 143,405 | |
| | | | | | | | | | | | |
Total costs of goods sold | | | 5,785,053 | | | | 4,742,413 | | | | 4,656,758 | |
| | | | | | | | | | | | |
Gross profit | | | 918,570 | | | | 743,102 | | | | 716,332 | |
Operating expenses: | | | | | | | | | | | | |
Selling and administrative expenses | | | 723,328 | | | | 585,243 | | | | 584,906 | |
Severance and restructuring expenses | | | 9,002 | | | | 4,580 | | | | 4,907 | |
Loss on sale of foreign entity | | | 3,646 | | | | — | | | | — | |
Acquisition-related expenses | | | 3,329 | | | | 4,447 | | | | — | |
| | | | | | | | | | | | |
Earnings from operations | | | 179,265 | | | | 148,832 | | | | 126,519 | |
Non-operating (income) expense: | | | | | | | | | | | | |
Interest income | | | (1,209 | ) | | | (1,066 | ) | | | (783 | ) |
Interest expense | | | 19,174 | | | | 8,628 | | | | 7,224 | |
Net foreign currency exchange loss (gain) | | | 855 | | | | 522 | | | | (393 | ) |
Other expense, net | | | 1,347 | | | | 1,290 | | | | 1,295 | |
| | | | | | | | | | | | |
Earnings before income taxes | | | 159,098 | | | | 139,458 | | | | 119,176 | |
Income tax expense | | | 68,415 | | | | 54,768 | | | | 43,325 | |
| | | | | | | | | | | | |
Net earnings | | $ | 90,683 | | | $ | 84,690 | | | $ | 75,851 | |
| | | | | | | | | | | | |
Net earnings per share: | | | | | | | | | | | | |
Basic | | $ | 2.54 | | | $ | 2.35 | | | $ | 2.00 | |
| | | | | | | | | | | | |
Diluted | | $ | 2.50 | | | $ | 2.32 | | | $ | 1.98 | |
| | | | | | | | | | | | |
Shares used in per share calculations: | | | | | | | | | | | | |
Basic | | | 35,741 | | | | 36,102 | | | | 37,984 | |
| | | | | | | | | | | | |
Diluted | | | 36,207 | | | | 36,438 | | | | 38,275 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Net sales: | | | | | |
| Products | $ | 8,947,787 | | | $ | 8,120,127 | | | $ | 7,172,155 | |
| Services | 1,483,404 | | | 1,315,986 | | | 1,168,424 | |
| Total net sales | 10,431,191 | | | 9,436,113 | | | 8,340,579 | |
| Costs of goods sold: | | | | | |
| Products | 8,111,252 | | | 7,380,908 | | | 6,497,001 | |
| Services | 683,372 | | | 607,648 | | | 543,636 | |
| Total costs of goods sold | 8,794,624 | | | 7,988,556 | | | 7,040,637 | |
| Gross profit: | | | | | |
| Products | 836,535 | | | 739,219 | | | 675,154 | |
| Services | 800,032 | | | 708,338 | | | 624,788 | |
| Gross profit | 1,636,567 | | | 1,447,557 | | | 1,299,942 | |
| Operating expenses: | | | | | |
| Selling and administrative expenses | 1,216,660 | | | 1,117,130 | | | 1,013,765 | |
| Severance and restructuring expenses, net | 4,235 | | | (1,634) | | | 12,394 | |
| Acquisition and integration related expenses | 1,972 | | | — | | | 2,208 | |
| Earnings from operations | 413,700 | | | 332,061 | | | 271,575 | |
| Non-operating (income) expense: | | | | | |
| Interest expense, net | 39,497 | | | 40,516 | | | 41,594 | |
| Other (income) expense, net | (230) | | | (1,012) | | | 1,529 | |
| Earnings before income taxes | 374,433 | | | 292,557 | | | 228,452 | |
| Income tax expense | 93,825 | | | 73,212 | | | 55,812 | |
| Net earnings | $ | 280,608 | | | $ | 219,345 | | | $ | 172,640 | |
| Net earnings per share: | | | | | |
| Basic | $ | 8.04 | | | $ | 6.27 | | | $ | 4.92 | |
| Diluted | $ | 7.66 | | | $ | 5.95 | | | $ | 4.87 | |
| Shares used in per share calculations: | | | | | |
| Basic | 34,903 | | | 35,011 | | | 35,117 | |
| Diluted | 36,620 | | | 36,863 | | | 35,444 | |
| | | | | |
| | | | | |
| | | | | |
See accompanying notes to consolidated financial statements.
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
Net earnings | | $ | 90,683 | | | $ | 84,690 | | | $ | 75,851 | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | | |
Foreign currency translation adjustments | | | 31,835 | | | | (16,063 | ) | | | (26,707 | ) |
| | | | | | | | | | | | |
Total comprehensive income | | $ | 122,518 | | | $ | 68,627 | | | $ | 49,144 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Net earnings | $ | 280,608 | | | $ | 219,345 | | | $ | 172,640 | |
| Other comprehensive (loss) income, net of tax: | | | | | |
| Foreign currency translation adjustments | (31,708) | | | (11,639) | | | 22,710 | |
| Total comprehensive income | $ | 248,900 | | | $ | 207,706 | | | $ | 195,350 | |
See accompanying notes to consolidated financial statements.
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | | Treasury Stock | | | Additional
Paid-in | | | Accumulated
Other Comprehensive | | | Retained | | | Total
Stockholders’ | |
| | | Shares | | | Par Value | | | Shares | | | Amount | | | Capital | | | Loss | | | Earnings | | | Equity | |
Balances at December 31, 2014 | | | 40,147 | | | $ | 401 | | | | — | | | $ | — | | | $ | 337,167 | | | $ | (13,329 | ) | | $ | 396,992 | | | $ | 721,231 | |
Issuance of common stock under employee stock plans, net of shares withheld for payroll taxes | | | 259 | | | | 3 | | | | — | | | | — | | | | (2,268 | ) | | | — | | | | — | | | | (2,265 | ) |
Stock-based compensation expense | | | — | | | | — | | | | — | | | | — | | | | 8,922 | | | | — | | | | — | | | | 8,922 | |
Tax benefit from stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | 553 | | | | — | | | | — | | | | 553 | |
Repurchase of treasury stock | | | — | | | | — | | | | (3,300 | ) | | | (91,843 | ) | | | — | | | | — | | | | — | | | | (91,843 | ) |
Retirement of treasury stock | | | (3,300 | ) | | | (33 | ) | | | 3,300 | | | | 91,843 | | | | (27,688 | ) | | | — | | | | (64,122 | ) | | | — | |
Foreign currency translation adjustments, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | (26,707 | ) | | | — | | | | (26,707 | ) |
Net earnings | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 75,851 | | | | 75,851 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at December 31, 2015 | | | 37,106 | | | | 371 | | | | — | | | | — | | | | 316,686 | | | | (40,036 | ) | | | 408,721 | | | | 685,742 | |
Issuance of common stock under employee stock plans, net of shares withheld for payroll taxes | | | 269 | | | | 3 | | | | — | | | | — | | | | (2,222 | ) | | | — | | | | — | | | | (2,219 | ) |
Stock-based compensation expense | | | — | | | | — | | | | — | | | | — | | | | 11,058 | | | | — | | | | — | | | | 11,058 | |
Tax benefit from stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | 235 | | | | — | | | | — | | | | 235 | |
Repurchase of treasury stock | | | — | | | | — | | | | (1,891 | ) | | | (50,000 | ) | | | — | | | | — | | | | — | | | | (50,000 | ) |
Retirement of treasury stock | | | (1,891 | ) | | | (19 | ) | | | 1,891 | | | | 50,000 | | | | (16,107 | ) | | | — | | | | (33,874 | ) | | | — | |
Foreign currency translation adjustments, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | (16,063 | ) | | | — | | | | (16,063 | ) |
Net earnings | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 84,690 | | | | 84,690 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at December 31, 2016 | | | 35,484 | | | | 355 | | | | — | | | | — | | | | 309,650 | | | | (56,099 | ) | | | 459,537 | | | | 713,443 | |
Issuance of common stock under employee stock plans, net of shares withheld for payroll taxes | | | 345 | | | | 3 | | | | — | | | | — | | | | (5,321 | ) | | | — | | | | — | | | | (5,318 | ) |
Stock-based compensation expense | | | — | | | | — | | | | — | | | | — | | | | 12,826 | | | | — | | | | — | | | | 12,826 | |
Foreign currency translation adjustments, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | 31,835 | | | | — | | | | 31,835 | |
Net earnings | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 90,683 | | | | 90,683 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at December 31, 2017 | | | 35,829 | | | $ | 358 | | | | — | | | $ | — | | | $ | 317,155 | | | $ | (24,264 | ) | | $ | 550,220 | | | $ | 843,469 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 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 | 220 | | | 2 | | | — | | | — | | | (7,907) | | | — | | | — | | | (7,905) | |
| Stock-based compensation expense | — | | | — | | | — | | | — | | | 22,710 | | | — | | | — | | | 22,710 | |
| Repurchase of treasury stock | — | | | — | | | (1,109) | | | (107,922) | | | — | | | — | | | — | | | (107,922) | |
| Retirement of treasury stock | (1,108) | | | (11) | | | 1,109 | | | 107,922 | | | (10,482) | | | — | | | (97,429) | | | — | |
| Foreign currency translation adjustments, net of tax | — | | | — | | | — | | | — | | | — | | | (31,708) | | | — | | | (31,708) | |
| Net earnings | — | | | — | | | — | | | — | | | — | | | | | 280,608 | | | 280,608 | |
| Balances at December 31, 2022 | 34,009 | | | $ | 340 | | | — | | | $ | — | | | $ | 327,872 | | | $ | (58,802) | | | $ | 1,368,658 | | | $ | 1,638,068 | |
| Balances at December 31, 2020 | 35,103 | | | $ | 351 | | | — | | | $ | — | | | $ | 364,288 | | | $ | (15,455) | | | $ | 993,245 | | | $ | 1,342,429 | |
| Issuance of common stock under employee stock plans, net of shares withheld for payroll taxes | 291 | | | 3 | | | — | | | — | | | (9,112) | | | — | | | — | | | (9,109) | |
| Stock-based compensation expense | — | | | — | | | — | | | — | | | 18,201 | | | — | | | — | | | 18,201 | |
| Repurchase of treasury stock | — | | | — | | | (497) | | | (50,000) | | | — | | | — | | | — | | | (50,000) | |
| Retirement of treasury stock | (497) | | | (5) | | | 497 | | | 50,000 | | | (5,095) | | | — | | | (44,900) | | | — | |
| Foreign currency translation adjustments, net of tax | — | | | — | | | — | | | — | | | — | | | (11,639) | | | — | | | (11,639) | |
| Net earnings | — | | | — | | | — | | | — | | | — | | | — | | | 219,345 | | | 219,345 | |
| Balances at December 31, 2021 | 34,897 | | | $ | 349 | | | — | | | $ | — | | | $ | 368,282 | | | $ | (27,094) | | | $ | 1,167,690 | | | $ | 1,509,227 | |
| Balances at December 31, 2019 | 35,263 | | | $ | 353 | | | — | | | $ | — | | | $ | 357,032 | | | $ | (38,164) | | | $ | 841,097 | | | $ | 1,160,318 | |
| Issuance of common stock under employee stock plans, net of shares withheld for payroll taxes | 285 | | | 3 | | | — | | | — | | | (5,967) | | | — | | | — | | | (5,964) | |
| Stock-based compensation expense | — | | | — | | | — | | | — | | | 17,727 | | | — | | | — | | | 17,727 | |
| Repurchase of treasury stock | — | | | — | | | (445) | | | (25,000) | | | — | | | — | | | — | | | (25,000) | |
| Retirement of treasury stock | (445) | | | (5) | | | 445 | | | 25,000 | | | (4,504) | | | (1) | | | (20,492) | | | (2) | |
| Foreign currency translation adjustments, net of tax | — | | | — | | | — | | | — | | | — | | | 22,710 | | | — | | | 22,710 | |
| Net earnings | — | | | — | | | — | | | — | | | — | | | — | | | 172,640 | | | 172,640 | |
| Balances at December 31, 2020 | 35,103 | | | $ | 351 | | | — | | | $ | — | | | $ | 364,288 | | | $ | (15,455) | | | $ | 993,245 | | | $ | 1,342,429 | |
See accompanying notes to consolidated financial statements.
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net earnings | | $ | 90,683 | | | $ | 84,690 | | | $ | 75,851 | |
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities: | | | | | | | | | | | | |
Depreciation and amortization of property and equipment | | | 25,787 | | | | 27,493 | | | | 26,649 | |
Amortization of intangible assets | | | 16,812 | | | | 10,637 | | | | 11,308 | |
Non-cash real estate impairment | | | — | | | | — | | | | 800 | |
Provision for losses on accounts receivable | | | 5,245 | | | | 2,452 | | | | 6,761 | |
Write-downs of inventories | | | 2,776 | | | | 2,934 | | | | 3,997 | |
Write-off of property and equipment | | | 418 | | | | — | | | | 535 | |
Non-cash stock-based compensation | | | 12,826 | | | | 11,058 | | | | 8,922 | |
Deferred income taxes | | | 19,139 | | | | 10,517 | | | | 5,174 | |
Loss on sale of foreign entity | | | 3,646 | | | | — | | | | — | |
Gain on sale of real estate | | | — | | | | (338 | ) | | | — | |
Changes in assets and liabilities: | | | | | | | | | | | | |
Increase in accounts receivable | | | (208,065 | ) | | | (168,966 | ) | | | (47,206 | ) |
Increase in inventories | | | (14,046 | ) | | | (50,712 | ) | | | (9,214 | ) |
Decrease (increase) in other assets | | | 4,982 | | | | (50,130 | ) | | | (26,714 | ) |
(Decrease) increase in accounts payable | | | (237,457 | ) | | | 193,582 | | | | 113,594 | |
(Decrease) increase in deferred revenue | | | (27,184 | ) | | | 10,633 | | | | 2,927 | |
(Decrease) increase in accrued expenses and other liabilities | | | (988 | ) | | | 12,278 | | | | 7,718 | |
| | | | | | | | | | | | |
Net cash (used in) provided by operating activities | | | (305,426 | ) | | | 96,128 | | | | 181,102 | |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Acquisitions, net of cash and cash equivalents acquired | | | (186,932 | ) | | | (10,297 | ) | | | (44,221 | ) |
Purchases of property and equipment | | | (19,230 | ) | | | (12,266 | ) | | | (13,416 | ) |
Proceeds from sale of foreign entity | | | 1,517 | | | | — | | | | — | |
Proceeds from sale of real estate, net | | | — | | | | 1,378 | | | | — | |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (204,645 | ) | | | (21,185 | ) | | | (57,637 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Borrowings on senior revolving credit facility | | | 1,151,216 | | | | 772,218 | | | | 686,410 | |
Repayments on senior revolving credit facility | | | (1,033,716 | ) | | | (772,218 | ) | | | (686,410 | ) |
Borrowings on accounts receivable securitization financing facility | | | 3,961,389 | | | | 2,802,000 | | | | 1,897,100 | |
Repayments on accounts receivable securitization financing facility | | | (3,975,889 | ) | | | (2,851,500 | ) | | | (1,869,100 | ) |
Borrowings under Term Loan A | | | 175,000 | | | | — | | | | — | |
Repayments under Term Loan A | | | (8,750 | ) | | | — | | | | — | |
Repayments under other financing agreements | | | (5,636 | ) | | | (1,309 | ) | | | (543 | ) |
Payments on capital lease obligations | | | (1,089 | ) | | | (445 | ) | | | (223 | ) |
Net borrowings (repayments) under inventory financing facility | | | 141,037 | | | | 48,603 | | | | (16,454 | ) |
Payment of debt issuance costs | | | (1,123 | ) | | | (3,360 | ) | | | — | |
Payment of payroll taxes on stock-based compensation through shares withheld | | | (5,318 | ) | | | (2,219 | ) | | | (2,265 | ) |
Repurchases of common stock | | | — | | | | (50,000 | ) | | | (91,843 | ) |
| | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 397,121 | | | | (58,230 | ) | | | (83,328 | ) |
| | | | | | | | | | | | |
Foreign currency exchange effect on cash and cash equivalent balances | | | 15,899 | | | | (1,809 | ) | | | (16,683 | ) |
| | | | | | | | | | | | |
(Decrease) increase in cash and cash equivalents | | | (97,051 | ) | | | 14,904 | | | | 23,454 | |
Cash and cash equivalents at beginning of year | | | 202,882 | | | | 187,978 | | | | 164,524 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 105,831 | | | $ | 202,882 | | | $ | 187,978 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Cash flows from operating activities: | | | | | |
| Net earnings | $ | 280,608 | | | $ | 219,345 | | | $ | 172,640 | |
| Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 56,614 | | | 55,421 | | | 65,560 | |
| Provision for losses on accounts receivable | 6,066 | | | 7,862 | | | 10,163 | |
| Non-cash stock-based compensation | 22,710 | | | 18,201 | | | 17,727 | |
| Deferred income taxes | (9,251) | | | 11,858 | | | (13,246) | |
| Amortization of debt discount and issuance costs | 6,105 | | | 16,875 | | | 16,217 | |
| Other adjustments | 2,035 | | | (3,259) | | | 6,272 | |
| Changes in assets and liabilities: | | | | | |
| Increase in accounts receivable | (406,370) | | | (289,009) | | | (132,599) | |
| Decrease (increase) in inventories | 53,711 | | | (148,941) | | | 1,029 | |
| Decrease (increase) in other assets | 27,858 | | | (18,100) | | | 7,367 | |
| Increase in accounts payable | 53,607 | | | 303,395 | | | 152,235 | |
| Increase (decrease) in accrued expenses and other liabilities | 4,413 | | | (9,937) | | | 52,217 | |
| Net cash provided by operating activities: | 98,106 | | | 163,711 | | | 355,582 | |
| Cash flows from investing activities: | | | | | |
| Proceeds from sale of assets | 1,346 | | | 31,005 | | | 40,295 | |
| Purchases of property and equipment | (70,939) | | | (52,079) | | | (24,184) | |
| Acquisitions, net of cash and cash equivalents acquired | (68,248) | | | — | | | (6,405) | |
| Net cash (used in) provided by investing activities: | (137,841) | | | (21,074) | | | 9,706 | |
| Cash flows from financing activities: | | | | | |
| Borrowings on ABL revolving credit facility | 4,678,212 | | | 3,953,496 | | | 3,030,679 | |
| Repayments on ABL revolving credit facility | (4,433,510) | | | (4,040,496) | | | (3,462,063) | |
| Net (repayments) borrowings under inventory financing facilities | (8,307) | | | (14,355) | | | 103,254 | |
| Repurchases of common stock | (107,922) | | | (50,000) | | | (25,000) | |
| Other payments | (14,466) | | | (10,030) | | | (8,661) | |
| Net cash provided by (used in) financing activities: | 114,007 | | | (161,385) | | | (361,791) | |
| Foreign currency exchange effect on cash, cash equivalents and restricted cash balances | (14,531) | | | (5,857) | | | 10,788 | |
| Increase (decrease) in cash, cash equivalents and restricted cash | 59,741 | | | (24,605) | | | 14,285 | |
| Cash, cash equivalents and restricted cash at beginning of period | 105,977 | | | 130,582 | | | 116,297 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 165,718 | | | $ | 105,977 | | | $ | 130,582 | |
See accompanying notes to consolidated financial statements.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)Operations and Summary of Significant Accounting Policies
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500500-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 34 years of broad IT expertise. We amplify our solutions and services with global
information technology (“IT”) provider helping businesses of all sizes – from smallscale, local expertise and
medium sized firms to worldwide enterprises, governments, schools and health care organizations – define, architect, implement and manage Intelligent Technology SolutionsTM. We empowerour e-commerce experience, enabling our clients to
managerealize their
IT environments so they can drive meaningful business outcomes today and transform their operations for tomorrow.digital ambitions at every opportunity. Our company is organized in the following three operating segments, which are primarily defined by their related geographies:
| | | | | | | | |
Operating Segment | | Geography |
North America | | United States ("U.S.") 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.services, including cloud solutions. Our offerings in the remainder of our EMEA and APAC segments
areconsist largely
of software and certain software-related
services. A discussion of changes in our classification of certain revenue streams during 2017, can be found in Note 20. Prior year results were reclassified to conform to the current year presentation. These reclassifications had no effect on consolidated total net sales.services and cloud solutions.
Effective September 26, 2017,June 1, 2022, we acquired Caase Group B.V. (referred to herein as, “Caase.com”Hanu Software Solutions, Inc. and Hanu Software Solutions (India) Private Ltd. (collectively, “Hanu”), for a Dutch cloud service provider, for apreliminary cash purchase price, net of cash and cash equivalents acquired, of approximately $6,038,000, subject$68,248,000, excluding the estimated fair value of an earn out with a maximum value of $20,000,000 and hold backs for representations and warranties of approximately $8,501,000 to be paid in future periods.
Effective February 28, 2020, we acquired vNext SAS (“vNext”), a
final working capital adjustment.French digital consulting services and managed services provider. The acquisition was funded using cash on hand.
Effective January 6, 2017, we acquired Datalink Corporation (“Datalink”), a leading provider of IT services and enterprise data center solutions based in Eden Prairie, Minnesota, for a cash purchase price of $257,456,000, which included cash and cash equivalents acquired of $76,597,000. The acquisition was funded using cash on hand and borrowings under our revolving facility in the form of an incremental Term Loan A (“TLA”).
Effective September 1, 2016, we acquired Ignia Pty Ltd (“Ignia”), a business technology consulting and managed services provider headquartered in Perth, Australia, with an additional office in Melbourne, for a cash purchase price, net of cash acquired, of approximately $10,804,000. The acquisition was funded using cash on hand.
Effective October 1, 2015, we acquired BlueMetal Architects, Inc. (“BlueMetal”), an interactive design and technology architecture firm based in the Boston area with offices in Chicago and New York, for a cash purchase price, net of cash acquired, of approximately $44,221,000. The acquisition was funded using borrowings under our accounts receivable securitization financing facility.
Our results of operations include the results of
Caase.com, Datalink, IgniaHanu and
BlueMetalvNext from their respective acquisition dates. (See Note
2120 for a discussion of our
acquisitions.)Hanu acquisition).
Principles of Consolidation and Presentation
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.
Included in our accounts receivable, net balance at December 31, 2022 and 2021 is $11,069,000 and $15,316,000, respectively, of accounts receivable from an unconsolidated affiliate. References to “the Company,” “Insight,” “we,” “us,” “our” and other similar words refer to Insight Enterprises, Inc. and its consolidated subsidiaries, unless the context suggests otherwise.
Acquisition Accounting
The Company accounts for all business combinations using the acquisition method of accounting, which allocates the fair value of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes estimates and assumptions. Initial purchase price allocations are subject to revision within the measurement period, not to exceed one year from the date of acquisition.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Acquisition-related expenses and transaction costs associated with business combinations are expensed as incurred.
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“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.
Cash,
and Cash Equivalents
and Restricted Cash
We consider all highly liquid investments with maturities at the date of purchase of three months or less to be cash equivalents.
Book overdrafts represent the amount by which outstanding checks issued, but not yet presented to our banks for disbursement, exceed balances on deposit in applicable bank accounts and a legal right of offset with our positive cash balances in other financial institution accounts does not exist. Our book overdrafts, which are not directly linked to a credit facility or other bank overdraft arrangement, do not result in an actual bank financing, but rather constitute normal unpaid trade payables at the end of a reporting period. These amounts are included within our accounts payable balance in our consolidated balance sheets. The changes in these book overdrafts are included within the changes in accounts payable line item as a component of cash flows from operating activities in our consolidated statements of cash flows.
Restricted cash generally includes any cash that is restricted as to withdrawal or usage. These amounts are included with cash and cash equivalents on the consolidated statement of cash flows. All cash receipts/payments with third parties directly to/from restricted cash accounts are reported as an operating, investing or financing cash flow, based on the nature of the transaction.
Allowance for Doubtful Accounts
We establish an allowance for doubtful accounts to reflect our best estimate of probable losses inherent in our accounts receivable balance. The allowance is based on our evaluation of the aging of the receivables, historical write-offs and the current economic environment. We write off individual accounts against the reserve when we no longer believe that it is probable that we will collect the receivable because we become aware of a client’s or partner’s inability to meet its financial obligations. Such awareness may be as a result of bankruptcy filings, or deterioration in the client’s or partner’s operating results or financial position.
We state inventories, principally purchased IT hardware, at the lower of weighted average cost (which approximates cost under the
first-in,first-out method) or net realizable value. We evaluate inventories for excess, obsolescence or other factors that may render inventories unmarketable at normal margins. Write-downs are recorded so that inventories reflect the approximate net realizable value and take into account contractual provisions with our partners governing price protection, stock rotation and return privileges relating to obsolescence. Because of the large number of transactions and the complexity of managing the price protection and stock rotation process, estimates are made regarding write-downs of the carrying amount of inventories. Additionally, assumptions about future demand, market conditions and decisions by manufacturers/publishers to discontinue certain products or product lines can affect our decision to write down inventories.
