INSIGHT ENTERPRISES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this Quarterly Report on Form 10-Q. We refer to our customers as “clients,” our suppliers as “partners” and our employees as “teammates.” Quarterly Overview Today, every business is a technology business. We empower organizations of all sizes with Intelligent Technology Solutions TM and services to maximize the business value of information technology (“IT”) in North America; Europe, the Middle East and Africa (“EMEA”); and Asia-Pacific (“APAC”). As a Fortune 500-ranked global provider of digital innovation, cloud/data center transformation, connected workforce, and supply chain optimization solutions, we help clients innovate and optimize their operations to run smarter. Our offerings in North America and certain countries in EMEA and APAC include hardware, software and services. Our offerings in the remainder of our EMEA and APAC segments are largely software and certain software-related services. O n a consolidated basis, for the three months ended September 30, 2020: • Net sales of $1.9 billion increased 1% compared to the three months ended September 30, 2019, primarily due to the addition of PCM. Without the addition of PCM, net sales in the core business would have been down compared to the prior year quarter as a result of the negative impact of COVID-19. The overall increase in net sales reflects an increase in hardware and services net sales, which was partially offset by a decrease in software net sales. Excluding the effects of fluctuating foreign currency exchange rates, net sales remained flat compared to the third quarter of 2019. • Gross profit of $308 million increased 11% compared to the three months ended September 30, 2019. Excluding the effects of fluctuating foreign currency exchange rates, gross profit increased 12% compared to the third quarter of 2019. • Gross margin improved approximately 150 basis points to 15.9% of net sales in the three months ended September 30, 2020. This increase reflects an increase in the mix of higher margin services net sales and an increase in margins on hardware net sales compared to the same period in the prior year. • Earnings from operations increased 38%, year over year, to $61.5 million in the third quarter of 2020 compared to $44.4 million in the third quarter of 2019, primarily due to increased gross profit and reduction in acquisition and integration related expenses, incurred in connection with PCM. The increase was partially offset by increased personnel costs, including teammate benefits and variable compensation, and increased amortization of intangible assets, both related to the PCM acquisition. Excluding the effects of fluctuating foreign currency exchange rates, earnings from operations increased 42% year over year. • Net earnings and diluted earnings per share were $38.9 million and $1.10, respectively, for the third quarter of 2020. This compares to net earnings of $27.1 million and diluted earnings per share of $0.76 for the third quarter of 2019. 26 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Recent Developments – Impact of COVID - 19 to our Business In late 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”), which has since spread globally. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. In an effort to protect the health and safety of our teammates, we took proactive action to adopt social distancing policies at our locations globally, including working from home where possible, limiting the number of teammates attending in-person meetings, reducing the number of people in our locations at any one time, and suspending teammate travel. Governments around the world have also enacted various measures, including orders to close all businesses not deemed “essential,” isolate residents to their homes or places of residence, and practice social distancing when engaging in essential activities. These measures taken by the Company continued to be in effect for the duration of the third quarter of 2020 and remain in place to date. 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. We continued to observe a pronounced impact of COVID-19 on our third quarter financial results when compared to internal budgets, and anticipate demand for our products and services will continue to be impacted in the fourth quarter as clients continue to evaluate the impact of COVID-19 on their businesses, their profitability and their liquidity. While we did not experience a decline in bookings in October 2020, we anticipate that the declining trend, which began in April 2020, may continue into the fourth quarter of 2020, when compared to the prior year. In the short run, we took steps to accelerate and complete our integration with PCM and to reduce discretionary operating expenditures, such as certain teammate benefits and variable compensation and travel related expenditures. We have also utilized various partner and government incentives available to us to help offset some of these business impacts. In the third quarter of 2020, we invested in our sales force, adding key technical talent across our solution areas and additional sales coverage to our geographic footprint. We will continue to invest in this area in the fourth quarter to ensure we are positioned well to compete in the marketplace in 2021, when we expect the IT market will start to recover. We fully paid down all of our debt under our ABL facility during the quarter and believe we have a strong balance sheet and healthy liquidity position. The Company had current capacity of up to $1.2 billion under our ABL facility available as of September 30, 2020. 