Inventories not available for sale relate to product sales transactions in which we are warehousing the product and will be deploying the product to our clients’ designated locations subsequent toperiod-end. Additionally, we may perform services on a portion of the product prior to shipment to our clients and will be paid a fee for doing so. Although these product contracts arenon-cancelable with customary credit terms beginning the date the inventories are segregated in our warehouse and invoiced to the client and the warranty periods begin on the date of invoice, these transactions do not meet the sales recognition criteria under GAAP. Therefore, we do not record sales and the inventories are classified as inventories not available for sale on our consolidated balance sheet until the product is delivered. If clients remit payment before we deliver the product to them, we record the payments received as deferred revenue on our consolidated balance sheet until such time as the product is delivered.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We record property and equipment at cost. We capitalize major improvements and betterments, while maintenance, repairs and minor replacements are expensed as incurred. Depreciation or amortization is provided using the straight-line method over the following estimated economic lives of the assets:
| | | | | |
| | Estimated Economic Life |
Leasehold improvements | | Shorter of underlying lease term or asset life |
Furniture and fixtures | | 2 – 7 years |
Equipment | | 3 – 5 years |
Software | | 3 – 10 years |
Buildings | | 29 years |
Costs incurred to developinternal-use software during the application development stage, including capitalized interest, are recorded in property and equipment at cost.
External direct costs of materials and services consumed in developing or obtaining
internal-use computer software and payroll and payroll-related costs for teammates who are directly associated with and who devote time to
internal-use computer software development projects, to the extent of the time spent directly on the project and specific to application development, are capitalized.
Reviews are regularly performed to determine whether facts and circumstances exist which indicate that the
usefuleconomic life is shorter than originally estimated or the carrying amount of assets may not be recoverable. When an indication exists that the carrying amount of long-lived assets may not be recoverable, we assess the recoverability of our assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Such impairment test is based on the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Impairment, if any, is based on the excess of the carrying amount over the estimated fair value of those assets.
Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of net identified tangible and intangible assets acquired. Goodwill is tested for impairment at the reporting unit level on an annual basis in the fourth quarter and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. We may first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform a quantitative goodwill impairment test. Otherwise, the goodwill impairment test is not required. The quantitative goodwill impairment review process compares the fair value of the reporting unit in which goodwill resides to its carrying value. The Company has three reporting units, which are the same as our operating segments. Multiple valuation techniques
canwould likely be used to assess the fair value of the reporting unit.
All of theseThese techniques include the use of estimates and assumptions that are inherently uncertain. Changes in these estimates and assumptions could materially affect the determination of fair value or goodwill impairment, or both.
We amortize
finite lived intangible assets acquired in business combinations using the straight-line method over the
following estimated economic lives of the intangible assets from the date of
acquisition: | | |
| | Estimated Economic
Life |
Customer relationships
| | 2 –11 years |
Tradenames and Restrictive Covenant Agreements
| | 9 months –3 years |
acquisition.
We regularly perform reviews to determine if facts and circumstances exist which indicate that the usefuleconomic lives of our intangible assets are shorter than originally estimated or the carrying amount of these assets may not be recoverable. When an indication exists that the carrying amount of intangible assets may not be recoverable, we assess the recoverability of our assets by comparing the projected undiscounted net cash flows associated with the related asset
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
or group of assets over their remaining lives against their respective carrying amounts. Such impairment test is based on the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Impairment, if any, is based on the excess of the carrying amount over the estimated fair value of those assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Trade Credits
Trade credit liabilities arise from aged unclaimed credit memos, duplicate payments, payments for returned product
Leases
We determine if a contract or overpayments madearrangement is, or contains, a lease at inception. Balances related to us by our clients, and, to a lesser extent, from goods received by us from a partner for which we were never invoiced. Trade credit liabilitiesoperating leases are included in accrued expensesother assets, other current liabilities, and other current liabilities in our consolidated balance sheets. We derecognizesheet. Balances related to financing leases are included in property and equipment, current portion of long-term debt, and long-term debt in our consolidated balance sheet. Right of use (“ROU”) assets represent our right to use an underlying asset for the liability only if it has been extinguished, upon either (1) our payment of the liability to relievelease term and lease liabilities represent our obligation or (2) our legal releaseto make lease payments arising from the related obligation, whichlease.
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset includes any prepaid lease payments and additional direct costs and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is
recorded as a reduction of costs of goods sold.reasonably certain that we will exercise that option.
We are self-insured in the
United StatesU.S. for medical insurance up to certain annual stop-loss limits and workers’ compensation claims up to certain deductible limits. We establish reserves for claims, both reported and incurred but not reported, using currently available information as well as our historical claims experience.
We record repurchases of our common stock as treasury stock at cost. We also record the subsequent retirement of these treasury shares at cost. The excess of the cost of the shares retired over their par value is allocated between additional
paid-in capital and retained earnings. The amount recorded as a reduction of
paid-in capital is based on the excess of the average original issue price of the shares over par value. The remaining amount is recorded as a reduction of retained earnings.
Revenue is measured based on the consideration specified in a contract with a client, and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control of a product or service or by arranging for the sale of a vendor’s products or service to a client.
Taxes assessed by a governmental authority that are recognized when titleboth imposed on and riskconcurrent with a specific revenue-producing transaction, that are collected by the Company from a client, are excluded from revenue.
We record the freight we bill to our clients as product net sales and the related freight costs we pay as product costs of loss are passed togoods sold.
Nature of Goods and Services
We sell hardware and software products on both a stand-alone basis without any services and as solutions bundled with services.
When we provide a combination of hardware and software products with the provision of services, we separately identify our performance obligations under our contract with the client there is persuasive evidence ofas the distinct goods (hardware and/or software products) or services that will be provided. The total
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
transaction price for an arrangement for sale, delivery has occurred and/or services have been rendered, the saleswith multiple performance obligations is allocated at contract inception to each distinct performance obligation in proportion to its stand-alone selling price. The stand-alone selling price is fixed or determinable and collectibility is reasonably assured. Our standard sales terms are F.O.B. shipping point or equivalent,the price at which we would sell a promised good or service separately to a client. We estimate the price based on observable inputs, including direct labor hours and allocable costs, or use observable stand-alone prices when they are available.
Product Offerings
Hardware
We recognize hardware product revenue on a gross basis at the point in time
when a client takes control of the hardware, which typically occurs when title and risk of loss have passed to the
client. However, because we either (i) have a general practice of covering client
losses while products are in transit despite titleat its destination. Our selling terms and
risk of loss contractually transferring at the point of shipment or (ii) have specifically stated conditions specify Free On Board (“F.O.B.
”) destination contractual terms
withsuch that control is transferred from the
client, delivery is not deemed to have occurred untilCompany at the point in time when the product is received by the client.
We make provisionsThe transaction price for hardware sales is adjusted for estimated product returns that we expect to occur under our return policy based upon historical return rates.
We leverage drop-shipment arrangements with many of our partners and suppliers to deliver products to our clients without having to physically hold the inventory at our warehouses, thereby increasing efficiency and reducing costs. We recognize revenue for drop-shipment arrangements on a gross basis as the principal in the transaction when the product is received by the client. We recognize revenue on a gross basis as the principal in the transactionclient because we control the transaction asproduct prior to transfer to the client. In addition to other factors considered, we assume primary obligorresponsibility for product fulfillment in the arrangement, we assume inventory risk if the product is returned by the client, we set the price of the product charged to the client we assume credit risk for the amounts invoiced, and we work closely with our clients to determine their hardware specifications.
Bill and
software specifications.Hold Transactions
We record the freight we billoffer a service to our customers whereby clients as net salesmay purchase product that we procure on their behalf and, at our clients’ direction, store the product in our warehouse for a designated period of time, with the intention of deploying the product to the clients’ designated locations at a later date. These warehousing services are designed to help our clients with inventory management challenges associated with technology roll-outs, product that is moving to end of life, or clients needing integrated stock available for immediate deployment. The client is invoiced, title transfers to the client, and revenue is recognized upon receipt of the product at our warehouse. These product contracts are non-cancelable with customary credit terms beginning the date the product is received in our warehouse and the related freight costs we pay as costswarranty periods begin on the date of goods sold. invoice.
Software
We
report sales net of any sales-based taxes assessed by governmental authorities that are imposed on and concurrent with sales transactions.Revenue is recognizedrecognize revenue from software sales on a gross basis at the point in time when clients acquirethe client acquires the right to use or copy software under license but in no case priorand control transfers to the client. For renewals, revenue is recognized upon the commencement of the software license agreement or when the renewal term begins, as applicable.
A substantial portion of the software licenses we sell are perpetual software licenses and do not require renewal or extension after their initial purchase by the client. Such perpetual licenses are periodically subject to true-up, whereby additional perpetual licenses are sold under the client’s pre-existing master agreement. Such true-ups are generally sold in arrears, and clients are invoiced for the additional licenses they had already been utilizing. Since the client already possessed copies of the licensed software prior to the true-up, software revenue related to the underlying additional licenses is recognized when we agree to the true-up with our client and the partner.
For sales transactions for certain security software products that are sold with integral third-party delivered software maintenance, we record the software license on a net basis, as the agent in the arrangement.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Services Offerings
Software Maintenance
Software maintenance agreements provide our clients with the right to obtain any software upgrades, bug fixes and help desk and other support services directly from the software publisher at no additional charge during the term of the
initial software license agreement, provided that all other revenue recognition criteria have been met (i.e., evidence of the arrangement exists, the fee is fixed or determinable and collectibility of the fee is probable).We sell certain third-party service contracts, software maintenance agreements. We act as the software publisher’s agent in selling these software maintenance agreements and cloud orsoftware-as-a-service subscription products for whichdo not assume any performance obligation to the client under the agreements. As a result, we are not the primary obligor. Theseagent in these transactions and these sales do not meet the criteria for gross sales recognition, and thus are recorded on a net sales recognition basis. As we enter into contracts with third-party service providers or vendors and our clients, we evaluate whether the subsequent sales of such services should be recorded as gross sales or net sales. We determine whether we act as a principal in the transaction and assume the risks and rewards of ownership or if we are simply acting as an agent or broker. Under gross sales recognition, the selling price is recorded in sales and our cost to the third-party service provider or vendor is recorded in costs of goods sold. Under net sales recognition, the cost toof the third-party service provider or vendorsoftware maintenance agreement is recorded as a reduction to sales, resulting in net sales equal to the gross profit on the transaction, and there are no costs of goods sold.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Because we are acting as the software publisher’s agent, revenue is recognized when the parties agree to the initial purchase, renewal or extension as our agency services are then complete. We report all fees earned from activities reported net within our services net sales category in our consolidated statements of operations.
Vendor Direct Support Services Contracts
Clients may purchase a vendor direct support services contract through us. Under these contracts, our clients call the manufacturer/publisher or its designated service organization directly for both the initial technical triage and any follow-up assistance. We act as the manufacturer/publisher’s agent in selling these support service contracts and do not assume any performance obligation to the client under the arrangements. As a result, these sales are recorded on a net sales recognition basis similar to software maintenance agreements, as discussed above. Because we are acting as the agent, revenue is recognized when the parties agree to the purchase of the support services contract as our agency services are then complete.
Cloud / Software-as-a-Service Offerings
Cloud or software-as-a-service (“SaaS”) subscription products provide our clients with access to software products hosted in the public cloud without the client taking possession of the software. We act as the agent in selling these software-as-a service subscription products. We do not take control of the software products or assume any performance obligations to the clients related to the provisioning of the offerings in the cloud. As a result, these sales are recorded on a net sales recognition basis. We report all fees earned from activities recognized net within our services net sales category in our consolidated statements of operations. Because we are acting as the agent in the transaction, revenue is recognized when the parties agree to the purchase of the cloud or SaaS offerings as our agency services are then complete. Often, these agency fees are based on end-client usage and therefore are variable throughout the term of the service contract. Where this variable consideration is uncertain, we recognize our agency revenue to the extent that a significant reversal will not occur.
Insight Delivered Services
We design, procure, deploy, implement and manage solutions that combine hardware, software and services to help businesses run smarter. Such services are provided by us or third-party sub-contract vendors as part of bundled arrangements, or are provided separately on a stand-alone basis as technical, consulting or managed services engagements. If the services are provided as part of a bundled arrangement with hardware and software, the hardware, software and services are generally distinct performance obligations. In general, we recognize revenue from services engagements as we perform the underlying services and satisfy our performance obligations.
We recognize revenue forfrom sales of services ratably over the time period over which the service will be provided if there is no discernible pattern of recognitionby measuring progress toward complete satisfaction of the cost to perform the service.related service performance obligation. Billings for such services that are made in advance of the related revenue recognized are recorded as deferreda contract liability.
Specific revenue recognition practices for certain of our services offerings are described in further detail below.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Time and
recognized as revenue ratably over the billing coverage period. Revenue from certain arrangements that allow for the use of a product or service over a period of time without taking possession of software are also accounted for ratably over the time period over which the service will be provided.Materials Services Contracts
We recognize revenue for professional services engagements that are on a time and materials basis based upon hours incurred for the performance completed to date for which we have the right to consideration, even if such amounts have not yet been invoiced as of period end.
Fixed Fee Services Contracts
We recognize revenue on fixed fee professional services contracts using a proportional performance method of revenue recognition based on the ratio of direct labor and other allocated costs incurred to total estimated direct labor and other allocated costs.
OneCall Support Services Contracts
When we sell certain hardware and/or software products to our clients, we also enter into service contracts with them. These contracts are support service agreements for the hardware and/or software products that were purchased from us. Under certain support services contracts, although we purchase third-party support contracts for maintenance on the specific hardware or software products we have sold, our internal support desk assists the client first by performing an initial technical triage to determine the source of the problem and whether we can direct the client on how to fix the problem. We refer to these services as “OneCall.” We act as the principal in the transaction because we perform the OneCall services are performedover the term of the support service contract and amounts are earned. Netwe set the price of the service charged to the client. As a result, we recognize revenue from OneCall extended service contracts on a gross sales for these services engagements are notrecognition basis. We recognize the revenue ratably over the contract term of the stand ready obligation, generally one to three years.
On our consolidated balance sheet, a significant portion of our
consolidated net sales.Additionally,contract liabilities balance relates to OneCall support services agreements for which clients have paid or have been invoiced but for which we sell certain professionalhave not yet recognized the applicable services revenue. We also defer incremental direct costs to fulfill our service contracts on a fixed fee basis. Revenuesthat we prepay to third parties for fixed fee professionaldirect support of our fulfillment of the service contract to our clients under our contract terms and amortize them into operations over the term of the contracts.
Third-party Provided Services
A majority of our third-party sub-contractor services contracts are
recognized based onentered into in conjunction with other services contracts under which the
ratio of costs incurred to total estimated costs. Net sales for these service contracts are not a significant portion of our consolidated net sales.In certain arrangements, we may provide a combination of hardware and software products and the provision of services. Services thatservices are performed by usInsight teammates. We have concluded that we control all services under the contract and can direct the third-party sub-contractor to provide the requested services. As such, we act as the principal in conjunctionthe transaction and record the services under a gross sales recognition basis, with hardwarethe selling price being recorded in sales and software sales that are completedour cost to the third-party service provider being recorded in our facilitiescosts of goods sold. For certain third-party service contracts in which we do not control the services prior to shipmenttransferring to our clients because we are not responsible for fulfillment of the productservices, we have concluded that we are recognized upon delivery, when title passes toan agent in the client, for the hardware sale. Nettransaction and record revenue on a net sales of services that are performed at client locations are primarily service-only contracts and are recorded as sales when the services are performed. The total consideration for an arrangement with multiple deliverables is allocated to all deliverables that represent a separate unit of accounting using the relative selling price method.
recognition basis.
Costs of goods sold include product costs, direct costs incurred associated with delivering services, outbound and inbound freight costs and provisions for inventory reserves. These costs are reduced by provisions for supplier discounts and certain payments and credits received from partners, as described under “Partner Funding” below.
Selling and Administrative Expenses
Selling and administrative expenses include salaries and wages for teammates who are not directly associated with delivering services, bonuses and incentives, stock-based compensation expense, employee-related expenses, facility-related expenses, marketing and advertising expense, reduced by certain payments and credits received from partners related to shared marketing expense programs, as described under “Partner Funding” below, depreciation of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
property and equipment, professional fees, amortization of intangible assets, provisions for losses on accounts receivable and other operating expenses.
We receive payments and credits from partners, including consideration pursuant to volume sales incentive programs, volume purchase incentive programs and shared marketing expense programs. Partner funding received pursuant to volume sales incentive programs is recognized as it is earned as a reduction to costs of goods sold. Partner funding received pursuant to volume purchase incentive programs is allocated as a reduction to inventories based on the applicable incentives earned from each partner and is recorded in cost of goods sold as the related inventory is sold. Partner funding received pursuant to shared marketing expense programs is recorded as it is earned as a reduction of the related selling and administrative expenses in the period the program takes place if the consideration represents a reimbursement of specific, incremental, identifiable costs. Consideration that exceeds the specific, incremental, identifiable costs is classified as a reduction of costs of goods sold. The amount of partner funding recorded as a reduction of selling and administrative expenses in our statements of operations totaled
$53,227,000, $48,114,000$128,153,000, 103,447,000 and
$45,146,00085,888,000 in
2017, 20162022, 2021 and
2015,2020, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Although we are affected by the international economic climate, management does not believe material credit risk concentration existed at December 31,
2017.2022. We monitor our clients’ financial condition and do not require collateral.
Sales to the U.S. federal government, which are diversified across multiple agencies and departments, collectively accounts for approximately 9% of our 2017 net sales. Excluding these sales to the federal government, we are not reliant on any one client. No single client accounted for more than
4%10% of our consolidated net sales in
2017.Supplier2022.
Purchases from Microsoft,
Techdata (a distributor) and Ingram Micro (a distributor) accounted for approximately
26%22%, 10%, and 9% respectively, of our aggregate purchases in
2017.2022. No other partner accounted for more than 10% of purchases in
2017.2022. Our top five partners as a group for
20172022 were Microsoft,
Cisco Systems, Tech DataTechdata (a distributor), Ingram Micro (a distributor), Dell and
HP Inc.,Cisco Systems, and approximately
60%55% of our total purchases during
20172022 came from this group of partners. Although brand names and individual products are important to our business, we believe that competitive sources of supply are available in substantially all of our product categories such that, with the exception of Microsoft, we are not dependent on any single partner for sourcing products.
Advertising costs are expensed as they are incurred. Advertising expense of
$47,053,000, $37,565,000$88,667,000, $66,375,000 and
$33,568,000$60,865,000 was recorded in
2017, 20162022, 2021 and
2015,2020, respectively. These amounts were predominantly offset by partner funding earned pursuant to shared marketing expense programs recorded as a reduction of selling and administrative expenses, as discussed in “Partner Funding” above.
Stock-based compensation is measured based on the fair value of the award on the date of grant and the corresponding expense is recognized over the period during which an employee is required to provide service in exchange for the reward. Stock-based compensation expense is classified in the same line item of our consolidated statements of operations as other payroll-related expenses specific to the employee. Compensation expense related to service-based restricted stock units (“RSUs”) is recognized on a straight-line basis over the requisite service period for the entire award. Compensation expense related to performance-based RSUs is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was,
in-substance, multiple awards (i.e., a graded vesting basis).
Forfeitures are recognized as they occur.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We use the U.S. dollar as our reporting currency. The functional currencies of our foreign subsidiaries are
typically the local currencies. Accordingly, assets and liabilities of the subsidiaries are translated into U.S. dollars at the exchange rate in effect at the balance sheet dates. Income and expense items are translated at the average exchange rate for each month within the year. The resulting translation adjustments are recorded directly in accumulated other comprehensive income, net of tax – foreign currency translation adjustments as a separate component of stockholders’ equity. Net foreign currency transaction gains/losses, including transaction gains/losses on intercompany balances that are not of a long-term investment nature and
non-functional currency cash balances, are reported
as a separate component ofin other expense (income), net within non-operating (income) expense in our consolidated statements of operations.
Derivative Financial Instruments
We enter into forward foreign exchange contracts to mitigate the risk ofnon-functional currency monetary assets and liabilities on our consolidated financial statements. These forward contracts are not designated as hedge instruments. The fair value of all derivative assets and liabilities are recorded gross in the other current assets and accrued expenses and other current liabilities sections of our consolidated balance sheets. Gains/losses are recorded net innon-operating (income) expense in our consolidated statements of operations.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable earnings in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.
We recognize net deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income,
tax-planning strategies and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
We record uncertain tax positions on the basis of a
two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the
more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. Interest and penalties related to unrecognized tax benefits are recognized within the income tax expense line in our consolidated statements of operations. Accrued interest and penalties are included within the related tax liability line in our consolidated balance sheets.
Contingencies
From time to time, we are subject to potential claims and assessments from third parties. We are also subject to various government agency, client and partner audits. We continually assess whether or not such claims have merit and warrant accrual. An accrual is made if it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Such estimates are subject to change and may affect our results of operations and our cash flows.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net Earnings Per Share (“EPS”)
Basic EPS is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during each year. 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 RSUs. RSUs and certain shares underlying our outstanding convertible senior notes (the "Notes").
A reconciliation of the denominators of the basic and diluted EPS calculations follows (in thousands, except per share data):
| | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
Numerator: | | | | | | | | | | | | |
Net earnings | | $ | 90,683 | | | $ | 84,690 | | | $ | 75,851 | |
| | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | |
Weighted-average shares used to compute basic EPS | | | 35,741 | | | | 36,102 | | | | 37,984 | |
Dilutive potential common shares due to dilutive RSUs, net of tax effect | | | 466 | | | | 336 | | | | 291 | |
| | | | | | | | | | | | |
Weighted-average shares used to compute diluted EPS | | | 36,207 | | | | 36,438 | | | | 38,275 | |
| | | | | | | | | | | | |
Net earnings per share: | | | | | | | | | | | | |
Basic | | $ | 2.54 | | | $ | 2.35 | | | $ | 2.00 | |
| | | | | | | | | | | | |
Diluted | | $ | 2.50 | | | $ | 2.32 | | | $ | 1.98 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Numerator: | | | | | |
| Net earnings | $ | 280,608 | | | $ | 219,345 | | | $ | 172,640 | |
| Denominator: | | | | | |
| Weighted-average shares used to compute basic EPS | 34,903 | | | 35,011 | | | 35,117 | |
| Dilutive potential common shares due to: | | | | | |
| Dilutive RSUs, net of tax effect | 251 | | | 399 | | | 327 | |
| Convertible senior notes | 1,466 | | | 1,453 | | | — | |
| Weighted-average shares used to compute diluted EPS | 36,620 | | | 36,863 | | | 35,444 | |
| Net earnings per share: | | | | | |
| Basic | $ | 8.04 | | | $ | 6.27 | | | $ | 4.92 | |
| Diluted | $ | 7.66 | | | $ | 5.95 | | | $ | 4.87 | |
In
2017, 20162022, 2021 and
2015,2020, approximately
40,000, 36,00039,000, 2,000 and
1,000,122,000, respectively, of our RSUs were not included in the diluted EPS calculations because their inclusion would have been anti-dilutive. These share-based awards could be dilutive in the future.
In the years ended December 31, 2022, 2021, and 2020 certain potential outstanding shares from the warrants relating to the Call Spread Transactions (as defined in Note 8) were not included in the diluted EPS calculations because their inclusion would have been anti-dilutive. In the year ended December 31, 2020 certain potential outstanding shares from the Notes were not included in the diluted EPS calculations because their inclusion would have been anti-dilutive.
Recently Issued Accounting Standards
In January 2017,
In August 2020, the Financial Accounting Standards Board (“FASB”("FASB") issued Accounting Standard Update (“ASU”("ASU") ASU No. 2017-04, “Simplifying the Test2020-06, “Accounting for Goodwill ImpairmentConvertible Instruments and Contracts in an Entity’s Own Equity”.” The new standardrequiresguidance is intended to simplify the accounting for certain convertible instruments with characteristics of both liability and equity. The guidance removed certain accounting models which separate the embedded conversion features from the host contract for convertible instruments. As a result, after the adoption of this guidance, an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairmententity’s convertible debt instrument will be measured using the difference between the carrying amountwholly accounted for as debt. The guidance also expanded disclosure requirements for convertible instruments and the fair valuesimplified areas of the reporting unit.guidance for diluted earnings-per-share calculations by requiring the use of the if-converted method. The new standard isguidance was effective for annual and interim periodsfiscal years beginning after December 15, 2019,2021, and early adoption is permitted. Wecould have been adopted on either a fully retrospective or modified retrospective basis.
The Company adopted this
standard effective January 1, 2022, using the modified retrospective approach. Therefore, financial statements for the year ended December 31, 2022 are presented under the new standard,
when we performed our annual goodwill impairment analysis for 2017while the comparative periods are not adjusted and are reported in
accordance with the
fourth quarterCompany's old method of
2017 and applied it prospectively.accounting. The adoption of
this standard did not have a material effect on our consolidated financial statements. See “Goodwill” above for further details about our test for goodwill impairment.ASU
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2020-06 significantly impacts our consolidated statements of operations and consolidated balance sheets as we no longer report accreted interest on the Notes and the full par value of the Notes is reflected as debt. The cumulative effect adjustment from prior periods that we recognized in our consolidated balance sheet as adjustments to reduce additional paid in capital and increase retained earnings were $44,731,000 and $17,789,000, respectively. Had we followed the prior method of accounting for the three months ended December 31, 2022, both reported basic and diluted net EPS would decrease by $0.06, from $2.24 and $2.13, respectively, to $2.18 and $2.07, respectively.For the year ended December 31, 2022, reported basic and diluted EPS would decrease by $0.24 and $0.22, respectively, from $8.04 and $7.66, respectively, to $7.80 and $7.44, respectively.
In
November 2016,December 2019, the FASB issued ASU
No. 2016-18, “Restricted Cash.2019-12, “Simplifying the Accounting for Income Taxes.” The new standard
requires companiesis intended to
include cashsimplify various aspects of accounting for income taxes by removing specific exceptions and
cash equivalents that have restrictions on withdrawal or use within total cash and cash equivalents when reconciling thebeginning-of-period andend-of-period total amounts shown on the statement of cash flows.amending certain requirements. The new standard is effective for interim and annual periods beginning after December 15,
2017,2020, and early adoption is permitted.
The new standard is required to be adopted retrospectively. We plan to adopt this new standard in the first quarter of 2018 and do not expect the adoption to have a material effect on our consolidated financial statements.In August 2016, the FASB issued ASUNo. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” The new standard is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. It addresses eight specific cash flow issues to clarify the presentation and classification of cash receipts and cash payments in the statement of cash flows. The new standard is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The new standard is required to be adopted retrospectively. We plan to adopt this new standard in the first quarter of 2018 and do not expect the adoption to have a material effect on our consolidated financial statements.
In March 2016, the FASB issued ASUNo. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This new standard simplifies the accounting for share-based payment transactions, including the income tax consequences, the calculation of diluted earnings per share, the treatment of forfeitures, the classification of awards as either equity or liabilities and the classification on the statement of cash flows. This new standard increases volatility in the statement of operations by requiring all excess tax benefits and deficiencies to be recognized as income tax benefit or expense in the statement of operations and treated as discrete items in the period in which they occur. We adopted the new standard as of January 1, 2017, and prospectively applied the provisions in this guidance requiring recognition of excess tax benefits and deficits in the statement of operations, which resulted in an income tax benefit of $2,483,000 for the year ended December 31, 2017.2021. The corresponding increase in net earnings equated to $0.07 per diluted share during the year ended December 31, 2017. Also, as a result of the adoption of the new standard, we made an accounting policy election to recognize forfeitures as they occur and no longer estimate expected forfeitures. The provisions in this guidance requiring the use of a modified retrospective transition method would have required us to record a cumulative effect adjustment in retained earnings as of January 1, 2017. We elected not to adjust retained earnings and to record such cumulative effect adjustment as stock-based compensation in the first quarter of 2017 on the basis of immateriality. Lastly, we applied the provisions of this guidance relating to classification on the statement of cash flows retrospectively. As a result, excess tax benefits from employee gains on stock-based compensation of $323,000 and $592,000 were reclassified from cash flows from financing activities to cash flows from operating activities for the years ended December 31, 2016 and 2015, respectively, to conform to the current period presentation.
In February 2016, the FASB issued ASUNo. 2016-02, “Leases,” which supersedes the existing lease recognition requirements in the existing accounting standard for leases. The core principal of the new standard is that an entity should recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The new standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within such fiscal years. Early adoption is permitted. The new standard is to be applied using a modified retrospective transition method with the option to elect a number of practical expedients. We expect to adopt the new standard in the first quarter of 2019 and are in the process of determining the effect that the adoption of ASU2016-02 will have on our consolidated financial statements and disclosures. We have not yet selected our planned transition approach.
In January 2016, the FASB issues ASUNo. 2016-01, “Financial Instruments Overview: Recognition and Measurement of Financial Assets and Financial Liabilities.” The new standard amends the guidance on the classification and measurement of financial instruments and changes the accounting for investments in equity securities. The new standard is effective for annual and interim periods in fiscal years beginning after December 15, 2017, and early adoption is permitted. We plan to adopt this new standard in the first quarter of 2018 and do not expect the adoption to have a material effect on our consolidated financial statements.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In July 2015, the FASB issued ASUNo. 2015-11, “Simplifying the Measurement of Inventory.” This standard changes the measurement from lower of cost or market to lower of cost and net realizable value. We adopted the standard in the first quarter of 2017 and applied the provisions prospectively. The standard did not have a material effect on our consolidated financial statements.
On May 28, 2014,
(2) Receivables, Contract Liabilities and Performance Obligations
Contract Balances
The following table provides information about receivables and contract liabilities as of December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Current receivables, which are included in “Accounts receivable, net” | $ | 3,272,371 | | | $ | 2,936,732 | |
| Non-current receivables, which are included in “Other assets” | 161,837 | | | 147,139 | |
| Contract liabilities, which are included in “Accrued expenses and other current liabilities” and “Other liabilities” | $ | 102,057 | | | $ | 116,067 | |
Significant changes in the FASB issued ASUNo. 2014-09, “Revenuecontract liabilities balances during the year ended December 31, 2022 are as follows (in thousands):
| | | | | |
| Increase (Decrease) |
| Balances at December 31, 2020 | $ | 107,158 | |
| Reclassification of the beginning contract liabilities to revenue, as the result of performance obligations satisfied | $ | (77,622) | |
| Cash received in advance and not recognized as revenue | $ | 86,531 | |
| Balances at December 31, 2021 | $ | 116,067 | |
| Reclassification of the beginning contract liabilities to revenue, as the result of performance obligations satisfied | (77,334) | |
| Cash received in advance and not recognized as revenue | 63,324 | |
| Balances at December 31, 2022 | $ | 102,057 | |
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Transaction price allocated to the remaining performance obligations
The following table includes estimated net sales related to performance obligations that are unsatisfied (or partially unsatisfied) as of December 31, 2022 that are expected to be recognized in the future (in thousands):
| | | | | |
| Services |
| 2023 | $ | 109,824 | |
| 2024 | 31,351 | |
| 2025 | 14,519 | |
| 2026 and thereafter | 6,509 | |
| Total remaining performance obligations | $ | 162,203 | |
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
Contracts with Customers,” which amends the existing accounting standards for revenue recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customersa client in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard, as amended, will be effective for the Company beginning in the first quarter of 2018. The standard permits two methods of adoption: retrospectively to each prior reporting period presented (the full retrospective transition method) or retrospectivelycorresponds directly with the
cumulative effect adjustmentvalue to the client of
initially applying the new standard recognized at the date of initial application (the modified retrospective transition method).We will adopt the standard as of January 1, 2018, and will utilize the modified retrospective transition method. While we are still finalizing our accounting policies under the new standard and are in the process of quantifying the cumulative effect adjustment from prior periods that will be recognized in our consolidated balance sheet as of the date of adoption as an adjustment to retained earnings,performance completed to date, we have concluded:
In sales transactions for certain security software products that are sold with integral third-party delivered software maintenance, we will change to record both the software license and the accompanying software maintenance on a net basis, as the agentrecognized revenue in the arrangement. Under current guidance,amount to which we bifurcate the salehave a right to invoice as of the software license from the sale of the maintenance contract, record the sale of the software product on a gross basis, as the principalDecember 31, 2022 and do not disclose information about related remaining performance obligations in the arrangement,table above. Our open time and record the salematerial contracts at December 31, 2022, have an average expected duration of the software maintenance on a net basis, as an agent in the arrangement. This change will lead us23 months.
The majority of our product backlog historically has been and continues to report lower net sales in future periods related to security software products. This change will have no effect on gross profit dollars, but all other things being equal, gross margin for these specific sales would increase compared to prior years.
The accounting for inventories not available for sale, otherwise known as bill and hold arrangements, will change such that a portion of revenue under the contracts will be recognized earlier than we are recognizing under current accounting standards. Bill and hold arrangements are inventory balances owned and paid for by our clients, but for which we are warehousing the product and will be deploying it to the clients’ locations in a future period.
The accounting for renewals of certain software term licenses will change to delay revenue recognition until the beginning of the renewal period. Under current guidance, we recognize revenue as the renewal order is completed.open cancellable purchase orders. We do not believe this change willthat 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 as of December 31, 2022, in the table above.
Assets recognized for costs of obtaining a contract with a customer
Sales commissions are the only significant incremental costs incurred to obtain contracts with our clients. The majority of our contracts are completed within a one-year performance period, and for contracts with a specified term of one year or less, we recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that we otherwise would have a material effect on ourrecognized is one year or less. We record sales or profitability trends, as it is only a change in timing of recognition between periods.
Sales commissions on contracts with performance periods that exceed one year will be recorded as an asset and amortizedamortize the asset to expense over the related contract performance period as opposedperiod. As of December 31, 2022 and 2021, the related asset balance was $13,478,732 and $20,549,000,respectively. The expense is expected to being expensedbe recognized over the next 36 months.
(3) Assets Held for Sale
During 2021, we completed the sale of our three properties in the period the transaction is generated.
Our analysis and evaluation of the new standard will continue through to when we publish our first quarter of 2018 results. A substantial amount of work has been completed, and findings and progress to date have been reported to managementTempe, Arizona and the Audit Committee. Althoughsale of our property in Woodbridge, Illinois for total net proceeds of approximately $27,211,000. During 2020, we currently believe thatcompleted the changes overall resultingsale of our Irvine, California and El Segundo, California properties for approximately $14,218,000 and $26,404,000, respectively. We used the proceeds from the adoption of the new standard will not leadthese sales to operating trends that are materially different than we reportedready our global corporate headquarters in prior years, our evaluation of the effects is still being finalized. Currently, we estimate the total cumulative effect adjustment from prior periods that will be recognized in our consolidated balance sheet as of the date of adoption as an adjustment to retained earnings to be less than $10,000,000, on a pretax basis.
Chandler, Arizona.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(2)
(4) Property and Equipment Property and equipment consist of the following (in thousands):
| | | | | | | | |
| | | December 31, | |
| | | 2017 | | | 2016 | |
Software | | $ | 171,701 | | | $ | 159,442 | |
Buildings | | | 65,468 | | | | 63,253 | |
Equipment | | | 103,542 | | | | 93,553 | |
Furniture and fixtures | | | 38,459 | | | | 36,526 | |
Leasehold improvements | | | 25,981 | | | | 21,132 | |
Land | | | 5,179 | | | | 5,131 | |
| | | | | | | | |
| | | 410,330 | | | | 379,037 | |
Accumulated depreciation and amortization | | | (335,078 | ) | | | (308,127 | ) |
| | | | | | | | |
Property and equipment, net | | $ | 75,252 | | | $ | 70,910 | |
| | | | | | | | |
We periodically assess whether any indicators of impairment existed related to our property and equipment. We incurrednon-cash charges of $418,000 and $535,000 during 2017 and 2015, respectively, towrite-off certain property and equipment. No such charges were incurred in 2016.
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Software | 161,943 | | | 160,633 | |
| Buildings | 98,228 | | | 83,405 | |
| Equipment | 54,110 | | | 52,653 | |
| Furniture and fixtures | 40,700 | | | 32,471 | |
| Leasehold improvements | 26,065 | | | 42,246 | |
| Land | 38,195 | | | 38,641 | |
| 419,241 | | | 410,049 | |
| Accumulated depreciation and amortization | (214,981) | | | (233,786) | |
| Property and equipment, net | 204,260 | | | 176,263 | |
Depreciation and amortization expense related to property and equipment was $25,787,000, $27,493,000$23,722,000, $23,376,000 and $26,649,000$28,025,000 in 2017, 20162022, 2021 and 2015,2020, respectively. Interest charges capitalized
Included within the software and buildings values presented above for 2022 are assets in
connection withinternal-usethe process of being readied for use in the amounts of approximately $3,532,000 and $3,346,000, respectively. Included within the software,
development projectsbuildings and land values presented above for 2021 are assets in
2017, 2016the process of being readied for use in the amounts of approximately $7,016,000, $62,286,000 and
2015 were immaterial.(3)$11,700,000, respectively. Depreciation on these assets will commence, as appropriate, when they are ready for use and placed in service.
The changes in the carrying amount of goodwill for the year ended December 31,
20172022 are as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | | North America | | | EMEA | | | APAC | | | Consolidated | |
Goodwill | | $ | 379,617 | | | $ | 151,439 | | | $ | 13,973 | | | $ | 545,029 | |
Accumulated impairment losses | | | (323,422 | ) | | | (151,439 | ) | | | (13,973 | ) | | | (488,834 | ) |
Goodwill acquired during 2016 | | | (507 | ) | | | — | | | | 6,957 | | | | 6,450 | |
| | | | | | | | | | | | | | | | |
Balance at December 31, 2016 | | | 55,688 | | | | — | | | | 6,957 | | | | 62,645 | |
Goodwill acquired during 2017 | | | 64,140 | | | | 4,041 | | | | 605 | | | | 68,786 | |
| | | | | | | | | | | | | | | | |
Balance at December 31, 2017 | | $ | 119,828 | | | $ | 4,041 | | | $ | 7,562 | | | $ | 131,431 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| North America | | EMEA | | APAC | | Consolidated |
| Goodwill | $ | 720,240 | | | $ | 163,011 | | | $ | 20,732 | | | $ | 903,983 | |
| Accumulated impairment losses | (323,422) | | | (151,439) | | | (13,973) | | | (488,834) | |
| Goodwill acquired during 2021 | — | | | 4,865 | | | — | | | 4,865 | |
| Measurement period adjustments during 2021 | 5,711 | | | (677) | | | — | | | 5,034 | |
| Foreign currency translation adjustment | 1,062 | | | 1,975 | | | 261 | | | 3,298 | |
| Balance at December 31, 2021 | $ | 403,591 | | | $ | 17,735 | | | $ | 7,020 | | | $ | 428,346 | |
| Goodwill acquired during 2022 | 69,923 | | | — | | | — | | | 69,923 | |
| | | | | | | |
| Foreign currency translation adjustment | (2,991) | | | (1,748) | | | (497) | | | (5,236) | |
| Balance at December 31, 2022 | $ | 470,523 | | | $ | 15,987 | | | $ | 6,523 | | | $ | 493,033 | |
On
September 26, 2017,June, 1, 2022 we acquired
Caase.com,Hanu, which has been integrated into our
EMEANorth America business. Under the
purchaseacquisition method of accounting, the
preliminary purchase price for the acquisition was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The excess purchase price over fair value of net assets acquired of approximately
$4,041,000$69,923,000 was recorded as goodwill in the
EMEANorth America reporting
unit (see Note 21). The primary driver for this acquisition was to strengthen our ability to deliver Intelligent Technology Solutions to our clients in the Netherlands, with a view to expand into the wider European region in the near future.unit.
On January 6, 2017,February 28, 2020, we acquired Datalink,vNext, which has been integrated into our North AmericaEMEA business. Under the purchaseacquisition method of accounting, the purchase price for the acquisition was
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The excess purchase price over fair value of net assets acquired
of approximately $64,140,000 was recorded as goodwill in the
North AmericaEMEA reporting
unit (see Note 21).unit. The primary driver for this acquisition was to strengthen our
position as a leading IT solutions provider with deep technical talent delivering data center solutionscapacity to
clients on premise or in the cloud. On September 1, 2016, we acquired Ignia, which has been integrated into our APAC business. Under the purchase method of accounting, the purchase price for the acquisition was allocateddeliver consulting and implementation services to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The excess purchase price over fair value of net assets acquired of approximately $6,957,000 was recorded as goodwill in the APAC reporting unit (see Note 21). The primary driver for this acquisition was to expand our global footprint in the areas of application design,support clients’ digital solutions, cloud, mobility and business analytics, while also building on our unique position to bring solutions powered by Intelligent Technology™ to our clients in the Asia-Pacific region. The change in goodwill in our APAC operating segment as of December 31, 2017 compared to the balance as of December 31, 2016 resulted from a final working capital adjustment of $35,000 during the year and foreign currency translation adjustments associated with the goodwill balance.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On October 1, 2015, we acquired BlueMetal, which has been integrated into our North America business. In 2016, we resolved the working capital contingency associated with the acquisition of BlueMetal. We recorded the adjustment of the purchase price allocation as a reduction of goodwill in our North America operating segment upon the receipt of $507,000 in cash during 2016.
transformation initiatives.
During
2017,2022, we periodically assessed whether any indicators of impairment existed which would require us to perform an interim impairment review. As of each interim period end during the year, we concluded that a triggering event had not occurred that would more likely than not reduce the fair value of our reporting units below their carrying values. We performed our annual test of goodwill for impairment during the fourth quarter of
2017.2022. The results of the
qualitative goodwill impairment test indicated that the fair values of our North America, EMEA and APAC reporting units
estimated using the market approach, were in excess of their respective carrying values.
(4)
Intangible assets consist of the following (in thousands):
| | | | | | | | |
| | | December 31, | |
| | | 2017 | | | 2016 | |
Customer relationships | | $ | 133,660 | | | $ | 41,711 | |
Other | | | 4,475 | | | | 1,978 | |
| | | | | | | | |
| | | 138,135 | | | | 43,689 | |
Accumulated amortization | | | (37,357 | ) | | | (22,982 | ) |
| | | | | | | | |
Intangible assets, net | | $ | 100,778 | | | $ | 20,707 | |
| | | | | | | | |
In March and December 2017, respectively, the customer relationship intangible assets associated with the 2012 acquisition of Inmac and the 2011 acquisition of Ensynch were fully amortized. As such, the gross intangible assets balance and the accumulated amortization balance were both reduced by approximately $2,516,000, which had no effect on the net intangible assets balance reported in the accompanying consolidated balance sheet as of December 31, 2017.
In September 2016, the customer relationship intangible assets associated with the 2006 acquisition of Software Spectrum Inc. and the 2008 acquisition of MINX Limited in the United Kingdom were fully amortized. As such, the gross intangible assets balance and the accumulated amortization balance were both reduced by approximately $81,817,000, which had no effect on the net intangible assets balance reported in the accompanying consolidated balance sheet as of December 31, 2016.
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Customer relationships | $ | 338,755 | | | $ | 320,323 | |
| Other | 8,540 | | | 5,374 | |
| 347,295 | | | 325,697 | |
| Accumulated amortization | (142,297) | | | (110,909) | |
| Intangible assets, net | $ | 204,998 | | | $ | 214,788 | |
During
2017,2022, we periodically assessed whether any indicators of impairment existed related to our intangible assets. As of each interim period end during the year, we concluded that a triggering event had not occurred that would more likely than not reduce the fair value of our intangible assets below their carrying values.
Amortization expense recognized in 2017, 20162022, 2021 and 20152020 was $16,812,000, $10,637,000$32,892,000, $32,045,000 and $11,308,000,$37,535,000, respectively.
Future amortization expense for the remaining unamortized balance as of December 31,
20172022 is estimated as follows (in thousands):
| | | | |
Years Ending December 31, | | Amortization Expense | |
2018 | | $ | 14,260 | |
2019 | | | 11,690 | |
2020 | | | 11,677 | |
2021 | | | 11,638 | |
2022 | | | 11,638 | |
Thereafter | | | 39,875 | |
| | | | |
Total amortization expense | | $ | 100,778 | |
| | | | |
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(5)
| | | | | | | | |
| Years Ending December 31, | | Amortization Expense |
| 2023 | | $ | 32,413 | |
| 2024 | | 30,743 | |
| 2025 | | 30,434 | |
| 2026 | | 30,434 | |
| 2027 | | 20,850 | |
| Thereafter | | 60,124 | |
| Total amortization expense | | $ | 204,998 | |
(7) Accounts Payable - Inventory Financing FacilityFacilities
We have entered into
an agreementagreements with
a financial
intermediaryintermediaries to facilitate the purchase of inventory from various suppliers under certain terms and conditions, as described below.
TheseThe amounts
outstanding under these facilities are classified separately as accounts payable - inventory financing
facilityfacilities in the accompanying consolidated balance sheets.
The aggregate
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 for vendor purchases 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. As of December 31, 2022, our combined inventory financing facilities had a total maximum capacity of $705,000,000, of which $301,314,000 was outstanding.
The facilities remain in effect until they are terminated by any of the parties. If balances are not paid within stated vendor terms, they will accrue interest at prime plus 2.00% 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 $325,000,000.no longer available. Net amounts drawn down or repaid during the year on these facilities are classified within cash flows from financing activities in the accompanying consolidated statements of cash flows. Interest does not accrue on accounts payable under these facilities provided the accounts payable are paid within stated vendor terms (typically 60 days); however, we impute interest on the average daily balance outstanding during these stated vendor terms based on our incremental borrowing rate during the period. Imputed interest of $15,523,000, $15,292,000 and $13,076,000 was recorded in 2022, 2021 and 2020, respectively.
(8) Debt, Finance Leases and Other Financing Obligations
Debt
Our long-term debt consists of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| ABL revolving credit facility | $ | 291,599 | | | $ | 53,000 | |
| Convertible senior notes due 2025 | 346,199 | | | 308,543 | |
| Finance leases and other financing obligations | 102 | | | 63 | |
| 637,900 | | | 361,606 | |
| Less: current portion of long-term debt | (346,228) | | | (36) | |
| Long-term debt | $ | 291,672 | | | $ | 361,570 | |
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
inventory financingABL facility by up to an aggregate of
$25,000,000,the U.S. dollar equivalent of $750,000,000, subject to customary
conditions.conditions, including receipt of commitments from lenders. The
facility matures on June 23, 2021. Additionally, the facility may be renewed under certain circumstances described in the agreement for successive12-month periods. Interest does not accrue on accounts payable under this facility provided the accounts payable are paid within stated vendor terms (typically 60 days). We impute interest on the average daily balance outstanding during these stated vendor terms based on our blended incremental borrowing rate during the period under our senior revolving credit facility and our accounts receivable securitization financing facility. Imputed interest of $6,736,000, $3,385,000 and $3,406,000 was recorded in 2017, 2016 and 2015, respectively. If balances are not paid within stated vendor terms, they will accrue interest at prime plus 1.25%. TheABL facility is guaranteed by
the Company and eachcertain of
itsour material
domestic subsidiaries and is secured by a lien on
substantially allcertain of
the Company’sour assets and certain of each other borrower’s and each guarantor’s assets.
(6)Debt, Capital Lease and Other Financing Obligations
Debt
Our long-term debt consists The ABL facility now provides for an uncommitted first-in, last-out revolving facility in an aggregate amount of the following (in thousands):
| | | | | | | | |
| | | December 31, | |
| | | 2017 | | | 2016 | |
Senior revolving credit facility | | $ | 117,500 | | | $ | — | |
Term Loan A (less unamortized debt issuance costs of $873) | | | 165,377 | | | | — | |
Accounts receivable securitization financing facility | | | 25,000 | | | | 39,500 | |
Capital leases and other financing obligations | | | 5,291 | | | | 1,231 | |
| | | | | | | | |
Total | | | 313,168 | | | | 40,731 | |
Less: current portion of long-term debt | | | (16,592 | ) | | | (480 | ) |
| | | | | | | | |
Long-term debt | | $ | 296,576 | | | $ | 40,251 | |
| | | | | | | | |
Our senior revolving credit facility (“revolving facility”) is used for general corporate purposes, which may include acquisitions and share repurchases, and may be used for borrowings in certain foreign currencies and for letters of credit, in each case up to specified sublimits.$100,000,000. The revolvingABL facility has an aggregate U.S. dollar equivalent maximum borrowingnow matures on July 22, 2027. As of December 31, 2022, eligible accounts receivable and inventory were sufficient to permit access to the full $1,800,000,000 facility amount, of $350,000,000, including a maximum borrowing capacity that may be used for borrowing in certain foreign currencies of $50,000,000. On January 6, 2017, we amended our revolving facility to expand the facility by $175,000,000 in the form of an incremental Term Loan A (“TLA”). Pricing and all other general terms and conditions of the TLA are governed by the existing revolving facility. The TLA requires amortization payments of 5%, 7.5%, 10%, 12.5% and 15% of the original principal balance in years one through five, respectively, to be paid quarterly through March 31, 2021, with the remaining balance of $107,187,500 due at maturity on June 23, 2021. The revolving facility and TLA are guaranteed by the Company’s material domestic subsidiaries and are secured by a lien on substantially all of the Company’s and each guarantor’s assets.
which $291,599,000 was outstanding.