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, its severity, the actions taken to contain the virus or treat its impact, such as restrictions on travel and transportation, and how quickly and to what extent normal economic and operating conditions can resume. We will continue to actively monitor the situation and anticipate 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 for the remainder of 2020. Accordingly, our current results and financial condition discussed herein may not be indicative of future operating results and trends. See “Risk Factors” in Part II, Item 1A of this report for additional risks we face due to the COVID-19 pandemic. 27 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Throughout the “Quarterly Overview” and “Results of Operations” sections of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we refer to changes in net sales, gross profit, selling and administrative expenses and earnings from operations on a consolidated basis and in North America, EMEA and APAC excluding the effects of fluctuating foreign currency exchange rates. In computing the changes in amounts and percentages, we compare the current period amount as translated into U.S. dollars under the applicable accounting standards to the prior period amount in local currency translated into U.S. dollars utilizing the weighted average translation rate for the current period. Details about segment results of operations can be found in Note 11 to the Consolidated Financial Statements in Part I, Item 1 of this report. Our discussion and analysis of financial condition and results of operations is intended to assist in the understanding of our consolidated financial statements, including the changes in certain key items in those consolidated financial statements from period to period and the primary factors that contributed to those changes, as well as how certain critical accounting estimates affect our consolidated financial statements. Critical Accounting Estimates Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). For a summary of significant accounting policies, see Note 1 to the Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2019. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results, however, may differ from estimates we have made. Members of our senior management have discussed the critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors. There have been no changes to the items disclosed as critical accounting estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019. 28 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Results of Operations The COVID-19 pandemic has negatively impacted the global economy and has disrupted global supply chains and workforce participation. We continued to observe impacts on our third quarter financial results and believe the ultimate extent of the impact of the COVID-19 pandemic on our future 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. The following table sets forth certain financial data as a percentage of net sales for the three and nine months ended September 30, 2020 and 2019: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Costs of goods sold 84.1 85.6 84.2 85.3 Gross profit 15.9 14.4 15.8 14.7 Selling and administrative expenses 12.7 11.6 12.5 11.3 Severance and restructuring expenses and acquisition and integration related expenses 0.1 0.5 0.2 0.3 Earnings from operations 3.1 2.3 3.1 3.1 Non-operating expense, net 0.5 0.4 0.5 0.3 Earnings before income taxes 2.6 1.9 2.6 2.8 Income tax expense 0.6 0.5 0.6 0.7 Net earnings 2.0 % 1.4 % 2.0 % 2.1 % We generally experience some seasonal trends in our sales of IT hardware, software and services. Software sales are typically seasonally higher in our second quarter. Business clients, particularly larger enterprise businesses in the United States, tend to spend more in our fourth quarter and less in our first quarter. Sales to the federal government in the United States are often stronger in our third quarter, while sales in the state and local government and education markets are also stronger in our second quarter. Sales to public sector clients in the United Kingdom are often stronger in our first quarter. These trends create overall seasonality in our consolidated results such that net sales and profitability are expected to be higher in the second and fourth quarters of the year. Our gross profit across the business is, and will continue to be, impacted by partner incentives, which can change significantly in the amounts made available and in the related product or services sales being incentivized by the partner. Incentives from our largest partners are significant and changes in the incentives, which occur regularly, could impact our results of operations to the extent we are unable to adapt our sales strategies to optimize performance under the revised programs. 