The interest rates applicable to borrowings under the revolvingABL facility and the TLA are based on the leverage ratio ofaverage aggregate excess availability under the CompanyABL facility as set forth on a pricing grid in the credit agreement. Amounts outstanding under the revolvingABL facility and TLA bear interest, payable quarterly, at a floating rate equal to the prime rateSOFR, EURIBOR, AUD Rate, or SONIA, as applicable, plus a predetermined spread of 0.00% to 0.75% or, at our option, a LIBOR rate plus apre-determined
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
spread of 1.25% to 2.25%1.50%. The floating interest rate applicable at December 31, 20172022 was 3.49%5.47% per annum for the revolving facility and 3.57% per annum for the TLA.ABL facility. In addition, we pay a quarterly commitment fee on the unused portion of the facility of 0.25% to 0.45%, and our letter of credit participation fee ranges from 1.25% to 2.25%1.50%. During 2017, 2016 and 2015, due to availability under our ABS facility,2022, weighted average borrowings under our revolvingABL facility were $63,604,000, $35,811,000 and $21,987,000, respectively.$523,023,000. Interest expense associated with the revolvingABL facility was $21,362,000, $11,065,000 and TLA was $8,491,000, $2,191,000$14,541,000 in 2022, 2021 and $1,813,000 in 2017, 2016 and 2015,2020, respectively, including the commitment fee and amortization of deferred financing fees. As
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
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, 2017, we had $117,500,000 outstanding under2019 (and only during such calendar quarter), if the last reported sale price of our revolving facilitycommon stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and approximately $166,250,000 outstanding underincluding, the TLA. See discussionlast trading day of the maximum leverage ratio under “Debt Covenants” below. immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price of our common stock per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) if we call any or all of the Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after June 15, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date, the holders may convert their notes at any time, regardless of the foregoing circumstances.
The
revolving facility matures on June 23, 2021.Notes exceeded the market price trigger of $88.82 in the fourth quarter of 2022 and as such, the Notes are convertible at the option of the holders through March 31, 2023. All of the Notes remain outstanding at December 31, 2022. The Notes are convertible at the option of the holders at December 31, 2022 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 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 or deliver cash equal to the principal amount of the notes, plus cash or shares of our common stock or a combination of the two for any additional amounts due. The conversion rate will initially be 14.6376 shares of common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of approximately $68.32 per share of common stock). The conversion rate is subject to change in certain circumstances and will not be adjusted for any accrued and unpaid interest. In addition, following certain events that occur prior to the maturity date or following our issuance of a notice of redemption, the conversion rate is subject to an increase for a holder who elects to convert their notes in connection with those events or during the related redemption period in certain circumstances.
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
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Our accounts receivable securitization financing facility (“ABS facility”) has a maximum aggregate borrowing availability of $250,000,000 and matures on June 23, 2019. Under our ABS facility, we can sell receivables periodically to a special purpose accounts receivable and financing entity (the “SPE”), which is exclusively engaged in purchasing receivables from us. The SPE is a wholly-owned, bankruptcy-remote entity that we have included in our consolidated financial statements. The SPE funds its purchases by selling undivided interests in eligible trade accounts receivable to independent financial institution purchasers under the ABS facility (“Purchasers”), which is administered by an independent financial institution agent. The SPE’s assets are available first and foremost to satisfy the claims
principal amount of the Purchasers,Notes to be repurchased, plus accrued and we cannot convey anyunpaid interest into, but excluding, the receivables sold to the Purchasers (or allow any adverse claims on the receivables) without the consent of the Purchasers. In addition, the SPE is required to maintain a minimum capital amount and various reserves pursuant to the terms of the ABS facility. We maintain effective control over the receivables that are sold. Accordingly, the receivables remain recorded on our consolidated balance sheets. At December 31, 2017 and 2016, the SPE owned $1,141,520,000 and $936,467,000, respectively, of receivables recorded at fair value and included in the accompanying consolidated balance sheets. While the ABS facility has a stated maximum amount, the actual availability under the ABS facility is limited by the quantity and quality of the underlying accounts receivable.fundamental change repurchase date. As of December 31, 2017, qualified receivables were sufficient to permit access to the full $250,000,000 facility amount, of which $25,000,000 was outstanding. See discussion2022, none of the criteria for a fundamental change or a conversion rate adjustment had been met.
The maximum
leverage ratio under “Debt Covenants” below.Undernumber of shares issuable upon conversion, including the amended ABS facility, interest is payable monthly,effect of a fundamental change and the floating interestsubject to other conversion rate applicable at December 31, 2017 was 2.41% per annum, including a 0.85% usage fee onadjustments, would be 6,788,208.
We may redeem for cash all or any outstanding balances. In addition, we pay a monthly commitment fee on the unused portion of the facilityNotes, at our option, on or after August 20, 2022 if the last reported sale price of 0.375%. Duringour common stock has been at least 130% of the years endedconversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes.
The Notes are subject to certain customary events of default and acceleration clauses. As of December 31,
2017, 2016 and 2015, the weighted average interest rates on amounts outstanding under our ABS facility, including the usage and commitment fees and the amortization of deferred financing fees, were 2.4%, 1.9% and 1.6%, respectively. Weighted average borrowings under our ABS facility in 2017, 2016 and 2015 were $153,759,000, $145,376,000 and $112,101,000, respectively.Debt Covenants
Our revolving facility, our TLA and our ABS facility contain various covenants customary for transactions of this type, including limitations on the payment of dividends and the requirement that we comply with maximum leverage and minimum fixed charge ratio requirements, comply with a minimum receivables requirement and meet monthly, quarterly and annual reporting requirements. If we fail to comply with these covenants, the lenders would be able to demand payment within a specified period of time. Further, the terms2022, no such events have occurred.
The Notes consist of the
ABS facility identify various circumstances that would result in an “amortization event” underfollowing balances reported within the
facility.Our consolidated debt balance that can be outstanding at the end of any fiscal quarter under our revolving facility, our TLA and our ABS facility is limited by certain financial covenants, particularly a maximum leverage ratio. The maximum leverage ratio is calculated as aggregate debt outstanding divided by the sum of our trailing twelve month net earnings (loss) plus (i) interest expense, excludingnon-cash imputed interest on our inventory financing facility, (ii) income tax expense (benefit), (iii) depreciation and amortization,(iv) non-cash stock-based compensation, (v) extraordinary ornon-recurringnon-cash losses or expenses and (vi) certain cash restructuring and acquisition-related charges and synergies, not to exceed a specified cap (“adjusted earnings”). The maximum leverage ratio permitted under the facilities was increased to 3.50 times trailing twelve-month adjusted earnings in conjunction with the acquisition of Datalink effective January 6, 2017. A significant drop in our adjusted earnings would limit the amount of indebtedness that could be outstanding at the end of any fiscal quarter to a level that would be below our consolidated maximum facility amount. Based on our maximum leverage ratiosheet as of December 31, 2017,2022 and 2021 (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Liability: | | | |
| Principal | $ | 350,000 | | | $ | 350,000 | |
| Less: debt discount and issuance costs, net of accumulated accretion | (3,801) | | | (41,457) | |
| Net carrying amount | $ | 346,199 | | | $ | 308,543 | |
| | | |
| Equity, net of deferred tax | $ | — | | | $ | 44,731 | |
The remaining life of the debt discount and issuance cost accretion is approximately 2.12 years. The effective interest rate on the liability component of the Notes is 4.325%.
The following table summarizes the interest expense components resulting from the Notes reported within the consolidated statement of operations for the year ended December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 | | 2020 |
| Contractual coupon interest | $ | 2,625 | | | $ | 2,625 | | | $ | 2,625 | |
| Amortization of debt discount | $ | — | | | $ | 10,702 | | | $ | 10,226 | |
| Amortization of debt issuance costs | $ | 1,789 | | | $ | 1,422 | | | $ | 1,359 | |
As a result of our
aggregateadoption of ASU 2020-06, effective January 1, 2022, we will no longer reflect any debt
discount on the Notes in our consolidated balance
that could have been outstanding undersheet, nor will we recognize amortization of debt discount within our
revolving facility,consolidated statement of operations. Also in January 2022, we filed an irrevocable settlement election notice with the Note holders to inform them of our
TLA and our ABS facility waselection to settle the
fullprincipal amount of the
maximum borrowing capacityNotes in cash. As a result of
$766,250,000, of which $117,500,000 was outstanding under our revolving facility, $166,250,000 was outstanding under our TLA and $25,000,000 was outstanding under our ABS facilitythis election, at
December 31, 2017.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Capital Lease
period ends where the market price, or other conversion triggers are met, the Notes will be classified in our consolidated balance sheet as current.
Convertible Note Hedge and Warrant Transaction
In connection with the issuance of the Notes, we entered into certain convertible note hedge and warrant transactions (the “Call Spread Transactions”) with respect to the Company’s common stock.
The convertible note hedge consists of an option to purchase up to 5,123,160 common stock shares at a price of $68.32 per share. The hedge expires on February 15, 2025 and can only be concurrently executed upon the conversion of the Notes. We paid approximately $66,325,000 for the convertible note hedge transaction.
Additionally, we sold warrants to purchase 5,123,160 shares of common stock at a price of $103.12 per share. The warrants expire on May 15, 2025 and can only be exercised at maturity. The Company received aggregate proceeds of approximately $34,440,000 for the sale of the warrants.
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.
Finance Leases and Other Financing Obligations
In August 2017, we entered into two12-month capital leases for certain IT equipment. In May 2017 and March 2016, we entered into capitalized leases with36-month terms for certain IT equipment. The capital leases werenon-cash transactions and, accordingly, have been excluded from our consolidated statements of cash flows for the years ended December 31, 2017 and 2016.
Future minimum payments under the capitalized leases consist of the following as of December 31, 2017 (in thousands):
| | | | |
Years Ending December 31, | | | |
2018 | | $ | 1,550 | |
2019 | | | 1,016 | |
2020 | | | 381 | |
| | | | |
Total minimum lease payments | | | 2,947 | |
Less amount representing interest | | | (145 | ) |
| | | | |
Present value of minimum lease payments | | $ | 2,802 | |
| | | | |
From time to time, we
also enter into
finance leases and other financing agreements with financial intermediaries to facilitate the purchase of products from certain vendors.
In conjunction with our acquisition of Datalink effective January 6, 2017, we acquired certain obligations associated with Datalink’s financing of the equipment that it leased to its clients. At December 31, 2017, these financing obligations totaled $2,489,000. No amounts were owed under other financing agreements as of December 31, 2016.The current and long-term portions of our
capitalfinance lease and other financing obligations are included in the current and long-term portions of long-term debt in the table above and in our consolidated balance sheets as of December 31,
20172022 and
2016.(7)Operating 2021.
We havenon-cancelable operatinglease office space, distribution centers, land, vehicles and equipment. Lease agreements with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases with third parties, primarily for administrative and distribution center space and computer equipment. Our facilities leases generally provide for periodic rent increases and many contain escalation clauses and renewal options. We recognize rent expense on a straight-line basis over the lease term. Rental expense
Certain lease agreements include one or more options to renew, with renewal terms that can extend the lease term from one to five years or more. The exercise of lease renewal options is at our sole discretion. Some agreements also include options to purchase the leased property. The estimated life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Certain of our lease agreements include rental payments adjusted periodically for these third-party operating leases was $19,126,000, $14,444,000inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table provides information about the financial statement classification of our lease balances reported within the consolidated balance sheets as of December 31, 2022 and $14,737,000 in 2017, 2016December 31, 2021 (in thousands):
| | | | | | | | | | | | | | |
| | December 31, |
| Leases | Classification | 2022 | | 2021 |
| Assets | | | | |
| Operating lease assets | Other assets | $ | 76,160 | | | $ | 72,605 | |
| Finance lease assets | Property and equipment(a) | 59 | | | 80 | |
| Total lease assets | | $ | 76,219 | | | $ | 72,685 | |
| Liabilities | | | | |
| Current | | | | |
| Operating lease liabilities | Accrued expenses and other current liabilities | $ | 19,213 | | | $ | 20,667 | |
| Finance lease liabilities | Current portion of long-term debt | 28 | | | 36 | |
| Non-current | | | | |
| Operating lease liabilities | Other liabilities | 63,324 | | | 58,442 | |
| Finance lease liabilities | Long-term debt | — | | | 27 | |
| Total lease liabilities | | $ | 82,565 | | | $ | 79,172 | |
| | | | | |
| (a) | Recorded net of accumulated amortization of $48,000 and $27,000 as of December 31, 2022 and 2021, respectively. |
The following table provides information about the financial statement classification of our lease expenses reported within the consolidated statement of operations for the year ended December 31, 2022 and
2015, respectively, and is included in selling and administrative expenses in the accompanying consolidated statements of operations.2021 (in thousands):
| | | | | | | | | | | | | | |
| | December 31, |
| Lease cost | Classification | 2022 | | 2021 |
Operating lease cost (a) (b) | Selling and administrative expenses | $ | 23,986 | | | $ | 24,839 | |
| Finance lease cost | | | | |
| Amortization of leased assets | Selling and administrative expenses | 29 | | | 697 | |
| Interest on lease liabilities | Interest expense, net | 2 | | | 33 | |
| Total lease cost | | $ | 24,017 | | | $ | 25,569 | |
| | | | | |
| (a) | Includes immaterial amounts recorded to cost of goods sold. |
| (b) | Excludes short-term and variable lease costs, which are immaterial. |
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Future minimum lease payments under
non-cancelable operating leases
(with initial or remaining lease terms in excess of one year) as of December 31,
20172022 are as follows (in thousands):
| | | | |
Years Ending December 31, | | | |
2018 | | | 18,601 | |
2019 | | | 16,617 | |
2020 | | | 12,122 | |
2021 | | | 9,170 | |
2022 | | | 6,966 | |
Thereafter | | | 12,023 | |
| | | | |
Total minimum lease payments | | $ | 75,499 | |
| | | | |
Amounts in
| | | | | | | | | | | | | | | | | |
| Operating leases | | Finance leases | | Total |
| 2023 | $ | 21,719 | | | $ | 28 | | | $ | 21,747 | |
| 2024 | 16,614 | | | — | | | 16,614 | |
| 2025 | 13,568 | | | — | | | 13,568 | |
| 2026 | 12,038 | | | — | | | 12,038 | |
| 2027 | 10,140 | | | — | | | 10,140 | |
| After 2027 | 17,366 | | | — | | | 17,366 | |
| Total lease payments | 91,445 | | | 28 | | | 91,473 | |
| Less: Interest | (8,908) | | | — | | | (8,908) | |
| Present value of lease liabilities | $ | 82,537 | | | $ | 28 | | | $ | 82,565 | |
The following table provides information about the remaining lease terms and discount rates applied as of December 31, 2022 and 2021:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Weighted average remaining lease term (years): | | | |
| Operating leases | 5.67 | | 5.79 |
| Finance leases | 0.75 | | 1.75 |
| Weighted average discount rate (%): | | | |
| Operating leases | 3.49 | | | 3.09 | |
| Finance leases | 1.49 | | | 1.49 | |
The following table
above exclude approximately $1.6 million in each of 2018provides other information related to leases for the year ended December 31, 2022 and
2019 innon-cancellable rental income.2021 (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from operating leases | $ | 23,674 | | | $ | 24,640 | |
| Leased assets obtained in exchange for new operating lease liabilities | 22,725 | | | 15,980 | |
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(8)Severance and Restructuring Activities
During 2017, 2016 and 2015, we recorded severance expense associated with the elimination of certain positions based on are-alignment of roles and responsibilities and a continued review of resource needs. Charges in North America included severance actions taken to realign roles and responsibilities subsequent to the acquisition of Datalink in January 2017, as well as a headcount reduction as part of cost reduction initiatives in the fourth quarter of 2017 and early in 2016. Charges in EMEA included ongoing restructuring activities, primarily in France, Germany, the United Kingdom and the Netherlands, as part our cost reduction and restructuring initiatives in the region. The APAC charges primarily related to severance actions taken subsequent to the acquisition of Ignia. The following table details the activity for each of the three years in the period ending December 31, 2017 related to these resource actions, and the outstanding obligations as of December 31, 2017 (in thousands):
| | | | | | | | | | | | | | | | |
| | | North America | | | EMEA | | | APAC | | | Consolidated | |
Balances at December 31, 2014 | | $ | 857 | | | $ | 2,971 | | | $ | — | | | $ | 3,828 | |
Severance costs, net of adjustments | | | 1,126 | | | | 3,781 | | | | — | | | | 4,907 | |
Cash payments | | | (1,456 | ) | | | (3,534 | ) | | | — | | | | (4,990 | ) |
Foreign currency translation adjustments | | | (22 | ) | | | (235 | ) | | | — | | | | (257 | ) |
| | | | | | | | | | | | | | | | |
Balances at December 31, 2015 | | | 505 | | | | 2,983 | | | | — | | | | 3,488 | |
Severance costs, net of adjustments | | | 2,966 | | | | 1,496 | | | | 118 | | | | 4,580 | |
Cash payments | | | (2,524 | ) | | | (3,239 | ) | | | (118 | ) | | | (5,881 | ) |
Foreign currency translation adjustments | | | — | | | | (23 | ) | | | — | | | | (23 | ) |
| | | | | | | | | | | | | | | | |
Balances at December 31, 2016 | | | 947 | | | | 1,217 | | | | — | | | | 2,164 | |
Severance costs, net of adjustments | | | 4,010 | | | | 4,888 | | | | 104 | | | | 9,002 | |
Cash payments | | | (3,336 | ) | | | (3,597 | ) | | | (89 | ) | | | (7,022 | ) |
Foreign currency translation adjustments | | | 10 | | | | 486 | | | | — | | | | 496 | |
| | | | | | | | | | | | | | | | |
Balances at December 31, 2017 | | $ | 1,631 | | | $ | 2,994 | | | $ | 15 | | | $ | 4,640 | |
| | | | | | | | | | | | | | | | |
Immaterial adjustments were recorded as a reduction to severance and restructuring expense in each of 2017, 2016 and 2015, due to changes in estimates.
The remaining outstanding obligations as of December 31, 2017 are expected to be paid during the next 12 months and are therefore included in accrued expenses and other current liabilities.
(9)
(10) Stock-Based Compensation We recorded the following
pre-tax amounts in selling and administrative expenses for stock-based compensation, by operating segment, in the accompanying consolidated financial statements (in thousands):
| | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
North America | | $ | 9,697 | | | $ | 8,096 | | | $ | 6,648 | |
EMEA | | | 2,737 | | | | 2,530 | | | | 1,908 | |
APAC | | | 392 | | | | 432 | | | | 366 | |
| | | | | | | | | | | | |
Total Consolidated | | $ | 12,826 | | | $ | 11,058 | | | $ | 8,922 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| North America | $ | 17,822 | | | $ | 13,699 | | | $ | 13,151 | |
| EMEA | 3,960 | | | 3,844 | | | 3,953 | |
| APAC | 928 | | | 658 | | | 623 | |
| Total Consolidated | $ | 22,710 | | | $ | 18,201 | | | $ | 17,727 | |
On April 3, 2020, our Board of Directors adopted
and approved the
Amendednew Insight Enterprises, Inc.
20072020 Omnibus Plan (the “Plan”)
on March 28, 2011., subject to stockholder approval. The Plan was approved by our stockholders
at our 2020 annual meeting on May
18, 2011 at our 2011 annual meeting20, 2020 and, unless sooner terminated, will remain in place until May
18, 2021. 20, 2030. The Plan allows the Company to grant options, stock appreciation rights, stock awards, restricted stock, stock units (which may also be referred to as “restricted stock units” or "RSUs"), performance shares, performance units, cash-based awards and other awards payable in cash or shares of common stock to eligiblenon-employee directors, employees and consultants. Consultants and independent contractors are eligible if they provide bona fide services that are not related to capital raising or promoting or maintaining a market for the Company’s stock.
On
The Company grants service-based RSUs and performance-based RSUs to officers and certain employees under the Plan.RSUs vest over a two to four year vesting period, while performance-based RSUs are also subject to the achievement of pre-established annual financial and/or strategic performance goals.
In February 17, 2016,2022, Insight also granted performance-based RSUs based on relative total shareholder return (“rTSR”) metric to officers and certain employees under the BoardPlan.The number of DirectorsrTSR performance-based RSUs expected to be received at vesting will range from 0% to 200% of target, based on the Company’s total shareholder return as compared to a group of peer companies over a three-year performance period.The Monte Carlo Simulation model is used to determine the fair value at grant date.
The Company previously adopted the
First Amendment to theAmended Insight Enterprises, Inc. 2007 Omnibus Plan (the
“First Amendment”“Prior Plan”).
OnThe Prior Plan was approved by our stockholders on May 18,
20162011 at our
20162011 annual
meeting, our stockholders approved the First Amendment.meeting. The
First Amendment: (a) updates the list of performance criteria containedPrior Plan shall remain in
Section 16.1 of the Plan; (b) imposes a limit on the dollar value ofeffect until all awards
that may be granted to any one participant who is anon-employee director during any one calendar year; and (c) adds an objective clawback provision expressly providing that every award granted under the
Prior Plan have been exercised, forfeited or cancelled or have otherwise expired or terminated. Any shares that remain outstanding or otherwise become available under the terms of the Prior Plan following the date the Plan is
subject to potential forfeiture or recovery toapproved by the
fullest extent called for by law, listing standard or Company policy. The First Amendment did not increase the number of sharesCompany’s stockholders shall become available for
grantissuance under the
Plan or extendPlan. No further awards will be made under the
term of thePrior Plan.
The Plan is administered by the Compensation Committee of Insight’s Board of Directors, and, except as provided below, the Compensation Committee has the exclusive authority to administer the Plan, including the power to determine eligibility, the types of awards to be granted, the price and the timing of awards. Under the Plan, the Compensation Committee may delegate some of its authority to our Chief Executive Officer to grant awards to individuals other than individuals who are subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended. As of December 31, 2017,2022, of the 7,250,000 2,395,000shares of common stock reserved and available for grant under the Plan, 3,215,5402,200,747 shares of common stock remain available for grant under the Plan.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Accounting for Restricted Stock Units
We issue RSUs as incentives to certain officers and teammates and as compensation to members of our Board of Directors. We recognize compensation expense associated with the issuance of such RSUs over the vesting period for each respective RSU. The total compensation expense associated with RSUs represents the value based upon the number of RSUs awarded multiplied by the closing price of our common stock on the date of grant. The number of RSUs to be awarded under our service-based RSUs is fixed at the grant date. The number of RSUs ultimately awarded under our performance-based RSUs varies based on whether the Company achieves certain financial results. We record compensation expense each period based on our estimate of the most probable number of RSUs that will be issued under the grants of performance-based RSUs. Recipients of RSUs do not have voting or dividend rights until the vesting conditions are satisfied and shares are released.
As of December 31,
2017,2022, total compensation cost related to nonvested RSUs not yet recognized is
$17,483,000,$34,373,000, which is expected to be recognized over the next
1.251.06 years on a weighted-average basis.
The following table summarizes our RSU activity during
2017: | | | | | | | | | | | | |
| | | Number | | | Weighted Average
Grant Date Fair Value | | | Fair Value | |
Nonvested at the beginning of year | | | 1,067,557 | | | $ | 25.37 | | | | | |
Granted | | | 369,438 | | | $ | 44.12 | | | | | |
Vested, including shares withheld to cover taxes | | | (466,839 | ) | | $ | 24.88 | | | $ | 20,284,762 | (a) |
| | | | | | | | | | | | |
Forfeited | | | (78,043 | ) | | $ | 32.16 | | | | | |
| | | | | | | | | | | | |
Nonvested at the end of year | | | 892,113 | | | $ | 32.86 | | | $ | 34,159,007 | (b) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Number | | Weighted Average Grant Date Fair Value | | Fair Value | |
| Nonvested at the beginning of year | 690,688 | | $ | 67.60 | | | | |
| Service-based RSUs granted | 215,765 | | $ | 98.79 | | | | |
| Performance-based RSUs granted | 40,724 | | $ | 99.06 | | | | |
| Performance-based RSUs (rTSR) granted | 34,684 | | $ | 99.05 | | | | |
| Vested, including shares withheld to cover taxes | (300,365) | | $ | 61.57 | | | $ | 29,805,641 | | (a) |
| Forfeited | (37,836) | | $ | 82.41 | | | | |
| Nonvested at the end of year | 643,660 | | $ | 86.53 | | | $ | 64,539,788 | | (b) |
(a) | | | | | |
| (a) | The aggregate fair value of vested RSUs represents the totalpre-tax fair value, based on the closing stock price on the day of vesting, which would have been received by holders of RSUs had all such holders sold their underlying shares on that date. The aggregate intrinsic value for RSUs which vested during 20162021 and 20152020 was $9,235,102$34,558,405 and $9,168,784,$22,547,714, respectively. |
(b) | | | | | |
| (b) | The aggregate fair value of the nonvested RSUs and the RSUs expected to vest represents the totalpre-tax fair value, based on our closing stock price of $38.29 $100.27as of December 29, 2017 (December 31, 2017 was not a trading day),30, 2022, which would have been received by holders of RSUs had all such holders sold their underlying shares on that date. |
During each of the years in the three-year period ended December 31,
2017,2022, the RSUs that vested for teammates in the United States were
net-share settled such that we withheld shares with value equivalent
up to the teammates’
minimummaximum statutory United States tax obligation for the applicable income and other employment taxes and remitted the equivalent cash amount to the appropriate taxing authorities. The total shares withheld during
2017, 20162022, 2021 and
20152020 of
122,255, 84,95379,611, 105,434 and
85,652,101,159, respectively, were based on the value of the RSUs on their vesting dates as determined by our closing stock price on such dates. For
2017, 20162022, 2021 and
2015,2020, total payments for our teammates’ tax obligations to the taxing authorities were
$5,318,000, $2,219,000$7,905,000, $9,109,000 and
$2,265,000,$5,964,000, respectively, and are reflected as a financing activity within the accompanying consolidated statements of cash flows. These
net-share settlements had the effect of repurchases of our common stock as they reduced the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to us.
(10)Assets Held for Sale
In May 2016, we sold real estate that we owned in Bloomingdale, Illinois that was previously classified as a held for sale asset and included in other current assets in the accompanying consolidated balance sheet as of December 31, 2015. In previous years, we recordednon-cash charges to reduce the carrying amount of the related assets to their estimated fair value less costs to sell. During the second quarter of 2016, we recorded a gain on sale of approximately $338,000, which is included in selling and administrative expenses in the accompanying consolidated statement of operations for the year ended December 31, 2016.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents the
United States (“U.S.
”) and foreign components of earnings before income taxes and the related income tax expense (in thousands):
Earnings before income taxes:
| | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
United States | | $ | 119,330 | | | $ | 99,095 | | | $ | 90,575 | |
Foreign | | | 39,768 | | | | 40,363 | | | | 28,601 | |
| | | | | | | | | | | | |
| | $ | 159,098 | | | $ | 139,458 | | | $ | 119,176 | |
| | | | | | | | | | | | |
Income tax expense:
| | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
Current: | | | | | | | | | | | | |
U.S. Federal | | $ | 31,067 | | | $ | 27,947 | | | $ | 24,369 | |
U.S. State and local | | | 3,636 | | | | 2,200 | | | | 2,705 | |
Foreign | | | 14,573 | | | | 14,104 | | | | 11,077 | |
| | | | | | | | | | | | |
| | | 49,276 | | | | 44,251 | | | | 38,151 | |
| | | | | | | | | | | | |
Deferred: | | | | | | | | | | | | |
U.S. Federal | | | 20,327 | | | | 10,395 | | | | 5,104 | |
U.S. State and local | | | (427 | ) | | | 1,088 | | | | 602 | |
Foreign | | | (761 | ) | | | (966 | ) | | | (532 | ) |
| | | | | | | | | | | | |
| | | 19,139 | | | | 10,517 | | | | 5,174 | |
| | | | | | | | | | | | |
| | $ | 68,415 | | | $ | 54,768 | | | $ | 43,325 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Earnings before income taxes: | | | | | |
| United States | $ | 274,415 | | | $ | 200,657 | | | $ | 154,788 | |
| Foreign | 100,018 | | | 91,900 | | | 73,664 | |
| $ | 374,433 | | | $ | 292,557 | | | $ | 228,452 | |
| Income tax expense: | | | | | |
| Current: | | | | | |
| U.S. Federal | $ | 61,245 | | | $ | 29,478 | | | $ | 38,732 | |
| U.S. State and local | 15,788 | | | 7,391 | | | 8,203 | |
| Foreign | 26,043 | | | 24,485 | | | 22,123 | |
| 103,076 | | | 61,354 | | | 69,058 | |
| Deferred: | | | | | |
| U.S. Federal | (7,267) | | | 11,104 | | | (10,048) | |
| U.S. State and local | (1,153) | | | 3,239 | | | (1,779) | |
| Foreign | (831) | | | (2,485) | | | (1,419) | |
| (9,251) | | | 11,858 | | | (13,246) | |
| $ | 93,825 | | | $ | 73,212 | | | $ | 55,812 | |
The following schedule reconciles the differences between the U.S. federal income taxes at the U.S. statutory rate and our income tax expense (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | | 2016 | | | 2015 | |
Statutory federal income tax rate | | $ | 55,684 | | | | 35.0 | % | | $ | 48,810 | | | | 35.0 | % | | $ | 41,712 | | | | 35.0 | % |
State income tax expense, net of federal income tax benefit | | | 2,808 | | | | 1.8 | | | | 3,368 | | | | 2.4 | | | | 3,180 | | | | 2.7 | |
Audits and adjustments, net | | | (313 | ) | | | (0.2 | ) | | | (1,039 | ) | | | (0.7 | ) | | | (886 | ) | | | (0.7 | ) |
Change in valuation allowances | | | 2,472 | | | | 1.5 | | | | 3,742 | | | | 2.7 | | | | 2,944 | | | | 2.5 | |
Foreign income taxed at different rates | | | (6,057 | ) | | | (3.8 | ) | | | (6,611 | ) | | | (4.7 | ) | | | (5,729 | ) | | | (4.8 | ) |
U.S. mandatory deemed repatriation | | | 5,625 | | | | 3.5 | | | | — | | | | — | | | | — | | | | — | |
Adjustment of net deferred tax assets for enacted U.S. federal tax reform | | | 7,738 | | | | 4.9 | | | | — | | | | — | | | | — | | | | — | |
Change in U.S. tax law applicable to certain foreign entities | | | — | | | | — | | | | 2,577 | | | | 1.8 | | | | — | | | | — | |
Non-deductible compensation | | | 571 | | | | 0.4 | | | | 518 | | | | 0.4 | | | | 474 | | | | 0.4 | |
Other, net | | | (113 | ) | | | (0.1 | ) | | | 3,403 | | | | 2.4 | | | | 1,630 | | | | 1.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Effective tax rate | | $ | 68,415 | | | | 43.0 | % | | $ | 54,768 | | | | 39.3 | % | | $ | 43,325 | | | | 36.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
In December 2017,
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Statutory federal income tax rate | $ | 78,631 | | | 21.0 | % | | $ | 61,437 | | | 21.0 | % | | $ | 47,975 | | | 21.0 | % |
| State income tax expense, net of federal income tax benefit | 13,962 | | | 3.7 | | | 10,666 | | | 3.6 | | | 6,280 | | | 2.7 | |
| Audits and adjustments, net | 2,273 | | | 0.6 | | | 2,131 | | | 0.7 | | | 662 | | | 0.3 | |
| Change in valuation allowances | (2,551) | | | (0.7) | | | 1,317 | | | 0.5 | | | 476 | | | 0.2 | |
| Foreign income taxed at different rates | 5,660 | | | 1.5 | | | 4,308 | | | 1.5 | | | 3,825 | | | 1.7 | |
| | | | | | | | | | | |
| Research and other credits | (3,870) | | | (1.0) | | | (4,352) | | | (1.5) | | | (1,858) | | | (0.8) | |
| Other, net | (280) | | | — | | | (2,295) | | | (0.8) | | | (1,548) | | | (0.7) | |
| Effective tax rate | $ | 93,825 | | | 25.1 | % | | $ | 73,212 | | | 25.0 | % | | $ | 55,812 | | | 24.4 | % |
| | | | | | | | | | | |
On March 27, 2020, the U.S. federal tax reform was enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to provide certain relief as parta result of the COVID-19 pandemic, which included, among other things, provisions relating to net operating loss carrybacks and other beneficial income tax changes. In 2020, we recorded a tax benefit of approximately $1,712,000 related to the CARES Act, which was reflected in our effective tax rate reconciliation in ‘Other, net’.
As of December 31, 2022, we have accumulated undistributed earnings generated by our foreign subsidiaries, most of which have been taxed in the U.S.
as a result of the Tax Cuts and Jobs
Act. As partAct of
the change2017. For foreign subsidiary earnings not yet taxed under these provisions, we continue to assert permanent reinvestment of earnings earned in
foreign jurisdictions which impose a withholding tax
law, beginning in 2018, the U.S. statutory federal income tax rate was reduced from 35% to 21%. This reduction required a remeasurement of our deferred tax balances that resulted in an increase in our 2017 income tax expense. In addition, the change in tax law included provisions requiring mandatory deemed repatriation of undistributed foreign earnings. In 2017, we recorded a tax charge totaling $13,363,000 in connection with the enactment of the U.S. Tax Cutson dividends and,
Jobs Act. Due to the enactment date and complexities of the new law, weaccordingly, have not
completed our accounting related to these items. In accordance with Staff Accounting Bulletin 118, issued on December 22, 2017, we have concluded that the U.S.accrued any additional income
taxes attributable to the remeasurement of U.S. deferred income taxes, the mandatory deemed repatriation provision and the state tax effects of these items are provisional amounts.A change in U.S. tax law was enacted in December 2016 related to the taxation of foreign currency translation gains or losses arising from qualified business units. The change, which increased our U.S. federal income taxes, affects our foreign entities that are treated as branches for U.S. tax purposes. The “Other, net” line item in the schedule above includes $349,000 and $1,296,000 related to the effect ofnon-deductible acquisition-related expenses incurred during 2017 and 2016, respectively.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)For foreign entities not treated as branches for U.S. tax purposes, historically, we did not provide for U.S. income
or withholding taxes on the
undistributed earningspotential repatriation of these
subsidiaries asearnings. At the present time, given the various complexities involved in repatriating earnings, it is not practicable to estimate the amount of tax that may be payable if these earnings were
considered to benot reinvested
and, in the opinion of management, would continue to be reinvested indefinitely outside of the United States. As a result of U.S. federal tax reform enacted during December 2017, all undistributed foreign earnings are deemed distributed.indefinitely.
The significant components of deferred tax assets and liabilities are as follows (in thousands):
| | | | | | | | |
| | | December 31, | |
| | | 2017 | | | 2016 | |
Deferred tax assets: | | | | | | | | |
Net operating losses | | $ | 25,418 | | | $ | 18,964 | |
Foreign tax credits | | | 21,346 | | | | 13,115 | |
Accruals | | | 5,921 | | | | 6,426 | |
Goodwill and other intangibles | | | 4,717 | | | | 35,523 | |
Stock-based compensation | | | 3,023 | | | | 4,238 | |
Accounts receivable | | | 2,124 | | | | 2,547 | |
Inventories | | | 1,930 | | | | 2,598 | |
Property and equipment | | | 1,111 | | | | 705 | |
Deferred revenue | | | 600 | | | | 468 | |
Other | | | 335 | | | | 55 | |
| | | | | | | | |
Gross deferred tax assets | | | 66,525 | | | | 84,639 | |
Valuation allowances | | | (45,995 | ) | | | (30,972 | ) |
| | | | | | | | |
Total deferred tax assets | | | 20,530 | | | | 53,667 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Goodwill and other intangibles | | | (1,587 | ) | | | (1,221 | ) |
Accrued withholding tax | | | (1,452 | ) | | | — | |
Prepaid expenses | | | (369 | ) | | | (204 | ) |
Other | | | (775 | ) | | | (795 | ) |
| | | | | | | | |
Total deferred tax liabilities | | | (4,183 | ) | | | (2,220 | ) |
| | | | | | | | |
Net deferred tax assets | | $ | 16,347 | | | $ | 51,447 | |
| | | | | | | | |
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Deferred tax assets: | | | |
| Net operating losses | $ | 24,571 | | | $ | 25,791 | |
| Foreign tax credits | 10,681 | | | 13,518 | |
| Other | 37,315 | | | 27,445 | |
| Gross deferred tax assets | 72,567 | | | 66,754 | |
| Valuation allowances | (32,546) | | | (36,948) | |
| Total deferred tax assets | 40,021 | | | 29,806 | |
| Deferred tax liabilities: | | | |
| Goodwill and other intangibles | (38,593) | | | (49,987) | |
| Property and equipment | (26,905) | | | (19,351) | |
| Other | (1,744) | | | (1,852) | |
| Total deferred tax liabilities | (67,242) | | | (71,190) | |
| Net deferred tax liabilities | $ | (27,221) | | | $ | (41,384) | |
The net
non-current deferred tax assets and liabilities are as follows (in thousands):
| | | | | | | | |
| | | December 31, | |
| | | 2017 | | | 2016 | |
Netnon-current deferred tax assets | | $ | 17,064 | | | $ | 52,347 | |
Netnon-current deferred tax liabilities | | | (717 | ) | | | (900 | ) |
| | | | | | | | |
Net deferred tax assets | | $ | 16,347 | | | $ | 51,447 | |
| | | | | | | | |
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Net non-current deferred tax assets, which are included in "Other assets" | $ | 5,623 | | | $ | 5,689 | |
| Net non-current deferred tax liabilities | (32,844) | | | (47,073) | |
| Net deferred tax liabilities | $ | (27,221) | | | $ | (41,384) | |
As of December 31,
2017,2022, we have
a federalU.S. state net operating loss carryforward (“
NOL”NOLs”)
of $1,455,000 and U.S. state NOLs of $1,977,000 that will expire between
20182021 and
2036.2040. We also have
foreign NOLs
from variousnon-U.S. jurisdictions of
$87,056,000. While$84,328,000, certain of which will expire between 2023 and 2028, while the majority
of thenon-U.S. NOLs have no expiration
date, $6,258,000 will expire between 2018date. Certain state NOLs relate to pre-acquisition losses from acquired subsidiaries and
2024.Onare subject to annual limitations as to their use under the basisprovisions of currently available information, weInternal Revenue Code Section 382.
We have provided valuation allowances for certain of our deferred tax assets where we believe it is more likely than not that the related tax benefits will not be realized. At December 31, 20172022 and 2016,2021, our valuation allowances totaled $45,995,000$32,546,000 and $30,972,000,$36,948,000, respectively, representingnon-U.S.relating primarily to state and foreign NOLs foreign depreciation allowances and foreign tax credits.We believe it is more likely than not that forecasted income, including income that may be generated as a result of prudent and feasible tax planning strategies, together with the tax effects of deferred tax liabilities, will be sufficient Changes to fully recover our remaining deferred tax assets. In the future, if we determine that realization of the remaining deferred tax assets and the availability of certain previously paid taxes to be refunded are not more likely than not, we will need to increase our valuation allowances and record additional income tax expense.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the change in the valuation allowance (in thousands):
| | | | | | | | |
| | | December 31, | |
| | | 2017 | | | 2016 | |
Valuation allowances at beginning of year | | $ | 30,972 | | | $ | 28,750 | |
Increase in income tax expense | | | 2,472 | | | | 3,742 | |
U.S. federal tax reform | | | 11,623 | | | | — | |
Foreign currency translation adjustments | | | 2,865 | | | | (1,035 | ) |
Other | | | (1,937 | ) | | | (485 | ) |
| | | | | | | | |
Valuation allowances at end of year | | $ | 45,995 | | | $ | 30,972 | |
| | | | | | | | |
The increase in our valuation allowance related to U.S. federalfor the year ended December 31, 2022 were driven by the expiration of foreign tax reformcredits and changes in the table above was primarily related to U.S. mandatory deemed repatriation.
Various taxing jurisdictions are examining our tax returns for certain tax years. Although the outcome of tax audits cannot be predicted with certainty, management believes the ultimate resolution of these examinations will not result inNOLs against which a material adverse effect to our financial position, results of operations or cash flows.
valuation allowance had been recorded.
As of December 31,
20172022 and
2016,2021, we had approximately
$4,273,000$14,814,000 and
$2,246,000,$12,664,000, respectively, of unrecognized tax benefits. Of these amounts, approximately
$287,000$1,642,000 and
$195,000,$1,250,000, respectively, related to accrued interest.
A reconciliation ofThe changes in the
beginning and ending amounts of unrecognized tax benefits
excluding interest, is as follows (in thousands): | | | | |
Balance at December 31, 2016 | | $ | 2,051 | |
Additions for tax positions added through acquisition | | | 2,484 | |
Subtractions for tax positions in prior periods | | | (59 | ) |
Additions for tax positions in current period | | | 867 | |
Additions due to foreign currency translation | | | 53 | |
Subtractions due to audit settlements and statute expirations | | | (1,410 | ) |
| | | | |
Balance at December 31, 2017 | | $ | 3,986 | |
| | | | |
balance during the year reflect additions for tax positions taken in prior and current periods, net of reductions related to audit settlements and statute expirations.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In the future, if recognized, the liability associated with uncertain tax positions would affect our effective tax rate. We do not believe there will be any changes over the next 12 months that would have a material effect on our effective tax rate.
Several of our subsidiaries
We are currently under audit
in various jurisdictions for tax years
20122015 through
2015.2020. 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 significantly 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.
We, including our subsidiaries, file income tax returns in
In the U.S. federal jurisdiction and many state and local andnon-U.S. jurisdictions. In the United States,, federal income tax returns for 2014,years subsequent to 2015 2016 and 2017 remain open to examination. For U.S. state and local taxes as well as innon-U.S.foreign jurisdictions, the statute of limitations generally varies between three and ten years. However, to the extent allowable by law, the tax authorities may have a right to examine and make adjustment to prior periods when amended returns have been filed, or when net operating losses or tax credits were generated and carried forward for subsequent utilization.
(12)Market Risk Management
We have interest rate exposure arising from our financing facilities, which have variable interest rates. These variable interest rates are affected by changes in short-term interest rates. We currently do not hedge our interest rate exposure.
We do not believe that the effect of reasonably possible near-term changes in interest rates will be material to our financial position, results of operations and cash flows. Our financing facilities expose our net earnings to changes in short-term interest rates since interest rates on the underlying obligations are variable. We had $117,500,000$291,599,000 outstanding under our revolvingABL facility $166,250,000and $346,199,000 outstanding under our TLA and $25,000,000 outstanding under our ABS facilitythe Notes at December 31, 2017.2022. The interest rate attributable to the borrowings under our revolvingABL facility our TLA and our ABS facilitythe Notes was 3.49%, 3.57% 5.47%and 2.41%0.75%, respectively, per annum at December 31, 2017.2022. The change in annualpre-tax earnings from operations resulting from a hypothetical 10% increase or decrease in the applicable interest rate would have been immaterial.INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Although the Notes are based on a fixed rate, changes in interest rates could impact the fair market value of such notes. As of December 31, 2022, the fair market value of the Notes was $503,202,000.
Foreign Currency Exchange Risk
We have foreign currency exchange risk related to the translation of our foreign subsidiaries’ operating results, assets and liabilities (see Note 1 for a description of our Foreign Currencies policy). We also maintain cash accounts denominated in currencies other than the functional currency, which expose us to fluctuations in foreign exchange rates. Remeasurement of these cash balances results in gains/losses that are also reported
as a separate component ofin other expense (income), net within non-operating (income) expense. We monitor our foreign currency exposure and selectively enter into forward exchange contracts to mitigate risk associated with certain
non-functional currency monetary assets and liabilities related to foreign denominated payables, receivables and cash balances. Transaction gains and losses resulting from
non-functional currency assets and liabilities are offset by gains and losses on forward contracts in
non-operating (income) expense, net in our consolidated statements of operations. The counterparties associated with our foreign exchange forward contracts are large creditworthy commercial banks. The derivatives transacted with these institutions are short in duration and, therefore, we do not consider counterparty concentration and
non-performance to be material risks. The Company does not have a significant concentration of credit risk with any single counterparty.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(13)Derivative Financial InstrumentsWe use derivatives to partially offset our exposure to fluctuations in certain foreign currencies. We do not enter into derivative contracts for speculative or trading purposes. Derivatives are recorded at fair value on the balance sheet based on observable market based inputs or unobservable inputs that are corroborated by market data (Level 2). Gains or losses resulting from changes in fair value of the derivative are recorded currently in income. We do not designate our hedges for hedge accounting, and our foreign currency derivative instruments are not subject to any master netting arrangements with our counterparties.
We use foreign exchange forward contracts to mitigate risk associated with certainnon-functional currency assets and liabilities from fluctuations in foreign currency exchange rates. Ournon-functional currency assets and liabilities are primarily related to foreign currency denominated payables, receivables, and cash balances. The foreign currency forward contracts, carried at fair value, typically have a maturity of one month or less. We currently enter into approximately four foreign exchange forward contracts per month with an average notional value of $10,610,000 and an average maturity of approximately nine days.
Our derivative financial instruments as of December 31, 2017 were not material. The effect of our derivative financial instruments on our results of operations during the years ended December 31, 2017, 2016 and 2015 were a gain of $159,000, a loss of $2,722,000 and a loss of $942,000, respectively. These amounts are reported within the net foreign currency exchange (gain) loss line item in our consolidated statements of operations.
(14)
Fair Value Measurements Fair value measurements are determined based on the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
We have elected to use the income approach to value our foreign exchange derivatives, using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present value amount assuming that participants are motivated, but not compelled, to transact. Level 2 inputs for the valuations are limited to quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR rates, foreign exchange rates, and foreign exchange forward points).Mid-market pricing is used as a practical expedient for fair value measurements. Fair value measurement of an asset or liability must reflect the nonperformance risk of the entity and the counterparty. Therefore, the impact of the counterparty’s creditworthiness when in an asset position and the Company’s creditworthiness when in a liability position has also been factored into the fair value measurement of the derivative instruments and did not have a material impact on the fair value of these derivative instruments. Both the counterparty and the Company are expected to continue to perform under the contractual terms of the instruments.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of December 31,
2017,2022, we have no
non-financial assets or liabilities that are measured and recorded at fair value on a recurring basis, and our other financial assets or liabilities generally consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities and long-term debt. The estimated fair values of our cash and cash equivalents approximate their carrying values and are determined based on quoted prices in active markets for identical
assets (Level 1).assets. The estimated fair values of our long-term debt balances,
excluding the Notes, approximate their carrying values based on their variable interest rate terms that are based on current market interest rates for similar debt instruments.
The Notes were initially recorded at their estimated fair value based on market interest rates for similar debt instruments. The fair market value of the Notes as of December 31, 2022 is disclosed in footnote 12. The fair values of the other financial assets and liabilities are based on the values that would be received or paid in an orderly transaction between market participants and approximate their carrying values due to their nature and short duration.
(15)
We adopted a defined contribution benefit plan (the “Defined Contribution Plan”) for our U.S. teammates which complies with section 401(k) of the Internal Revenue Code. The Company provides a discretionary match to all participants who make 401(k) contributions pursuant to the Defined Contribution Plan.
On May 15, 2020, our matching contributions were temporarily suspended due to the COVID-19 pandemic. Company matching contributions returned in 2021. The discretionary match provided to participants is equivalent to 50% of a participant’s
pre-tax contributions up to a maximum of 6% of eligible compensation per pay period. Additionally, we offer several defined contribution benefit plans to our teammates outside of the United States. These plans and their related terms vary by country. Total consolidated contribution expense under these plans was
$14,083,000, $7,684,000$27,827,000, $25,270,000 and
$7,190,000$11,974,000 for
2017, 20162022, 2021 and
2015,2020, respectively.
(16)
(15) Share Repurchase ProgramsIn February 2016, February 2015 and October 2014,
On May 6, 2021, we announced that our Board of Directors
authorized share repurchase programs of $50,000,000, $75,000,000 and $25,000,000, respectively. No share repurchase program was authorized in 2017. The following table summarizes the shares of our common stock that we repurchased on the open market under these repurchase programs during the years ended December 31, 2017, 2016 and 2015, respectively, in thousands, except per share amounts: | | | | | | | | | | | | |
Year | | Total Number
of Shares
Purchased | | | Average Price
Paid per Share | | | Approximate Dollar
Value of Shares
Purchased | |
2017 | | | — | | | $ | — | | | $ | — | |
2016 | | | 1,891 | | | | 26.43 | | | | 50,000 | |
2015 | | | 3,300 | | | | 27.83 | | | | 91,843 | |
| | | | | | | | | | | | |
Total | | | 5,191 | | | | | | | $ | 141,843 | |
| | | | | | | | | | | | |
All shares repurchased were retired.
On February 13, 2018, our Board of Directorshad authorized the repurchase of up to $50,000,000$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. We initiated $200,000,000 of share repurchases under this authorization beginning in November 2022 which we expect to complete by March 31, 2023. As of December 31, 2022, approximately $217,086,000 remained available for repurchases under this share repurchase plan. Our share repurchases willmay be made on the open market, subject to Rule10b-18 or in privately negotiated transactions, through block trades, through10b5-1 plans or otherwise, at management’s discretion. The amountnumber 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.
(17)
The following table summarizes the shares of our common stock that we repurchased on the open market under these repurchase programs during the years ended December 31, 2022, 2022 and 2021, respectively, in thousands, except per share amounts:
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | | | | |
| Year | | Total Number of Shares Purchased | | Average Price Paid per Share | | Approximate Dollar Value of Shares Purchased |
| 2022 | | 1,109 | | | $ | 97.35 | | | $ | 108,000 | |
| 2021 | | 497 | | | 100.55 | | | 50,000 | |
| 2020 | | 445 | | | 56.20 | | | 25,000 | |
| | 2,051 | | | | | $ | 183,000 | |
All shares repurchased were retired.
(16) Commitments and Contingencies
In the ordinary course of business, we issue performance bonds to secure our performance under certain contracts or state tax requirements. As of December 31,
2017,2022, we had approximately
$1,962,000$28,538,000 of performance bonds outstanding. These bonds are issued on our behalf by a surety company on an unsecured basis; however, if the surety company is ever required to pay out under the bonds, we have contractually agreed to reimburse the surety company.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Management believes that payments, if any, related to these performance bonds are not probable at December 31,
2017.2022. 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 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.