29 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Net Sales . Net sales for the three months ended September 30 , 2020 increased 1 % , year over year , to $ 1.9 b illion compared to the three months ended September 30 , 2019 . Without the addition of PCM to our core business, net sales for the third quarter of 2020 would have been down as a result of the negative impact of COVID-19. We believe t his negative trend in net sales may continue into the fourth quarter of 2020, when compared to the prior year. Net sales for the nine months ended September 30 , 2020 increased 11 % , year over year , to $ 6.0 billion compared to the nine months ended September 30 , 2019. Our net sales by operating segment were as follows for the three and nine months ended September 30 , 2020 and 201 9 (dollar s in thousands): Three Months Ended September 30, % Nine Months Ended September 30, % 2020 2019 Change 2020 2019 Change North America $ 1,558,168 $ 1,515,162 3 % $ 4,771,696 $ 4,163,110 15 % EMEA 341,280 355,708 (4 %) 1,152,183 1,125,057 2 % APAC 37,030 41,677 (11 %) 125,385 145,867 (14 %) Consolidated $ 1,936,478 $ 1,912,547 1 % $ 6,049,264 $ 5,434,034 11 % Our net sales by offering category for North America for the three and nine months ended September 30, 2020 and 2019 were as follows (dollars in thousands): Three Months Ended September 30, % Nine Months Ended September 30, % Sales Mix 2020 2019 Change 2020 2019 Change Hardware $ 1,028,045 $ 1,020,083 1 % $ 3,180,501 $ 2,704,212 18 % Software 306,925 295,730 4 % 898,290 907,683 (1 %) Services 223,198 199,349 12 % 692,905 551,215 26 % $ 1,558,168 $ 1,515,162 3 % $ 4,771,696 $ 4,163,110 15 % Net sales in North America increased 3%, or $43.0 million, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, primarily driven by the addition of PCM, partially offset by the negative impact of COVID-19 on demand for hardware and certain services. Net sales of hardware, software and services increased 1%, 4% and 12%, respectively, year over year. The changes for the three months ended September 30, 2020 were the result of the following: • The increase in hardware net sales was due to the addition of PCM, which was partially offset by lower volume of sales to large enterprise and corporate clients. The decrease in volume of sales was largely due to decreased demand associated with client responses to COVID-19. • The increase in software net sales was primarily due to the addition of PCM, partially offset by continued migration of software to the cloud, reported net in services net sales. • The increase in services net sales was primarily due to an increase in net sales associated with cloud solution offerings and higher sales of Insight delivered services, including the addition of PCM. These increases were partially offset by decreases in demand for certain services due to the impact of COVID-19. Net sales in North America increased 15%, or $608.6 million, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily driven by the addition of PCM, partially offset by the negative impact of COVID-19 on demand for hardware and certain services. Net sales of hardware and services increased 18% and 26%, respectively, year over year. Net sales of software declined 1%, year to year. 30 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The net changes for the first nine months of 2020 were the result of the following: • The increase in hardware net sales was due to the addition of PCM and higher volume of sales to large enterprise and corporate clients. The net increase in volume of sales was largely due to increases in the first quarter of 2020 due to increased demand for work-from-home and collaboration solutions as companies responded to shelter in place mandates, which was partially offset by decreases in volume of sales in the second and third quarters associated with client responses to COVID-19. • The decrease in software net sales was due to a significant transaction in the prior year with no comparable activity in the current year and continued migration of software to the cloud, which was partially offset by the addition of PCM. • The increase in services net sales was primarily due to higher sales of Insight delivered services, including the addition of PCM and an increase in net sales associated with cloud solution offerings. These increases were partially offset by decreases in demand for certain services due to the impact of COVID-19. Our net sales by offering category for EMEA for the three and nine months ended September 