From time to time, in the ordinary course of business, we enter into contractual arrangements under which we agree to indemnify either our clients or third-party service providers from certain losses incurred relating to services performed on our behalf or for losses arising from defined events, which may include litigation or claims relating to past performance. These arrangements include, but are not limited to, the indemnification of our clients for certain claims arising out of our performance under our sales contracts, the indemnification of our landlords for certain claims arising from our use of leased facilities and the indemnification of the lenders that provide our credit facilities for certain claims arising from their extension of credit to us. Such indemnification obligations may not be subject to maximum loss clauses.
Management believes that payments, if any, related to these indemnifications are not probable at December 31,
2017.2022. Accordingly, we have not accrued any liabilities related to such indemnifications in the accompanying 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
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 our consolidated financial statements. Such estimates are subject to change and may affect our results of operations and our cash flows.
From time to time, we are party to various legal proceedings
arising inincidental to the
ordinary course of business, including preference payment claims asserted in client bankruptcy proceedings, indemnification claims, claims of alleged infringement of patents, trademarks, copyrights and other intellectual property rights,
employment claims, claims of alleged
non-compliance with contract provisions and claims related to alleged violations of laws and regulations. We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable or there is a reasonable possibility that a loss, or an additional loss, may have been incurred and determine if accruals are appropriate. If accruals are not appropriate, we further evaluate each legal proceeding to assess whether an estimate of possible loss or range of possible loss can be
made for disclosure.made. Although litigation is inherently unpredictable, we believe that we have adequate provisions for any probable and estimable losses. It is possible, nevertheless, that our consolidated financial position, results of operations or liquidity could be materially and adversely affected in any particular period by the
work required pursuant to any legal proceedings or the resolution of
aany legal
proceeding.proceedings during such period. Legal expenses related to defense
of any legal proceeding or the negotiations, settlements, rulings and advice of outside legal counsel
in connection with any legal proceedings are expensed as incurred.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In connection with the acquisition of PCM in 2019, 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 rejected and vigorously responded to those claims, and the Company continues to pursue 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.
(18)
(17) Supplemental Financial Information Additions and deductions related to the allowance for doubtful accounts receivable for
2017, 20162022, 2021 and
20152020 were as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | | Balance at
Beginning
of Year | | | Additions | | | Deductions | | | Balance at
End of Year | |
Allowance for doubtful accounts receivable: | | | | | | | | | | | | | | | | |
Year ended December 31, 2017 | | $ | 9,138 | | | $ | 5,245 | | | $ | (4,225 | ) | | $ | 10,158 | |
| | | | | | | | | | | | | | | | |
Year ended December 31, 2016 | | $ | 11,872 | | | $ | 2,452 | | | $ | (5,186 | ) | | $ | 9,138 | |
| | | | | | | | | | | | | | | | |
Year ended December 31, 2015 | | $ | 19,336 | | | $ | 6,761 | | | $ | (14,225 | ) | | $ | 11,872 | |
| | | | | | | | | | | | | | | | |
During 2015, we undertook a project to analyze our older accounts receivable to attempt further collection action, or where appropriate, to write off such accounts as uncollectible. Since these aged accounts receivable had been fully reserved against, the write off was accomplished through the elimination of the associated allowance, with no effect on net accounts receivable balances. The reduction of the allowance for doubtful accounts to $11,872,000 at December 31, 2015 was a direct result of the write off of these older fully reserved accounts receivable as well as an overall improvement in managing the receivables portfolio. The reduction of the reserve during 2015 related to these actions had no effect on our results of operations.
(19)
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance at Beginning of Year | | Additions | | Deductions | | Balance at End of Year |
| Allowance for doubtful accounts receivable: | | | | | | | |
| Year ended December 31, 2022 | $ | 16,941 | | | $ | 6,066 | | | $ | (7,846) | | | $ | 15,161 | |
| Year ended December 31, 2021 | $ | 15,106 | | | $ | 7,862 | | | $ | (6,027) | | | $ | 16,941 | |
| Year ended December 31, 2020 | $ | 10,762 | | | $ | 10,163 | | | $ | (5,819) | | | $ | 15,106 | |
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Cash payments for interest on indebtedness and cash payments for taxes on income were as follows (in thousands):
| | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | |
Cash paid during the year for interest | | $ | 10,976 | | | $ | 3,782 | | | $ | 2,866 | |
| | | | | | | | | | | | |
Cash paid during the year for income taxes, net of refunds | | $ | 55,470 | | | $ | 39,051 | | | $ | 41,062 | |
| | | | | | | | | | | | |
Non-cash investing activities for 2017, 2016 and 2015 included $159,000, $791,000 and $662,000, respectively, of capital expenditures in accounts payable, representing additions purchased at period end but not yet paid for in cash.
(20)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Supplemental disclosures of cash flow information: | | | | | |
| Cash paid during the year for interest | $ | 16,295 | | | $ | 8,852 | | | $ | 16,605 | |
| Cash paid during the year for income taxes, net of refunds | $ | 91,485 | | | $ | 75,986 | | | $ | 62,545 | |
(19) Segment and Geographic Information We operate in three reportable geographic operating segments: North
America; EMEA;America, EMEA, and APAC. Our offerings in North America and certain countries in EMEA and APAC include IT hardware, software and
services.services, including cloud solutions. Our offerings in the remainder of our EMEA and APAC segments
areconsist largely
of software and certain software-related
services.During the year ended December 31, 2017, subsequent to our acquisition of Datalink, our consolidated net sales from the provision of services approximated 10%. As such, for the year ended December 31, 2017, we began reporting net sales from the provision of services and cloud solutions.
Disaggregation of Revenue
In the following table, revenue is disaggregated by our reportable operating segments, which are primarily defined bytheir related costs of goods sold separately fromgeographies, 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 sales of products and the related costs of goods on the face of our consolidated statement of operations. For comparability purposes, net sales and costs of goods soldbasis as an agent, for the years ended December 31, 20162022, 2021 and 2015 have been expanded to conform to the current year presentation. These changes in presentation had no effect on previously reported total net sales, total costs of goods sold or gross profit amounts.2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| North America | | EMEA | | APAC | | Consolidated |
| Major Offerings | | | | | | | |
| Hardware | $ | 5,738,586 | | | $ | 654,381 | | | $ | 57,928 | | | $ | 6,450,895 | |
| Software | 1,552,715 | | | 857,516 | | | 86,661 | | | 2,496,892 | |
| Services | 1,193,091 | | | 200,624 | | | 89,689 | | | 1,483,404 | |
| $ | 8,484,392 | | | $ | 1,712,521 | | | $ | 234,278 | | | $ | 10,431,191 | |
| Major Client Groups | | | | | | | |
| Large Enterprise / Corporate | $ | 5,990,203 | | | $ | 1,249,286 | | | $ | 102,476 | | | $ | 7,341,965 | |
| Commercial | 1,710,340 | | | 61,873 | | | 68,491 | | | 1,840,704 | |
| Public Sector | 783,849 | | | 401,362 | | | 63,311 | | | 1,248,522 | |
| $ | 8,484,392 | | | $ | 1,712,521 | | | $ | 234,278 | | | $ | 10,431,191 | |
| Revenue Recognition based on acting as Principal or Agent in the Transaction | | | | | | | |
| Gross revenue recognition (Principal) | $ | 8,035,218 | | | $ | 1,603,600 | | | $ | 199,788 | | | $ | 9,838,606 | |
| Net revenue recognition (Agent) | 449,174 | | | 108,921 | | | 34,490 | | | 592,585 | |
| $ | 8,484,392 | | | $ | 1,712,521 | | | $ | 234,278 | | | $ | 10,431,191 | |
| | | | | | | |
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)In conjunction with these changes in presentation, because fees earned from activities reported net are considered services revenues, we reclassified certain revenue streams for which we act as the agent in the transaction to net sales from services. Previously, we included these net revenue streams within our software and, to a lesser extent, hardware sales mix categories based on the type of product being sold (e.g., fees earned for the sale of software maintenance and certain software licenses were included in software sales and fees earned for the sale of certain third-party provided training and warranty services were included in hardware sales when we historically disclosed and analyzed our sales mix). For comparability purposes, our sales mix among our hardware, software and services categories for the years ended December 31, 2016 and 2015 has been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported total net sales amounts. The following tables summarize net sales by offering for North America, EMEA and APAC including the effect of the reclassifications on the previously reported net sales by sales mix amounts for the years ended December 31, 2016 and 2015 (in thousands):
| | | | | | | | | | | | |
| | | North America
Years Ended December 31, | |
Sales Mix | | 2017 | | | 2016 | | | 2015 | |
| | | | | | (As Reclassified) | | | (As Reclassified) | |
Hardware | | $ | 3,352,355 | | | $ | 2,454,889 | | | $ | 2,336,764 | |
Software | | | 1,310,118 | | | | 1,146,808 | | | | 1,157,168 | |
Services | | | 519,261 | | | | 370,131 | | | | 329,596 | |
| | | | | | | | | | | | |
| | $ | 5,181,734 | | | $ | 3,971,828 | | | $ | 3,823,528 | |
| | | | | | | | | | | | |
In North America, fees earned from activities reported on a net basis of $270,000 and $87,984,000 that were previously reported as part of our hardware and software product categories, respectively, in 2016, and fees earned from activities reported on a net basis of $24,000 and $74,101,000 that were previously reported as part of our hardware and software product categories, respectively, in 2015, were reclassified to services to conform to the current year presentation.
| | | | | | | | | | | | |
| | | EMEA
Years Ended December 31, | |
Sales Mix | | 2017 | | | 2016 | | | 2015 | |
| | | | | | (As Reclassified) | | | (As Reclassified) | |
Hardware | | $ | 536,500 | | | $ | 481,505 | | | $ | 531,308 | |
Software | | | 710,452 | | | | 762,427 | | | | 756,373 | |
Services | | | 108,464 | | | | 94,628 | | | | 83,456 | |
| | | | | | | | | | | | |
| | $ | 1,355,416 | | | $ | 1,338,560 | | | $ | 1,371,137 | |
| | | | | | | | | | | | |
In EMEA, fees earned from activities reported on a net basis of $48,586,000 and $43,388,000 that were previously reported as part of our software product category in 2016 and 2015, respectively, were reclassified to services to conform to the current year presentation.
| | | | | | | | | | | | |
| | | APAC
Years Ended December 31, | |
Sales Mix | | 2017 | | | 2016 | | | 2015 | |
| | | | | | (As Reclassified) | | | (As Reclassified) | |
Hardware | | $ | 27,907 | | | $ | 18,916 | | | $ | 14,327 | |
Software | | | 101,412 | | | | 132,718 | | | | 149,607 | |
Services | | | 37,154 | | | | 23,493 | | | | 14,491 | |
| | | | | | | | | | | | |
| | $ | 166,473 | | | $ | 175,127 | | | $ | 178,425 | |
| | | | | | | | | | | | |
In APAC, fees earned from activities reported on a net basis of $9,000 and $10,991,000 that were previously reported as part of our hardware and software product categories, respectively, in 2016, and fees earned from activities reported on a net basis of $6,000 and $8,439,000 that were previously reported as part of our hardware and software product categories, respectively, in 2015, were reclassified to services to conform to the current year presentation.
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| North America | | EMEA | | APAC | | Consolidated |
| Major Offerings | | | | | | | |
| Hardware | $ | 5,163,225 | | | $ | 676,815 | | | $ | 49,470 | | | $ | 5,889,510 | |
| Software | 1,315,412 | | | 825,361 | | | 89,844 | | | 2,230,617 | |
| Services | 1,041,686 | | | 201,875 | | | 72,425 | | | 1,315,986 | |
| $ | 7,520,323 | | | $ | 1,704,051 | | | $ | 211,739 | | | $ | 9,436,113 | |
| Major Client Groups | | | | | | | |
| Large Enterprise / Corporate | $ | 5,356,915 | | | $ | 1,219,601 | | | $ | 93,796 | | | $ | 6,670,312 | |
| Commercial | 1,495,311 | | | 65,728 | | | 61,627 | | | 1,622,666 | |
| Public Sector | 668,097 | | | 418,722 | | | 56,316 | | | 1,143,135 | |
| $ | 7,520,323 | | | $ | 1,704,051 | | | $ | 211,739 | | | $ | 9,436,113 | |
| Revenue Recognition based on acting as Principal or Agent in the Transaction | | | | | | | |
| Gross revenue recognition (Principal) | $ | 7,138,852 | | | $ | 1,591,156 | | | $ | 184,418 | | | $ | 8,914,426 | |
| Net revenue recognition (Agent) | 381,471 | | | 112,895 | | | 27,321 | | | 521,687 | |
| $ | 7,520,323 | | | $ | 1,704,051 | | | $ | 211,739 | | | $ | 9,436,113 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| North America | | EMEA | | APAC | | Consolidated |
| Major Offerings | | | | | | | |
| Hardware | $ | 4,418,295 | | | $ | 617,825 | | | $ | 31,953 | | | $ | 5,068,073 | |
| Software | 1,260,757 | | | 760,562 | | | 82,763 | | | 2,104,082 | |
| Services | 935,980 | | | 176,838 | | | 55,606 | | | 1,168,424 | |
| $ | 6,615,032 | | | $ | 1,555,225 | | | $ | 170,322 | | | $ | 8,340,579 | |
| Major Client Groups | | | | | | | |
| Large Enterprise / Corporate | $ | 4,507,041 | | | $ | 1,101,557 | | | $ | 62,734 | | | $ | 5,671,332 | |
| Commercial | 1,395,298 | | | 61,535 | | | 60,740 | | | 1,517,573 | |
| Public Sector | 712,693 | | | 392,133 | | | 46,848 | | | 1,151,674 | |
| $ | 6,615,032 | | | $ | 1,555,225 | | | $ | 170,322 | | | $ | 8,340,579 | |
| Revenue Recognition based on acting as Principal or Agent in the Transaction | | | | | | | |
| Gross revenue recognition (Principal) | $ | 6,284,948 | | | $ | 1,452,115 | | | $ | 146,770 | | | $ | 7,883,833 | |
| Net revenue recognition (Agent) | 330,084 | | | 103,110 | | | 23,552 | | | 456,746 | |
| $ | 6,615,032 | | | $ | 1,555,225 | | | $ | 170,322 | | | $ | 8,340,579 | |
The method for determining what information regarding operating segments, products and services, geographic areas of operation and major clients to report is based upon the “management approach,” or the way that management organizes the operating segments within a company, for which separate financial information is evaluated regularly by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources. Our CODM is our Chief Executive Officer.
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 in
2017, 20162022, 2021 or
2015.2020.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 considered to be a reasonable reflection of the utilization of services provided to or benefits received by the operating segments.
The tables below present information about our reportable operating segments (in thousands):
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2017 | |
| | | North
America | | | EMEA | | | APAC | | | Consolidated | |
Net Sales: | | | | | | | | | | | | | | | | |
Products | | $ | 4,662,473 | | | $ | 1,246,952 | | | $ | 129,319 | | | $ | 6,038,744 | |
Services | | | 519,261 | | | | 108,464 | | | | 37,154 | | | | 664,879 | |
| | | | | | | | | | | | | | | | |
Total net sales | | | 5,181,734 | | | | 1,355,416 | | | | 166,473 | | | | 6,703,623 | |
| | | | | | | | | | | | | | | | |
Costs of goods sold: | | | | | | | | | | | | | | | | |
Products | | | 4,253,587 | | | | 1,140,204 | | | | 118,611 | | | | 5,512,402 | |
Services | | | 236,470 | | | | 24,902 | | | | 11,279 | | | | 272,651 | |
| | | | | | | | | | | | | | | | |
Total costs of goods sold | | | 4,490,057 | | | | 1,165,106 | | | | 129,890 | | | | 5,785,053 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 691,677 | | | | 190,310 | | | | 36,583 | | | | 918,570 | |
Operating expenses: | | | | | | | | | | | | | | | | |
Selling and administrative expenses | | | 530,792 | | | | 164,305 | | | | 28,231 | | | | 723,328 | |
Severance and restructuring expenses | | | 4,010 | | | | 4,888 | | | | 104 | | | | 9,002 | |
Loss on sale of foreign entity | | | — | | | | 3,646 | | | | — | | | | 3,646 | |
Acquisition-related expenses | | | 3,223 | | | | 106 | | | | — | | | | 3,329 | |
| | | | | | | | | | | | | | | | |
Earnings from operations | | $ | 153,652 | | | $ | 17,365 | | | $ | 8,248 | | | $ | 179,265 | |
| | | | | | | | | | | | | | | | |
Total assets | | $ | 2,337,573 | | | $ | 530,242 | | | $ | 101,169 | | | $ | 2,968,984 | * |
| | | | | | | | | | | | | | | | |
| |
| | | Year Ended December 31, 2016 | |
| | | North
America | | | EMEA | | | APAC | | | Consolidated | |
Net Sales: | | | | | | | | | | | | | | | | |
Products | | $ | 3,601,697 | | | $ | 1,243,932 | | | $ | 151,634 | | | $ | 4,997,263 | |
Services | | | 370,131 | | | | 94,628 | | | | 23,493 | | | | 488,252 | |
| | | | | | | | | | | | | | | | |
Total net sales | | | 3,971,828 | | | | 1,338,560 | | | | 175,127 | | | | 5,485,515 | |
| | | | | | | | | | | | | | | | |
Costs of goods sold: | | | | | | | | | | | | | | | | |
Products | | | 3,301,148 | | | | 1,129,917 | | | | 140,397 | | | | 4,571,462 | |
Services | | | 145,199 | | | | 22,956 | | | | 2,796 | | | | 170,951 | |
| | | | | | | | | | | | | | | | |
Total costs of goods sold | | | 3,446,347 | | | | 1,152,873 | | | | 143,193 | | | | 4,742,413 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 525,481 | | | | 185,687 | | | | 31,934 | | | | 743,102 | |
Operating expenses: | | | | | | | | | | | | | | | | |
Selling and administrative expenses | | | 401,316 | | | | 160,269 | | | | 23,658 | | | | 585,243 | |
Severance and restructuring expenses | | | 2,966 | | | | 1,496 | | | | 118 | | | | 4,580 | |
Acquisition-related expenses | | | 4,278 | | | | — | | | | 169 | | | | 4,447 | |
| | | | | | | | | | | | | | | | |
Earnings from operations | | $ | 116,921 | | | $ | 23,922 | | | $ | 7,989 | | | $ | 148,832 | |
| | | | | | | | | | | | | | | | |
Total assets | | $ | 2,204,351 | | | $ | 562,293 | | | $ | 119,778 | | | $ | 2,886,422 | * |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| North America | | EMEA | | APAC | | Consolidated |
| Net sales: | | | | | | | |
| Products | $ | 7,291,301 | | | $ | 1,511,897 | | | $ | 144,589 | | | $ | 8,947,787 | |
| Services | 1,193,091 | | | 200,624 | | | 89,689 | | | 1,483,404 | |
| Total net sales | 8,484,392 | | | 1,712,521 | | | 234,278 | | | 10,431,191 | |
| Costs of goods sold: | | | | | | | |
| Products | 6,583,090 | | | 1,395,869 | | | 132,293 | | | 8,111,252 | |
| Services | 572,969 | | | 69,383 | | | 41,020 | | | 683,372 | |
| Total costs of goods sold | 7,156,059 | | | 1,465,252 | | | 173,313 | | | 8,794,624 | |
| Gross profit | 1,328,333 | | | 247,269 | | | 60,965 | | | 1,636,567 | |
| Operating expenses: | | | | | | | |
| Selling and administrative expenses | 973,798 | | | 200,988 | | | 41,874 | | | 1,216,660 | |
| Severance and restructuring expenses | 2,384 | | | 1,760 | | | 91 | | | 4,235 | |
| Acquisition and integration related expenses | 1,715 | | | 257 | | | — | | | 1,972 | |
| Earnings from operations | $ | 350,436 | | | $ | 44,264 | | | $ | 19,000 | | | $ | 413,700 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| North America | | EMEA | | APAC | | Consolidated |
| Net sales: | | | | | | | |
| Products | $ | 6,478,637 | | | $ | 1,502,176 | | | $ | 139,314 | | | $ | 8,120,127 | |
| Services | 1,041,686 | | | 201,875 | | | 72,425 | | | 1,315,986 | |
| Total net sales | 7,520,323 | | | 1,704,051 | | | 211,739 | | | 9,436,113 | |
| Costs of goods sold: | | | | | | | |
| Products | 5,874,551 | | | 1,380,221 | | | 126,136 | | | 7,380,908 | |
| Services | 510,322 | | | 64,968 | | | 32,358 | | | 607,648 | |
| Total costs of goods sold | 6,384,873 | | | 1,445,189 | | | 158,494 | | | 7,988,556 | |
| Gross profit | 1,135,450 | | | 258,862 | | | 53,245 | | | 1,447,557 | |
| Operating expenses: | | | | | | | |
| Selling and administrative expenses | 869,766 | | | 210,616 | | | 36,748 | | | 1,117,130 | |
| Severance and restructuring expenses | (3,129) | | | 1,328 | | | 167 | | | (1,634) | |
| Acquisition and integration related expenses | — | | | — | | | — | | | — | |
| Earnings from operations | $ | 268,813 | | | $ | 46,918 | | | $ | 16,330 | | | $ | 332,061 | |
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2015 | |
| | | North
America | | | EMEA | | | APAC | | | Consolidated | |
Net Sales: | | | | | | | | | | | | | | | | |
Products | | $ | 3,493,932 | | | $ | 1,287,681 | | | $ | 163,934 | | | $ | 4,945,547 | |
Services | | | 329,596 | | | | 83,456 | | | | 14,491 | | | | 427,543 | |
| | | | | | | | | | | | | | | | |
Total net sales | | | 3,823,528 | | | | 1,371,137 | | | | 178,425 | | | | 5,373,090 | |
| | | | | | | | | | | | | | | | |
Costs of goods sold: | | | | | | | | | | | | | | | | |
Products | | | 3,196,297 | | | | 1,167,113 | | | | 149,943 | | | | 4,513,353 | |
Services | | | 125,668 | | | | 17,737 | | | | — | | | | 143,405 | |
| | | | | | | | | | | | | | | | |
Total costs of goods sold | | | 3,321,965 | | | | 1,184,850 | | | | 149,943 | | | | 4,656,758 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 501,563 | | | | 186,287 | | | | 28,482 | | | | 716,332 | |
Operating expenses: | | | | | | | | | | | | | | | | |
Selling and administrative expenses | | | 396,603 | | | | 165,879 | | | | 22,424 | | | | 584,906 | |
Severance and restructuring expenses | | | 1,126 | | | | 3,781 | | | | — | | | | 4,907 | |
| | | | | | | | | | | | | | | | |
Earnings from operations | | $ | 103,834 | | | $ | 16,627 | | | $ | 6,058 | | | $ | 126,519 | |
| | | | | | | | | | | | | | | | |
Total assets | | $ | 1,999,485 | | | $ | 543,146 | | | $ | 114,973 | | | $ | 2,657,604 | * |
| | | | | | | | | | | | | | | | |
* | Consolidated total assets do not reflect intercompany eliminations and corporate assets of $283,333,000, $667,122,000 and $643,587,000 at December 31, 2017, 2016 and 2015, respectively. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| North America | | EMEA | | APAC | | Consolidated |
| Net sales: | | | | | | | |
| Products | $ | 5,679,052 | | | $ | 1,378,387 | | | $ | 114,716 | | | $ | 7,172,155 | |
| Services | 935,980 | | | 176,838 | | | 55,606 | | | 1,168,424 | |
| Total net sales | 6,615,032 | | | 1,555,225 | | | 170,322 | | | 8,340,579 | |
| Costs of goods sold: | | | | | | | |
| Products | 5,130,851 | | | 1,261,236 | | | 104,914 | | | 6,497,001 | |
| Services | 462,793 | | | 57,943 | | | 22,900 | | | 543,636 | |
| Total costs of goods sold | 5,593,644 | | | 1,319,179 | | | 127,814 | | | 7,040,637 | |
| Gross profit | 1,021,388 | | | 236,046 | | | 42,508 | | | 1,299,942 | |
| Operating expenses: | | | | | | | |
| Selling and administrative expenses | 790,913 | | | 192,485 | | | 30,367 | | | 1,013,765 | |
| Severance and restructuring expenses | 9,273 | | | 2,989 | | | 132 | | | 12,394 | |
| Acquisition and integration related expenses | 2,004 | | | 204 | | | — | | | 2,208 | |
| Earnings from operations | $ | 219,198 | | | $ | 40,368 | | | $ | 12,009 | | | $ | 271,575 | |
The following table is a summary of our total assets by reportable operating segment (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| North America | $ | 5,219,480 | | | $ | 4,920,220 | |
| EMEA | 939,327 | | | 828,456 | |
| APAC | 153,232 | | | 148,737 | |
| Corporate assets and intercompany eliminations, net | (1,199,458) | | | (1,208,333) | |
| Total assets | $ | 5,112,581 | | | $ | 4,689,080 | |
The following is a summary of our geographic net sales and long-lived assets, consisting of property and equipment, net (in thousands):
| | | | | | | | | | | | | | | | |
| | | United States | | | United Kingdom | | | Other Foreign | | | Total | |
2017 | | | | | | | | | | | | | | | | |
Net sales | | $ | 4,933,805 | | | $ | 684,632 | | | $ | 1,085,186 | | | $ | 6,703,623 | |
Total long-lived assets | | $ | 50,462 | | | $ | 14,783 | | | $ | 10,007 | | | $ | 75,252 | |
| | | | |
2016 | | | | | | | | | | | | | | | | |
Net sales | | $ | 3,776,352 | | | $ | 671,999 | | | $ | 1,037,164 | | | $ | 5,485,515 | |
Total long-lived assets | | $ | 46,774 | | | $ | 13,570 | | | $ | 10,566 | | | $ | 70,910 | |
| | | | |
2015 | | | | | | | | | | | | | | | | |
Net sales | | $ | 3,645,876 | | | $ | 711,957 | | | $ | 1,015,257 | | | $ | 5,373,090 | |
Total long-lived assets | | $ | 58,748 | | | $ | 16,810 | | | $ | 12,723 | | | $ | 88,281 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| United States | | United Kingdom | | Other Foreign | | Total |
| 2022 | | | | | | | |
| Net sales | $ | 7,973,814 | | | $ | 838,943 | | | $ | 1,618,434 | | | $ | 10,431,191 | |
| Total long-lived assets | $ | 182,482 | | | $ | 4,601 | | | $ | 17,177 | | | $ | 204,260 | |
| 2021 | | | | | | | |
| Net sales | $ | 7,046,742 | | | $ | 826,800 | | | $ | 1,562,571 | | | $ | 9,436,113 | |
| Total long-lived assets | $ | 144,777 | | | $ | 9,282 | | | $ | 22,204 | | | $ | 176,263 | |
| 2020 | | | | | | | |
| Net sales | $ | 6,237,901 | | | $ | 805,401 | | | $ | 1,297,277 | | | $ | 8,340,579 | |
| Total long-lived assets | $ | 110,161 | | | $ | 11,042 | | | $ | 24,813 | | | $ | 146,016 | |
Net sales by geographic area are presented by attributing net sales to external customers based on the domicile of the selling location.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) We recorded the following
pre-tax amounts, by operating segment, for depreciation and amortization in the accompanying consolidated financial statements (in thousands):
| | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
Depreciation and amortization of property and equipment: | | | | | | | | | | | | |
North America | | $ | 20,241 | | | $ | 21,952 | | | $ | 22,239 | |
EMEA | | | 5,025 | | | | 4,908 | | | | 3,757 | |
APAC | | | 521 | | | | 633 | | | | 653 | |
| | | | | | | | | | | | |
| | | 25,787 | | | | 27,493 | | | | 26,649 | |
| | | | | | | | | | | | |
Amortization of intangible assets: | | | | | | | | | | | | |
North America | | | 15,971 | | | | 8,139 | | | | 8,053 | |
EMEA | | | 73 | | | | 1,951 | | | | 2,834 | |
APAC | | | 768 | | | | 547 | | | | 421 | |
| | | | | | | | | | | | |
| | | 16,812 | | | | 10,637 | | | | 11,308 | |
| | | | | | | | | | | | |
Total | | $ | 42,599 | | | $ | 38,130 | | | $ | 37,957 | |
| | | | | | | | | | | | |
(21)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Depreciation and amortization of property and equipment: | | | | | |
| North America | $ | 20,587 | | | $ | 18,532 | | | $ | 22,396 | |
| EMEA | 2,538 | | | 4,256 | | | 5,073 | |
| APAC | 597 | | | 588 | | | 556 | |
| 23,722 | | | 23,376 | | | 28,025 | |
| Amortization of intangible assets: | | | | | |
| North America | 30,735 | | | 29,576 | | | 34,990 | |
| EMEA | 1,696 | | | 1,971 | | | 2,088 | |
| APAC | 461 | | | 498 | | | 457 | |
| 32,892 | | | 32,045 | | | 37,535 | |
| Total | $ | 56,614 | | | $ | 55,421 | | | $ | 65,560 | |
(20) AcquisitionsCaase.com
Hanu
Effective
September 26, 2017,June 1, 2022, we acquired
Caase.com,100 percent of the issued and outstanding shares of Hanu Software Solutions, Inc. and Hanu Software Solutions (India) Private Ltd. (collectively, “Hanu”) for a
Dutch cloud service provider, for apreliminary cash purchase price, net of cash
and cash equivalents acquired, of approximately
$6,038,000, subject$68,248,000, excluding the estimated fair value of an earn out with a maximum value of $20,000,000 and hold backs for representations and warranties of approximately $8,501,000 to
be paid in future periods. Hanu, a
final working capital adjustment.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
that this acquisition
strengthenedstrengthens our
ability to deliver Intelligent Technology Solutions toservice capabilities as a cloud solutions provider and is also a strategic investment in expanding our
clientspresence in
the Netherlands, with a view to expand into the wider European region in the near future.India.
The totalpreliminary fair value of net identifiable assets acquired was approximately $2,107,000,$22,326,000, including $68,000 of cash acquired and $2,039,000$24,750,000 of identifiable intangible assets, consisting primarily of customer relationships. The customer relationships identifiable intangible asset is beingthat will be amortized using the straight-linestraight line method over itsthe estimated economic life of 8ten years. The preliminary purchase price was allocated under the acquisition method of accounting using the information available at the time. During the fourth quarter of 2017, we finalized the fair value assumptions for identifiable intangible assetscurrently available. Goodwill acquired and reduced the fair value of identifiable intangible assets acquired by approximately $193,000. Goodwill initially recorded of approximately $4,117,000,approximated $69,923,000 which was recorded in our EMEANorth America operating segment, was adjusted to $4,041,000 as of December 31, 2017 as a result of the net effects of the decrease in the value of acquired identifiable intangible assets noted previously, adjustments for deferred taxes and foreign currency translation adjustments. None of the goodwill is tax deductible. segment.
We
will finalizehave not finalized the purchase price allocation in
2018 whenrelation to this acquisition as work on certain liabilities, including tax related balances, is not yet complete. We do not believe that the
final working capital adjustment is agreed upon and paid andcompletion of this work will materially modify the
evaluation of uncertain tax positions, which could leadpreliminary purchase price allocation. We expect to
an adjustment of thecomplete our purchase price allocation
is completed.prior to June 1, 2023.
We consolidated the results of operations for
Caase.comHanu within our
EMEANorth 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
Caase.comHanu 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
statementsconsolidated statement of operations.
Datalink
On January 6, 2017, we completed our acquisition of Datalink, a leading provider of IT services and enterprise data center solutions based in Eden Prairie, Minnesota, for a cash purchase price of $257,456,000, which included cash and cash equivalents acquired of $76,597,000. We believe that this acquisition strengthened our position as a leading IT solutions provider with deep technical talent delivering data center solutions to clients on premise or in the cloud.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the purchase price
Item 9. Changes in and the estimated fair value of the assets acquiredDisagreements With Accountants on Accounting and liabilities assumed at the date of acquisition (in thousands): | | | | | | | | |
Total purchase price | | | | | | $ | 257,456 | |
Fair value of net assets acquired: | | | | | | | | |
Current assets | | $ | 238,577 | | | | | |
Identifiable intangible assets – see description below | | | 94,500 | | | | | |
Property and equipment | | | 5,843 | | | | | |
Other assets | | | 17,888 | | | | | |
Current liabilities | | | (129,071 | ) | | | | |
Long-term liabilities, including deferred taxes | | | (34,421 | ) | | | | |
| | | | | | | | |
Total fair value of net assets acquired | | | | | | | 193,316 | |
| | | | | | | | |
Excess purchase price over fair value of net assets acquired (“goodwill”) | | | | | | $ | 64,140 | |
| | | | | | | | |
Under the acquisition method of accounting, the total purchase price as shown in the table above was allocated to the tangibleFinancial Disclosure
Not applicable.
Item 9A. Controls and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over fair value of net assets acquired was recorded as goodwill.The estimated fair values of current assets and liabilities (other than deferred revenue and related deferred costs) were based upon their historical costs on the date of acquisition due to their short-term nature. The majority of property and equipment were also estimated based upon historical costs as they approximated fair value. Certain long-term assets, including Datalink’s IT system, were written down to the estimated fair value based on the economic benefit expected to be realized from the assets following the acquisition. Deferred revenue acquired primarily represents monies collected prior to January 6, 2017 related to unearned revenues associated with support services to be performed in the future. The estimated fair value of deferred revenue of $65,500,000, which is included in current and long-term liabilities in the table above, was calculated using the adjusted fulfillment cost method as the present value of the costs expected to be incurred by a third party to perform the support services obligations acquired under various customer contracts, plus a reasonable profit associated with the performance effort. The deferred costs acquired represent monies paid prior to January 6, 2017 to purchase third party customer support contracts from manufacturers. The estimated fair value of the deferred costs of $48,029,000, which is included in current and other assets in the table above, was calculated in conjunction with the valuation of deferred revenue discussed above.
Identified intangible assets of $94,500,000 consist primarily of customer relationships, the trade name andnon-compete agreements, which were valued at $92,200,000, $2,200,000 and $100,000, respectively. These values were determined using the multiple-period excess earnings method, the relief from royalty method and the lost income method, respectively.
The identifiable intangibles resulting from the acquisition are amortized using the straight-line method over the following estimated useful lives:
| | |
Intangible Assets | | Estimated Economic Life |
Customer relationships
| | 10 Years |
Trade name
| | 1 Year |
Non-compete agreements
| | 1 Year |
Amortization expense recognized for the period from the acquisition date through December 31, 2017 was $11,520,000.
Goodwill of $64,140,000, which was recorded in our North America operating segment, represents the excess of the purchase price over the estimated fair value assigned to tangible and identifiable intangible assets acquired and liabilities assumed from Datalink. The addition of the Datalink technical employees to our team and the opportunity to grow our data center solutions business are the primary factors making up the goodwill recognized as part of the transaction. None of the goodwill is tax deductible.
The preliminary purchase price was allocated using information available at the time. During the second quarter of 2017, upon analysis of additional information affecting our estimate of the fair value of net assets acquired, we adjusted the purchase price allocation and reduced the goodwill balance by $945,000. During the remainder of 2017, no further adjustments to the purchase price allocation were made, and the purchase price allocation was finalized.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We have consolidated the results of operations for Datalink since its acquisition on January 6, 2017. Consolidated net sales and gross profit for the year ended December 31, 2017 include $524,281,000 and $118,917,000, respectively, from Datalink. The following table reports pro forma information as if the acquisition of Datalink had been completed at the beginning of the earliest period presented (in thousands, except per share amounts):
| | | | | | | | | | | | | | |
| | | | | Year Ended December 31, | |
| | | | | 2017 | | | 2016 | | | 2015 | |
Net sales | | As reported | | $ | 6,703,623 | | | $ | 5,485,515 | | | $ | 5,373,090 | |
| | Proforma | | $ | 6,707,533 | | | $ | 6,084,484 | | | $ | 6,033,750 | |
Net earnings | | As reported | | $ | 90,683 | | | $ | 84,690 | | | $ | 75,851 | |
| | Proforma | | $ | 92,276 | | | $ | 85,823 | | | $ | 75,696 | |
Diluted earnings per share | | As reported | | $ | 2.50 | | | $ | 2.32 | | | $ | 1.98 | |
| | Proforma | | $ | 2.55 | | | $ | 2.36 | | | $ | 1.98 | |
Ignia
Effective September 1, 2016, we acquired Ignia, a business technology consulting and managed services provider headquartered in Perth, Australia, with an additional office in Melbourne, for a cash purchase price, net of cash acquired, of approximately $10,804,000, subject to a final working capital adjustment. We believe that this acquisition expands our global footprint in the areas of application design, digital solutions, cloud, mobility and business analytics, while also building on our unique position to bring solutions powered by Intelligent Technology™ to our clients in the Asia-Pacific region.
The total fair value of net identifiable assets acquired initially recorded was approximately $5,324,000, including $1,463,000 of cash acquired and $4,716,000 of identifiable intangible assets, consisting primarily of customer relationships and restrictive covenant agreements which are being amortized using the straight-line method over their estimated economic lives of eight years and 27 months, respectively. The preliminary purchase price was allocated using the information available at the time. During the fourth quarter of 2016, we finalized the fair value assumptions for identifiable intangible assets acquired and reduced the fair value of identifiable intangible assets acquired by approximately $218,000. Goodwill initially recorded of approximately $7,248,000, which was recorded in our APAC operating segment, was adjusted to $6,957,000 as of December 31, 2016 as a result of the net effects of the decrease in the value of acquired identifiable intangible assets noted previously and foreign currency translation adjustments. None of the goodwill is tax deductible. We finalized the purchase price allocation in the second quarter of 2017 when the final working capital adjustment of $35,000 was agreed upon.
We consolidated the results of operations for Ignia within our APAC operating segment beginning on September 1, 2016, the effective date of the acquisition. Our historical results would not have been materially affected by the acquisition of Ignia 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 statements of operations.
BlueMetal
Effective October 1, 2015, we acquired BlueMetal, an interactive design and technology architecture firm based in the Boston area, with offices in Chicago and New York, for a cash purchase price, net of cash acquired, of approximately $44,221,000. BlueMetal delivers strategic design, application development, business intelligence solutions and data visualization platforms, and we believe this acquisition strengthens our services capabilities to bring value to our clients’ businesses in the area of application design, mobility and big data.
The total fair value of net assets acquired was approximately $15,412,000, including $15,240,000 of identifiable intangible assets, consisting primarily of customer relationships and restrictive covenant agreements which are being amortized using the straight-line method over their estimated economic lives of eight and three years, respectively. Goodwill acquired approximated $29,938,000, which was recorded in our North America operating segment. In 2016, we resolved the working capital contingency associated with the acquisition of BlueMetal. We recorded an adjustment of the purchase price as a reduction of goodwill in our North America operating segment upon the receipt of $507,000 in cash during 2016. The addition of the BlueMetal employees to our team and the opportunity to grow our services business are the primary factors making up the goodwill recognized as part of the transaction. None of the goodwill is tax deductible.
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We consolidated the results of operations for BlueMetal beginning on October 1, 2015, the effective date of the acquisition. Our historical results would not have been materially affected by the acquisition of BlueMetal 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 statements of operations.
(22)Sale of Foreign Entity
On July 19, 2017, we concluded the sale of our operations in Russia, formerly a part of our EMEA operating segment, to one of our global partners that is focused in the region. We recorded a loss on the sale of the foreign entity of approximately $3,646,000 during the third quarter of 2017, including a $2,903,000 charge upon the release of our cumulative translation adjustment account balance as of the sale date.
(23)Selected Quarterly Financial Information (unaudited)
The following tables set forth selected unaudited consolidated quarterly financial information for 2017 and 2016 (in thousands, except per share data):
| | | | | | | | | | | | | | | | |
| | | Quarters Ended | |
| | | December 31,
2017 | | | September 30,
2017 | | | June 30,
2017 | | | March 31,
2017 | |
Net sales | | $ | 1,784,075 | | | $ | 1,757,973 | | | $ | 1,684,032 | | | $ | 1,477,543 | |
Costs of goods sold | | | 1,551,192 | | | | 1,531,892 | | | | 1,432,653 | | | | 1,269,316 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 232,883 | | | | 226,081 | | | | 251,379 | | | | 208,227 | |
Operating expenses: | | | | | | | | | | | | | | | | |
Selling and administrative expenses | | | 184,554 | | | | 180,390 | | | | 180,752 | | | | 177,632 | |
Severance and restructuring expenses | | | 2,791 | | | | 494 | | | | 1,022 | | | | 4,695 | |
Loss on sale of foreign entity | | | — | | | | 3,646 | | | | — | | | | — | |
Acquisition-related expenses | | | — | | | | 106 | | | | 276 | | | | 2,947 | |
| | | | | | | | | | | | | | | | |
Earnings from operations | | | 45,538 | | | | 41,445 | | | | 69,329 | | | | 22,953 | |
Non-operating (income) expense: | | | | | | | | | | | | | | | | |
Interest income | | | (346 | ) | | | (227 | ) | | | (205 | ) | | | (431 | ) |
Interest expense | | | 5,360 | | | | 5,555 | | | | 4,326 | | | | 3,933 | |
Net foreign currency exchange (gain) loss | | | (117 | ) | | | 341 | | | | 251 | | | | 380 | |
Other expense, net | | | 367 | | | | 339 | | | | 326 | | | | 315 | |
| | | | | | | | | | | | | | | | |
Earnings before income taxes | | | 40,274 | | | | 35,437 | | | | 64,631 | | | | 18,756 | |
Income tax expense | | | 26,106 | | | | 13,025 | | | | 24,376 | | | | 4,908 | |
| | | | | | | | | | | | | | | | |
Net earnings | | $ | 14,168 | | | $ | 22,412 | | | $ | 40,255 | | | $ | 13,848 | |
| | | | | | | | | | | | | | | | |
Net earnings per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.40 | | | $ | 0.63 | | | $ | 1.13 | | | $ | 0.39 | |
| | | | | | | | | | | | | | | | |
Diluted | | $ | 0.39 | | | $ | 0.62 | | | $ | 1.11 | | | $ | 0.38 | |
| | | | | | | | | | | | | | | | |
Shares used in per share calculations: | | | | | | | | | | | | | | | | |
Basic | | | 35,809 | | | | 35,787 | | | | 35,765 | | | | 35,602 | |
| | | | | | | | | | | | | | | | |
Diluted | | | 36,272 | | | | 36,203 | | | | 36,169 | | | | 36,185 | |
| | | | | | | | | | | | | | | | |
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | |
| | | Quarters Ended | |
| | | December 31,
2016 | | | September 30,
2016 | | | June 30,
2016 | | | March 31,
2016 | |
Net sales | | $ | 1,467,583 | | | $ | 1,392,716 | | | $ | 1,456,234 | | | $ | 1,168,982 | |
Costs of goods sold | | | 1,276,614 | | | | 1,210,908 | | | | 1,247,017 | | | | 1,007,874 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 190,969 | | | | 181,808 | | | | 209,217 | | | | 161,108 | |
Operating expenses: | | | | | | | | | | | | | | | | |
Selling and administrative expenses | | | 145,066 | | | | 143,872 | | | | 150,186 | | | | 146,119 | |
Severance and restructuring expenses | | | 1,527 | | | | 788 | | | | 909 | | | | 1,356 | |
Acquisition-related expenses | | | 3,706 | | | | 741 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Earnings from operations | | | 40,670 | | | | 36,407 | | | | 58,122 | | | | 13,633 | |
Non-operating (income) expense: | | | | | | | | | | | | | | | | |
Interest income | | | (282 | ) | | | (318 | ) | | | (216 | ) | | | (250 | ) |
Interest expense | | | 2,271 | | | | 2,517 | | | | 1,992 | | | | 1,848 | |
Net foreign currency exchange (gain) loss | | | (520 | ) | | | 579 | | | | (153 | ) | | | 616 | |
Other expense, net | | | 311 | | | | 352 | | | | 359 | | | | 268 | |
| | | | | | | | | | | | | | | | |
Earnings before income taxes | | | 38,890 | | | | 33,277 | | | | 56,140 | | | | 11,151 | |
Income tax expense | | | 17,790 | | | | 11,642 | | | | 21,073 | | | | 4,263 | |
| | | | | | | | | | | | | | | | |
Net earnings | | $ | 21,100 | | | $ | 21,635 | | | $ | 35,067 | | | $ | 6,888 | |
| | | | | | | | | | | | | | | | |
Net earnings per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.59 | | | $ | 0.61 | | | $ | 0.96 | | | $ | 0.19 | |
| | | | | | | | | | | | | | | | |
Diluted | | $ | 0.59 | | | $ | 0.60 | | | $ | 0.96 | | | $ | 0.18 | |
| | | | | | | | | | | | | | | | |
Shares used in per share calculations: | | | | | | | | | | | | | | | | |
Basic | | | 35,479 | | | | 35,474 | | | | 36,380 | | | | 37,075 | |
| | | | | | | | | | | | | | | | |
Diluted | | | 35,963 | | | | 35,790 | | | | 36,612 | | | | 37,386 | |
| | | | | | | | | | | | | | | | |
INSIGHT ENTERPRISES, INC.
Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
Not applicable.
Item 9A. | Controls and Procedures |
Procedures
(a)Management’s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under Rules13a-15(f) and15d-15(f) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017.2022. In making this assessment, our management used the criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2017,2022, based on the criteria established in COSO’s Internal Control – Integrated Framework.Framework (2013).
KPMG LLP, the independent registered public accounting firm that audited the Consolidated Financial Statements in Part II, Item 8 of this report, has issued an attestation report on the Company’s internal control over financial reporting as of December 31,
2017.2022.
(b)Changes in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting
(as such term is defined inRules 13a-15(f) and15d-15(f) under the Exchange Act) during the quarter ended December 31,
20172022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
(c)Disclosure Controls and Procedures We maintain disclosure controls and procedures (as defined in
Rule Rules 13a-15(e) and
15d-15(e) under the Exchange Act). 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 and determined that as of December 31,
20172022 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.
(d)Inherent Limitations of Disclosure Controls and 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.
Item 9B. | Other Information |
Item 9B. Other Information
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
INSIGHT ENTERPRISES, INC.
PART III
Item 10. | Directors, Executive Officers and Corporate Governance |
Item 10. Directors, Executive Officers and Corporate Governance
The names of the executive officers of Insight and their ages, titles and biographies as of the date hereof are incorporated by reference from Part I, Item 1 of this report under the caption “Information about our Executive Officers.”
Other information required by this item can be found in our definitive Proxy Statement relating to our
20182023 Annual Meeting of Stockholders
to be filed with the SEC within 120 days after December 31, 2022 (our “Proxy Statement”) and is incorporated herein by reference.
Item 11. | Executive Compensation |
Item 11. Executive Compensation
The information required by this item can be found in our Proxy Statement and is incorporated herein by reference.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item can be found in our Proxy Statement and is incorporated herein by reference.
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item can be found in our Proxy Statement and is incorporated herein by reference.
Item 14. | Principal Accounting Fees and Services |
Item 14. Principal Accountant Fees and Services
Our independent registered public accounting firm is KPMG LLP, Phoenix, AZ, PCAOB Firm ID: 185.
The information required by this item can be found in our Proxy Statement and is incorporated herein by reference.
INSIGHT ENTERPRISES, INC.
PART IV
Item 15. | Exhibits, Financial Statement Schedules |
Item 15. Exhibits and Financial Statement Schedules
(a)Financial Statements and Schedules The Consolidated Financial Statements of Insight Enterprises, Inc. and subsidiaries and the related Reports of Independent Registered Public Accounting Firm are filed herein as set forth under Part II, Item 8 of this report.
Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included in the Consolidated Financial Statements or notes thereto.
The exhibits list
immediately following the signature page is incorporated herein by reference as the list of exhibits required as part of this report.
Item 16. Form 10-K Summary
INSIGHT ENTERPRISES, INC.