30, 2020 and 2019 were as follows (dollars in thousands): Three Months Ended September 30, % Nine Months Ended September 30, % Sales Mix 2020 2019 Change 2020 2019 Change Hardware $ 138,685 $ 137,416 1 % $ 466,909 $ 451,892 3 % Software 165,301 186,839 (12 %) 553,164 560,073 (1 %) Services 37,294 31,453 19 % 132,110 113,092 17 % $ 341,280 $ 355,708 (4 %) $ 1,152,183 $ 1,125,057 2 % Net sales in EMEA decreased 4%, or $14.4 million, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. Excluding the effects of fluctuating foreign currency exchange rates, net sales in EMEA decreased 8%, year to year. Net sales of hardware and services increased 1% and 19%, respectively, year over year. Net sales of software declined 12% year to year. The net changes for the three months ended September 30, 2020 were the result of the following: • The increase in hardware net sales was due primarily to higher volume sales of devices to public sector clients. • The decrease in software net sales was due to lower volume of sales to large enterprise clients and continued migration of software to the cloud. • The increase in services net sales was due primarily to higher sales of cloud solutions and higher volume sales of Insight delivered services. Net sales in EMEA increased 2%, or $27.1 million, for the first nine months of 2020 compared to the first nine months of 2019. Excluding the effects of fluctuating foreign currency exchange rates, net sales in EMEA increased 3%, year to year. Net sales of hardware and services increased 3% and 17% year over year, respectively. Net sales of software declined 1%, year to year. The net changes for the first nine months of 2020 were the result of the following: • The increase in hardware net sales was due primarily to higher volume sales of devices to corporate and public sector clients. • The decrease in software net sales was due to lower volume of sales to large enterprise and continued migration of software to the cloud, partially offset by higher volume of sales to corporate and public sector clients. 31 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) • The increase in services net sales was due primarily to higher sales of cloud solutions, increased software referral fees and higher volume sales of Insight delivered services. Our net sales by offering category for APAC for the three and nine months ended September 30, 2020 and 2019 were as follows (dollars in thousands): Three Months Ended September 30, % Nine Months Ended September 30, % Sales Mix 2020 2019 Change 2020 2019 Change Hardware $ 6,421 $ 9,243 (31 %) $ 21,001 $ 25,740 (18 %) Software 16,191 19,569 (17 %) 62,952 80,287 (22 %) Services 14,418 12,865 12 % 41,432 39,840 4 % $ 37,030 $ 41,677 (11 %) $ 125,385 $ 145,867 (14 %) Net sales in APAC decreased 11%, or $4.6 million, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. Excluding the effects of fluctuating foreign currency exchange rates, net sales in APAC decreased 13%, year to year. Net sales of hardware and software decreased by 31% and 17%, respectively, year to year. Net sales of services increased by 12%, year over year. The net changes for the three months ended September 30, 2020 were the result of the following: • The decrease in hardware net sales was primarily the result of lower volume of sales due to decreased demand associated with client responses to COVID-19. • The decrease in software net sales was primarily due to lower volume sales to large enterprise clients. • The increase in services net sales was primarily due to higher sales of Insight delivered services. Net sales in APAC decreased 14%, or $20.5 million, for the first nine months of 2020 compared to the first nine months of 2019. Excluding the effects of fluctuating foreign currency exchange rates, net sales in APAC decreased 11%, year to year. Net sales of hardware and software decreased by 18% and 22%, respectively, year to year. Services net sales increased 4% year over year. The net changes for the first nine months of 2020 were the result of the following: • The decrease in hardware net sales was primarily the result of lower volume of sales due to decreased demand associated with client responses to COVID-19. • The decrease in software net sales was primarily due to the loss of a significant public sector client and lower volume sales to large enterprise clients. • The increase in services net sales was primarily due to higher sales of Insight delivered services. 32 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) T he percentage of net sales by category for North America, EMEA and APAC were as follows for the three and nine months ended September 30 , 2020 and 201 9 : North America EMEA APAC Three Months Ended September 30, Three Months Ended September 30, Three Months Ended September 30, Sales Mix 2020 2019 2020 2019 2020 2019 Hardware 66 % 67 % 41 % 39 % 17 % 22 % Software 20 % 20 % 48 % 52 % 44 % 47 % Services 14 % 13 % 11 % 9 % 39 % 31 % 100 % 100 % 100 % 100 % 100 % 100 % North America EMEA APAC Nine Months Ended September 30, Nine Months Ended September 30, Nine Months Ended September 30, Sales Mix 2020 2019 2020 2019 2020 2019 Hardware 67 % 65 % 41 % 40 % 17 % 18 % Software 19 % 22 % 48 % 50 % 50 % 55 % Services 14 % 13 % 11 % 10 % 33 % 27 % 100 % 100 % 100 % 100 % 100 % 100 % Gross Profit . Gross profit increased 11%, or $31.4 million, for the three months ended September 30, 2020 , compared to the three months ended September 30, 2019 , with gross margin increasing approximately 150 basis points to 15.9% for the three months ended September 30, 2020 compared to 14.4% for the three months ended September 30, 2019. Gross profit increased 20%, or $157.2 million, in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 , with gross margin increasing approximately 110 basis points to 15.8% for the first nine months of 2020 compared to 14.7% for the first nine months of 2019. Our gross profit and gross profit as a percentage of net sales by operating segment were as follows for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 % of Net Sales 2019 % of Net Sales 2020 % of Net Sales 2019 % of Net Sales North America $ 247,168 15.9 % $ 218,644 14.4 % $ 748,992 15.7 % $ 600,310 14.4 % EMEA 50,300 14.7 % 47,891 13.5 % 177,254 15.4 % 169,324 15.1 % APAC 10,095 27.3 % 9,660 23.2 % 31,042 24.8 % 30,482 20.9 % Consolidated $ 307,563 15.9 % $ 276,195 14.4 % $ 957,288 15.8 % $ 800,116 14.7 % North America’s gross profit for the three months ended September 30, 2020 increased $28.5 million, or 13%, compared to the three months ended September 30, 2019. As a percentage of net sales, gross margin increased approximately 150 basis points to 15.9% for the third quarter of 2020 . The year over year improvement in gross margin was primarily attributable to the following: • An increase in product margin, which includes partner funding and freight, of 51 basis points and an increase in margin from services net sales of 92 basis points compared to the same period in the prior year. • The increase in product margin is primarily the result of higher volume of hardware sales from the addition of PCM and sales of hardware for the core North America business at higher margins than in the same period in the prior year . • The increase in margin from services net sales during the current quarter reflects an expansion in margin from cloud solutions and other services that are recorded net . 33 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) North America’s gross profit for the nine months ended September 30 , 20 20 increased $ 148.7 million, or 25 %, compared to the nine months ended September 30 , 201 9 . As a percentage of net sales, gross margin increased approximately 13 0 basis points to 15.7 % for the first nine months of 20 20 . The year over year improvement in gross margin was primarily attributable to the following: • A net increase in product margin, which includes partner funding and freight, of 68 basis points and an increase in margin from services net sales, which contributed 60 basis points of the margin expansion. • The increase in product margin is primarily the result of higher volume of hardware sales from the addition of PCM and sales of hardware for the core North America business at higher margins than in the same period in the prior year . This increase was partially offset by a contraction in margin on software net sales. • The increase in margin from services net sales during the first nine months of 2020 resulted from a higher volume of Insight delivered services at higher margins and a higher volume of cloud solutions that are recorded net . EMEA’s gross profit for the three months ended September 30, 2020 increased $2.4 million, or 5%, year over year (remaining flat when excluding the effects of fluctuating foreign currency exchange rates), compared to the three months ended September 30, 2019. As a percentage of net sales, gross margin increased approximately 120 basis points, year over year. The year over year net improvement in gross margin was primarily attributable to an increase in higher margin services net sales, which contributed 82 basis points of the margin expansion, together with a net increase in product margin, which includes partner funding and freight, of 46 basis points. EMEA’s gross profit for the nine months ended September 30, 2020 increased $7.9 million, or 5% (also 5% excluding the effects of fluctuating foreign currency exchange rates), compared to the first nine months of 2019. As a percentage of net sales, gross margin increased approximately 30 basis points, year over year. The year over year improvement in gross margin was primarily attributable to a net increase in services margin of 35 basis points. APAC’s gross profit for the three months ended September 30, 2020 increased $435,000, or 5%, compared to the three months ended September 30, 2019 (increasing 2% when excluding fluctuating foreign currency exchange rates). As a percentage of net sales, gross margin increased approximately 410 basis