YEAR ENDED DECEMBER 31,
20172022
Commission File No. 000-25092
| | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
Exhibit Number | | Exhibit Description | | Form | | File No. | | Exhibit
Number | | Filing/Effective
Date | | Filed
Herewith |
| | | | | | |
| 2.1 | | Agreement and Plan of Merger, dated as of November 6, 2016, by and among Insight Enterprises, Inc., Reef Acquisition Co., and Datalink Corporation (Schedules and exhibits to the Agreement and Plan of Merger have been omitted pursuant to Item 601(b)(2) of RegulationS-K. The registrant will furnish copies of any such schedules to the U.S. Securities and Exchange Commission upon request.) | | 8-K | | 000-25092 | | 2.1 | | November 7, 2016 | | |
| | | | | | |
| 3.1 | | Amended and Restated Certificate of Incorporation of Insight Enterprises, Inc. | | 10-K | | 000-25092 | | 3.1 | | February 17, 2006 | | |
| | | | | | |
| 3.2 | | Certificate of Amendment of Amended and Restated Certificate of Incorporation of Insight Enterprises, Inc. | | 8-K | | 000-25092 | | 3.1 | | May 21, 2015 | | |
| | | | | | |
| 3.3 | | Amended and Restated Bylaws of Insight Enterprises, Inc. | | 8-K | | 000-25092 | | 3.2 | | May 21, 2015 | | |
| | | | | | |
| 4.1 (P) | | Specimen Common Stock Certificate | | S-1 | | 33-86142 | | 4.1 | | January 20, 1995 | | |
| | | | | | |
| 10.1(1) | | Form of Indemnification Agreement | | 10-K | | 000-25092 | | 10.1 | | July 26, 2007 | | |
| | | | | | |
| 10.2(2) | | Amended Insight Enterprises, Inc. 2007 Omnibus Plan | | Proxy Statement | | 000-25092 | | Annex A | | April 4, 2011 | | |
| | | | | | |
| 10.3(2) | | First Amendment to the Amended Insight Enterprises, Inc. 2007 Omnibus Plan | | Proxy Statement | | 000-25092 | | Annex A | | April 5, 2016 | | |
| | | | | | |
| 10.4(2) | | Executive Management Separation Plan effective as of January 1, 2008 | | 10-Q | | 000-25092 | | 10.5 | | November 7, 2008 | | |
| | | | | | |
| 10.5(2) | | Amended and Restated Employment Agreement between Insight Enterprises, Inc. and Glynis A. Bryan dated as of January 1, 2009 | | 8-K | | 000-25092 | | 10.3 | | January 7, 2009 | | |
| | | | | | |
| 10.6(2) | | Executive Employment Agreement between Insight Enterprises, Inc. and Kenneth T. Lamneck, dated as of December 14, 2009 | | 10-K | | 000-25092 | | 10.24 | | February 25, 2010 | | |
| | | | | | |
| 10.7(2) | | Employment Agreement between Insight Enterprises, Inc. and Michael P. Guggemos, dated as of November 1, 2010 | | 10-K | | 000-25092 | | 10.16 | | February 23, 2011 | | |
| | | | | | |
| 10.8(2) | | Offer of employment letter to Michael P. Guggemos, dated September 28, 2010 | | 10-K | | 000-25092 | | 10.17 | | February 23, 2011 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit
Number | | Exhibit Description | | Form | | File No. | | Exhibit
Number | | Filing
Date | | Filed/Furnished
Herewith |
| | | | | | | | | | | | |
2.1(1) | | | | 8-K | | 000-25092 | | 2.1 | | November 7, 2016 | | |
| | | | | | | | | | | | |
2.2(1) | | | | 8-K | | 000-25092 | | 2.1 | | June 24, 2019 | | |
| | | | | | | | | | | | |
| 3.1 | | | | 10-K | | 000-25092 | | 3.1 | | February 17, 2006 | | |
| | | | | | | | | | | | |
| 3.2 | | | | 8-K | | 000-25092 | | 3.1 | | May 21, 2015 | | |
| | | | | | | | | | | | |
| 3.3 | | | | 8-K | | 000-25092 | | 3.2 | | May 21, 2015 | | |
| | | | | | | | | | | | |
| 4.1 (P) | | Specimen Common Stock Certificate | | S-1 | | 33-86142 | | 4.1 | | January 20, 1995 | | |
| | | | | | | | | | | | |
| 4.2 | | | | 8-K | | 000-25092 | | 4.1 | | August 15, 2019 | | |
| | | | | | | | | | | | |
| 4.3 | | | | 10-K | | 000-25092 | | 4.3 | | February 21, 2020 | | |
| | | | | | | | | | | | |
10.1(2) | | | | 10-K | | 000-25092 | | 10.1 | | July 26, 2007 | | |
| | | | | | | | | | | | |
10.2(3) | | | | Proxy Statement | | 000-25092 | | Annex A | | April 4, 2011 | | |
| | | | | | | | | | | | |
10.3(3) | | | | Proxy Statement | | 000-25092 | | Annex A | | April 5, 2016 | | |
| | | | | | | | | | | | |
10.4(3) | | | | S-8 | | 333-238543 | | 99.1 | | May 20, 2020 | | |
| | | | | | | | | | | | |
10.5(3) | | | | 10-K | | 000-25092 | | 10.5 | | February 18, 2022 | | |
| | | | | | | | | | | | |
10.6(3) | | | | 10-K | | 000-25092 | | 10.6 | | February 18, 2022 | | |
| | | | | | | | | | | | |
10.7(3) | | | | 10-K | | 000-25092 | | 10.7 | | February 18, 2022 | | |
| | | | | | | | | | | | |
INSIGHT ENTERPRISES, INC.
EXHIBITS TO FORM 10-K (continued)
YEAR ENDED DECEMBER 31,
20172022
Commission File No. 000-25092
| | | | | | | | | | | | | | |
| | | | | Incorporated by Reference | | | |
Exhibit Number | | Exhibit Description | | Form | | File No. | | Exhibit
Number | | Filing/Effective
Date | | Filed
Herewith | |
| | | | | | |
| 10.9(2) | | Employment Agreement between Insight Enterprises, Inc. and Steven W. Dodenhoff, dated as of January 30, 2012 | | 10-K | | 000-25092 | | 10.16 | | February 24, 2012 | | | | |
| | | | | | |
| 10.10(2) | | Employment Agreement between Insight Enterprises, Inc. and Dana A. Leighty, dated as of March 2, 2012 | | 10-K | | 000-25092 | | 10.12 | | February 22, 2013 | | | | |
| | | | | | |
| 10.11(2) | | Managing Director Service Agreement dated October 25, 2013 between Insight Technology Solutions GmbH and Wolfgang Ebermann | | 8-K | | 000-25092 | | 10.1 | | October 30, 2013 | | | | |
| | | | | | |
| 10.12(2) | | Executive Employment Agreement between Insight Enterprises, Inc. and Samuel C. Cowley, dated June 7, 2016 | | 10-K | | 000-25092 | | 10.12 | | February 2, 2017 | | | | |
| | | | | | |
| 10.13 | | Receivables Purchase Agreement dated as of December 31, 2002 among Insight Receivables, LLC, Insight Enterprises, Inc., Jupiter Securitization Corporation, Bank One NA, and the entities party thereto from time to time as financial institutions | | 10-K | | 000-25092 | | 10.38 | | March 27, 2003 | | | | |
| | | | | | |
| 10.14 | | Amended and Restated Receivables Sale Agreement dated as of September 3, 2003 by and among Insight Direct USA, Inc. and Insight Public Sector, Inc. as originators, and Insight Receivables, LLC, as buyer | | 10-Q | | 000-25092 | | 10.1 | | November 13, 2003 | | | | |
| | | | | | |
| 10.15 | | Amendment No. 1 to Receivables Purchase Agreement dated as of September 3, 2003 | | 10-Q | | 000-25092 | | 10.2 | | November 13, 2003 | | | | |
| | | | | | |
| 10.16 | | Amendment No. 2 to Receivables Purchase Agreement dated as of December 23, 2003 among Insight Receivables, LLC, Insight Enterprises, Inc. and Jupiter Securitization Corporation, Bank One NA | | 10-K | | 000-25092 | | 10.42 | | March 11, 2004 | | | | |
| | | | | | |
| 10.17 | | Amendment No. 5 to Receivables Purchase Agreement dated as of March 25, 2005 | | 10-Q | | 000-25092 | | 10.4 | | May 9, 2005 | | | | |
| | | | | | |
| 10.18 | | Amendment No. 6 to Receivables Purchase Agreement dated as of December 19, 2005 | | 8-K | | 000-25092 | | 10.1 | | December 22, 2005 | | | | |
| | | | | | |
| 10.19 | | Amendment No. 7 to Receivables Purchase Agreement dated as of September 7, 2006 | | 8-K | | 000-25092 | | 10.2 | | September 8, 2006 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit
Number | | Exhibit Description | | Form | | File No. | | Exhibit
Number | | Filing
Date | | Filed/Furnished
Herewith |
10.8(3) | | | | 10-Q | | 000-25092 | | 10.1 | | May 6, 2021 | | |
| | | | | | | | | | | | |
10.9(3) | | | | 10-K | | 000-25092 | | 10.5 | | February 21, 2020 | | |
| | | | | | | | | | | | |
10.10(3) | | | | 8-K | | 000-25092 | | 10.3 | | January 7, 2009 | | |
| | | | | | | | | | | | |
10.11(3) | | | | 10-Q | | 000-25092 | | 10.1 | | November 7, 2018 | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
10.12(3) | | | | 10-K | | 000-25092 | | 10.12 | | February 2, 2017 | | |
| | | | | | | | | | | | |
10.13(3) | | | | 10-K | | 000- 25092 | | 10.12 | | February 21, 2020 | | |
| | | | | | | | | | | | |
10.14(3) | | | | 8-K | | 000-25092 | | 10.1 | | October 18, 2021 | | |
| | | | | | | | | | | | |
10.15(3) | | | | 10-K | | 000-25092 | | 10.15 | | February 18, 2022 | | |
| | | | | | | | | | | | |
10.16(3) | | | | 10-Q | | 000-25092 | | 10.1 | | May 5, 2022 | | |
| | | | | | | | | | | | |
10.17(3) | | | | 10-Q | | 000-25092 | | 10.1 | | August 4, 2022 | | |
| | | | | | | | | | | | |
| 10.18 | | | | 8-K | | 000-25092 | | 10.1 | | August 15, 2019 | | |
| | | | | | | | | | | | |
| 10.19 | | | | 8-K | | 000-25092 | | 10.2 | | August 15, 2019 | | |
| | | | | | | | | | | | |
10.20(4) | | Credit Agreement, dated as of August 30, 2019, by and among Insight Enterprises, Inc., the subsidiaries of Insight Enterprises, Inc. party thereto as borrowers and guarantors, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto. | | 8-K | | 000-25092 | | 10.1 | | August 30, 2019 | | |
| | | | | | | | | | | | |
INSIGHT ENTERPRISES, INC.
EXHIBITS TO FORM 10-K (continued)
YEAR ENDED DECEMBER 31,
20172022
Commission File No. 000-25092
| | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
Exhibit Number | | Exhibit Description | | Form | | File No. | | Exhibit
Number | | Filing/Effective
Date | | Filed
Herewith |
| | | | | | |
| 10.20 | | Amendment No. 9 to Receivables Purchase Agreement dated as of September 17, 2008 | | 8-K | | 000-25092 | | 10.3 | | September 23, 2008 | | |
| | | | | | |
| 10.21 | | Amendment No. 11 and Joinder Agreement to Receivables Purchase Agreement dated as of July 24, 2009 | | 10-Q | | 000-25092 | | 10.1 | | August 6, 2009 | | |
| | | | | | |
| 10.22 | | Amendment No. 12 to Receivables Purchase Agreement dated as of July 1, 2010 among Insight Receivables, LLC, Insight Enterprises, Inc., the Purchasers and Managing Agents party thereto, and JPMorgan Chase Bank, N.A. (successor by merger to Bank One, NA (Main Office Chicago)), as agent for the Purchasers | | 10-Q | | 000-25092 | | 10.1 | | November 4, 2010 | | |
| | | | | | |
| 10.23 | | Omnibus Amendment and Joinder to Receivables Purchase Agreement, dated as of April 26, 2012, among Insight Receivables, LLC, Insight Enterprises, Inc., Insight Direct USA, Inc., Insight Public Sector, Inc., the purchasers and managing agents party thereto and JPMorgan Chase Bank, N.A., as Agent | | 8-K | | 000-25092 | | 10.3 | | May 2, 2012 | | |
| | | | | | |
| 10.24 | | Third Amended and Restated Credit Agreement, dated as of April 26, 2012, by and among Insight Enterprises, Inc., Insight Enterprises B.V., Insight Direct (UK) Ltd., as borrowers, JPMorgan Chase Bank, N.A., as administrative agent, Wells Fargo Bank, National Association, as syndication agent, and the lenders party thereto | | 8-K | | 000-25092 | | 10.1 | | May 2, 2012 | | |
| | | | | | |
| 10.25 | | Amended and Restated Credit Agreement, dated as of April 26, 2012, by and among Calence, LLC, Insight Direct USA, Inc. and Insight Public Sector, Inc., as Resellers, Castle Pines Capital LLC, as administrative agent, Wells Fargo Capital Finance, LLC, as collateral agent, syndication agent and administrative agent, and the lenders party thereto | | 8-K | | 000-25092 | | 10.2 | | May 2, 2012 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit
Number | | Exhibit Description | | Form | | File No. | | Exhibit
Number | | Filing
Date | | Filed/Furnished
Herewith |
| 10.21 | | First Amendment to Credit Agreement, dated as of July 31, 2020, by and among Insight Enterprises, Inc., the subsidiaries of Insight Enterprises, Inc. party thereto as borrowers and grantors, JPMorgan, N.A., as administrative agent, and the lenders party thereto. | | 10-Q | | 000-25092 | | 10.2 | | August 6, 2020 | | |
| | | | | | | | | | | | |
| 10.22 | | Second Amendment to Credit Agreement, dated as of December 31, 2021, by and among Insight Enterprises, Inc., the subsidiaries of Insight Enterprises, Inc. party thereto as borrowers and grantors, JPMorgan, N.A., as administrative agent, and the lenders party thereto. | | | | | | | | | | X |
| | | | | | | | | | | | |
| 10.23 | | Third Amendment to Credit Agreement, dated as of July 22, 2022, by and among Insight Enterprises, Inc., the subsidiaries of Insight Enterprises, Inc. party thereto as borrowers and grantors, JPMorgan, N.A., as administrative agent, and the lenders party thereto. | | 8-K | | 000-25092 | | 10.1 | | July. 26, 2022 | | |
| | | | | | | | | | | | |
| 21 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 23.1 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 24.1 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 24.2 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 24.3 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 24.4 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 24.5 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 24.6 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 24.7 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 24.8 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 24.9 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 31.1 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 31.2 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
INSIGHT ENTERPRISES, INC.
EXHIBITS TO FORM 10-K (continued)
YEAR ENDED DECEMBER 31,
20172022
Commission File No. 000-25092
| | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
Exhibit Number | | Exhibit Description | | Form | | File No. | | Exhibit
Number | | Filing/Effective
Date | | Filed
Herewith |
| | | | | | |
| 10.26 | | Omnibus Amendment, dated as of June 25, 2014, among Insight Receivables, LLC, Insight Enterprises, Inc., Insight Direct USA, Inc., Insight Public Sector, Inc., the purchasers and managing agents party thereto and Wells Fargo Bank, National Association, as successor agent | | 8-K | | 000-25092 | | 10.1 | | July 1, 2014 | | |
| | | | | | |
| 10.27 | | Amendment No. 2 to Amended and Restated Credit Agreement, dated as of July 2, 2015, by and among Calence, LLC, Insight Direct USA, Inc. and Insight Public Sector, Inc., as Resellers, Castle Pines Capital LLC, as a lender and as an administrative agent, Wells Fargo Capital Finance, LLC, as a lender, as collateral agent and as an administrative agent, and the other lenders party thereto. | | 8-K | | 000-25092 | | 10.1 | | July 9, 2015 | | |
| | | | | | |
| 10.28 | | Amendment No. 2 to Third Amended and Restated Credit Agreement, dated as of April 26, 2012, by and among Insight Enterprises, Inc., Insight Enterprises B.V., Insight Direct (UK) Ltd., as borrowers, JPMorgan Chase Bank, N.A., as administrative agent, Wells Fargo Bank, National Association, as syndication agent, and the lenders party thereto | | 10-Q | | 000-25092 | | 10.1 | | October 29, 2015 | | |
| | | | | | |
| 10.29 | | Amendment No. 3 to Amended and Restated Credit Agreement, dated as of April 26, 2012, by and among Calence, LLC, Insight Direct USA, Inc. and Insight Public Sector, Inc., as Resellers, Castle Pines Capital LLC, as administrative agent, Wells Fargo Capital Finance, LLC, as collateral agent, syndication agent and administrative agent, and the lenders party thereto | | 10-Q | | 000-25092 | | 10.2 | | October 29, 2015 | | |
| | | | | | |
| 10.30 | | Amendment to Receivables Purchase Agreement, dated as of October 15, 2015, among Insight Receivables, LLC, Insight Enterprises, Inc., PNC Bank, National Association and Wells Fargo Bank, National Association | | 10-Q | | 000-25092 | | 10.3 | | October 29, 2015 | | |
INSIGHT ENTERPRISES, INC.
EXHIBITS TO FORM 10-K (continued)
YEAR ENDED DECEMBER 31, 2017
Commission File No. 000-25092
| | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
Exhibit Number | | Exhibit Description | | Form | | File No. | | Exhibit
Number | | Filing/Effective
Date | | Filed
Herewith |
| | | | | | |
| 10.31 | | Fourth Amended and Restated Credit Agreement, dated as of June 23, 2016, by and among Insight Enterprises, Inc., Insight Enterprises B.V., Insight Direct (UK) Ltd., as borrowers, JPMorgan Chase Bank, N.A., as administrative agent, Wells Fargo Bank, National Association, as syndication agent, and the lenders party thereto | | 8-K | | 000-25092 | | 10.1 | | June 28, 2016 | | |
| | | | | | |
| 10.32 | | Second Amended and Restated Credit Agreement, dated as of June 23, 2016, by and among Calence, LLC, Insight Direct USA, Inc. and Insight Public Sector, Inc., as Resellers, Castle Pines Capital LLC, as administrative agent, Wells Fargo Capital Finance, LLC, as collateral agent, syndication agent and administrative agent, and the lenders party thereto | | 8-K | | 000-25092 | | 10.2 | | June 28, 2016 | | |
| | | | | | |
| 10.33 | | Amendment to Receivables Purchase Agreement, dated as of June 23, 2016, among Insight Receivables, LLC, Insight Enterprises, Inc., the purchasers and managing agents party thereto and Wells Fargo Bank, National Association, as Agent | | 8-K | | 000-25092 | | 10.3 | | June 28, 2016 | | |
| | | | | | |
| 10.34 | | Amendment No. 1 dated as of January 6, 2017 to Fourth Amended and Restated Credit Agreement, by and among Insight Enterprises, Inc., Insight Enterprises B.V. and Insight Direct (UK) Ltd., as borrowers, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto | | 10-K | | 000-25092 | | 10.34 | | February 2, 2017 | | |
| | | | | | |
| 10.35 | | Second Omnibus Reaffirmation Agreement, Amendment and Joinder to Loan Documents, dated as of January 6, 2017, by and among Calence, LLC, Insight Direct USA, Inc., Insight Public Sector, Inc. and Datalink Corporation, as Resellers, the guarantors party thereto, Castle Pines Capital LLC, as administrative agent, Wells Fargo Capital Finance, LLC, as collateral agent and administrative agent, and the lenders party thereto | | 10-K | | 000-25092 | | 10.35 | | February 2, 2017 | | |
| | | | | | |
| 21 | | Subsidiaries of Insight Enterprises, Inc. | | | | | | | | | | X |
| | | | | | |
| 23.1 | | Consent of KPMG LLP | | | | | | | | | | X |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | | | |
Exhibit
Number
| | Exhibit Description
| | Form | | | File No. | | | Exhibit
Number | | | Filing/Effective
Date | | | Filed
Herewith | |
| | | | | | |
24.1 | | Power of Attorney for Timothy A. Crown dated February 13, 2018 | Exhibit
Number | | Exhibit Description | | Form | | File No. | | Exhibit
Number | | Filing
Date | | Filed/Furnished
Herewith |
| 32.1 | | | | | | X | |
| | | | | | |
24.2 | | Power of Attorney for Richard E. Allen dated February 13, 2018 | | | | | | | | | | | | | | | | | | | X | |
| | | | | | |
24.3 | | Power of Attorney for Bruce W. Armstrong dated February 13, 2018 | | | | | | | | | | | | | | | | | | | X | |
| | | | | | |
24.4 | | Power of Attorney for Linda Breard dated February 13, 2018 | | | | | | | | | | | | | | | | | | | X | |
| | | | | | |
24.5 | | Power of Attorney for Catherine Courage dated February 13, 2018 | | | | | | | | | | | | | | | | | | | X | |
| | | | | | |
24.6 | | Power of Attorney for Bennett Dorrance dated February 8, 2018 | | | | | | | | | | | | | | | | | | | X | |
| | | | | | |
24.7 | | Power of Attorney for Michael M. Fisher dated February 13, 2018 | | | | | | | | | | | | | | | | | | | X | |
| | | | | | |
24.8 | | Power of Attorney for Anthony A. Ibargüen dated February 13, 2018 | | | | | | | | | | | | | | | | | | | X | |
| | | | | | |
24.9 | | Power of Attorney for Kathleen S. Pushor dated February 13, 2018 | | | | | | | | | | | | | | | | | | | X | |
| | | | | | |
24.10 | | Power of Attorney for Girish Rishi dated February 13, 2018 | | | | | | | | | | | | | | | | | | | X | |
| | | | | | |
31.1 | | | | | | | | | | | | | | | | | | | | | X | |
| | | | | | |
31.2 | | Certification of Chief Financial Officer Pursuant to Securities and Exchange Act Rule13a-14 | | | | | | | | | | | | | | | | | | | X | |
| | | | | | |
32.1 | | Certification of Chief Executive OfficerOffice and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | | | | | | | | | | X | |
| | | | | | |
101 | | Interactive data files pursuant to Rule 405 ofRegulation S-T | | | | | | |
| 101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | | | | | | X |
| | | | | | X | | | | | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | | | X |
| | | | | | | | | | | | |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101) | | | | | | | | | | X |
(1) | We have entered into a separate indemnification agreement with each of the following directors and executive officers that differ only in names and dates: Richard E. Allen, Bruce W. Armstrong, Linda Breard, Glynis A. Bryan, Catherine Courage, Samuel C. Cowley, Timothy A. Crown, Steven W. Dodenhoff, Bennett Dorrance, Wolfgang Ebermann, Michael M. Fisher, Michael P. Guggemos, Anthony A. Ibargüen, Helen K. Johnson, Kenneth T. Lamneck, Dana A. Leighty, Kathleen S. Pushor and Girish Rishi. Pursuant to the instructions accompanying Item 601 of RegulationS-K, the Registrant is filing the form of such indemnification agreement. |
(2) | Management contract or compensatory plan or arrangement. |
(1)Certain schedules and exhibits (or similar attachments) have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish copies of any such schedules and exhibits (or similar attachments) to the SEC upon request.
(2)We have entered into a separate indemnification agreement with each of the following directors and executive officers that differ only in names and dates: Richard E. Allen, Bruce W. Armstrong, Alexander L. Baum, Linda M. Breard, Glynis A. Bryan, Dee Burger, Catherine Courage, Samuel C. Cowley, Timothy A. Crown, Rachael A. Crump, Adrian Gregory, Anthony A. Ibargüen, James A. Morgado, Joyce A. Mullen, Sumana Nallapati, Kathleen S. Pushor, Girish Rishi, and Jennifer M. Vasin. Pursuant to the instructions accompanying Item 601 of Regulation S-K, the Registrant is filing the form of such indemnification agreement.
(3)Management contract or compensatory plan or arrangement.
(4)Certain schedules and exhibits (or similar attachments) have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K. The Company agrees to furnish copies of any such schedules and exhibits (or similar attachments) to the SEC upon request.
(P)Paper exhibit.
INSIGHT ENTERPRISES, INC.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| INSIGHT ENTERPRISES, INC. |
| |
By | | /s/ Kenneth T. Lamneck
|
| By | Kenneth T. Lamneck | /s/ Joyce A. Mullen |
| | | Joyce A. Mullen |
| | | President and Chief Executive Officer |
Dated: February
23, 201816, 2023
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | |
Signature
| | Title
| | Date
|
/s/ Kenneth T. Lamneck Kenneth T. Lamneck
Joyce A. Mullen | | President, Chief Executive Officer and Director (principal executive officer) | | February 23, 201816, 2023 |
| Joyce A. Mullen | | | |
| | | | |
/s/ Glynis A. Bryan | | Chief Financial Officer
(principal financial officer) | | February 16, 2023 |
| Glynis A. Bryan | | Chief Financial Officer (principal financial officer) | | February 23, 2018 |
| | | | |
/s/ DanaRachael A. Leighty DanaCrump
| | Global Corporate Controller
(principal accounting officer) | | February 16, 2023 |
Rachael A. LeightyCrump | | Vice President, Finance (principal accounting officer) | | February 23, 2018 |
| | | | |
/s/ Timothy A. Crown* Timothy A. Crown
| | Chairman of the Board | | February 23, 201816, 2023 |
| Timothy A. Crown | | | | |
| | | | |
/s/ Richard E. Allen* | | Director | | February 16, 2023 |
| Richard E. Allen | | Director | | February 23, 2018 |
| | | | |
/s/ Bruce W. Armstrong* | | Director | | February 16, 2023 |
| Bruce W. Armstrong | | Director | | February 23, 2018 |
| | | | |
/s/ Linda Breard* Linda Breard
Alexander L. Baum* | | Director | | February 23, 201816, 2023 |
| Alexander L. Baum | | | | |
| | | | |
/s/ Catherine Courage* Catherine Courage
Linda M. Breard* | | Director | | February 23, 201816, 2023 |
| Linda M. Breard | | | | |
| | | | |
/s/ Bennett Dorrance* Bennett Dorrance
Catherine Courage* | | Director | | February 23, 201816, 2023 |
| Catherine Courage | | | | |
| | | | |
/s/ Michael M. Fisher* Michael M. Fisher
Anthony A. Ibargüen* | | Director | | February 23, 201816, 2023 |
| Anthony A. Ibargüen | | | | |
| | | | |
/s/ Anthony A. Ibargüen* Anthony A. Ibargüen
Kathleen S. Pushor* | | Director | | February 23, 201816, 2023 |
| Kathleen S. Pushor | | | | |
| | | | |
/s/ Kathleen S. Pushor* Kathleen S. Pushor
Girish Rishi* | | Director | | February 23, 201816, 2023 |
| Girish Rishi | | | | |
| | | | |
/s/ Girish Rishi*
Girish Rishi
* By: /s/ Samuel C. Cowley | | Director | | February 23, 2018 |
| | |
* By: | | /s/ Samuel C. Cowley
|
| | Samuel C. Cowley, Attorney in Fact | | | | |
92