points, year over year. The increase in gross margin in the third quarter of 2020 compared to the third quarter of 2019 was due to an increase in gross margin on services net sales, including cloud solutions and Insight delivered services, of 421 basis points. APAC’s gross profit for the first nine months of 2020 increased $560,000, or 2%, compared to the first half of 2019 (increasing 5% excluding fluctuating foreign currency exchange rates). As a percentage of net sales, gross margin increased approximately 390 basis points, year over year. The increase in gross margin in the first nine months of 2020 compared to the first nine months of 2019 was due to an increase in gross margin on services net sales, including cloud solutions and Insight delivered services, of 394 basis points. 34 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 $21.9 million, or 10%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 . Selling and administration expenses increased $142.8 million, or 23%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. Our selling and administrative expenses by major expense type for the three and nine months ended September 30, 2020 and 2019 were as follows (dollars in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Personnel costs, including teammate benefits $ 190,451 $ 174,598 $ 576,910 $ 483,015 Depreciation and amortization 15,506 10,479 49,422 28,105 Facility expenses 9,378 7,860 29,769 21,042 Legal and professional fees 7,832 4,583 19,665 12,417 Travel and entertainment 1,449 7,379 9,957 20,225 Marketing 1,835 2,507 7,917 7,786 Other 18,704 15,809 62,958 41,177 Total $ 245,155 $ 223,215 $ 756,598 $ 613,767 Selling and administrative expenses increased approximately 100 basis points as a percentage of net sales in the third quarter of 2020 compared to the third quarter of 2019. The overall net increase in selling and administrative expenses reflects a $15.9 million net increase in personnel costs, including teammate benefits expenses primarily due to increased headcount, reflecting the acquisition of PCM in August 2019. There was also an increase in depreciation and amortization, legal and professional fees, other and facility expenses of $5.0 million, $3.2 million, $2.9 million and $1.5 million, respectively, primarily as a result of PCM. These increased costs were partially offset by decreases in travel and entertainment costs of $5.9 million reflecting cost control measures taken in response to COVID-19. Selling and administrative expenses increased approximately 120 basis points as a percentage of net sales in the first nine months of 2020 compared to the first nine months of 2019. The overall net increase in selling and administrative expenses reflects a $93.9 million increase in personnel costs, including teammate benefits expenses primarily due to increased headcount, including the acquisition of PCM. There was also an increase in other expenses, depreciation and amortization, facility expenses and legal and professional fees of $21.8 million, $21.3 million, $8.7 million and $7.2 million, respectively, primarily as a result of PCM. These increased costs were partially offset by decreases in travel and entertainment costs of $10.3 million reflecting cost control measures taken in response to COVID-19. Severance and Restructuring Expenses. During the three months ended September 30, 2020, we recorded severance expense, net of adjustments, of approximately $808,000. During the nine months ended September 30, 2020, we recorded severance expense, net of adjustments, of approximately $10.0 million. The charges in all three operating segments primarily related to a realignment of certain roles and responsibilities and for North America and EMEA, the acquisition of PCM. Current period charges were partially offset by adjustments for changes in estimates of previous accruals as cash payments were made. Comparatively, during the three months ended September 30, 2019, we recorded severance expense, net of adjustments, of approximately $2.7 million. For the nine months ended September 30, 2019, we recorded severance expense, net of adjustments, of approximately $3.7 million. 35 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Earnings from Operations . Earnings from operations increased 38 %, or $ 17.1 million, for the three months ended September 30 , 2020 , compared to the three months ended September 30 , 2019 . Earnings from operations in creased 9 %, or $ 15.0 million, for the nine months ended September 30 , 2020 , compared to the nine months ended September 30 , 2019 . Our earnings from operations and earnings from operations as a percentage of net sales by operating segment were as follows for the three and nine months ended September 30 , 2020 and 2019 (dollars in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 % of Net Sales 2019 % of Net Sales 2020 % of Net Sales 2019 % of Net Sales North America $ 54,244 3.5 % $ 39,306 2.6 % $ 148,653 3.1 % $ 135,550 3.3 % EMEA 4,843 1.4 % 3,110 0.9 % 31,073 2.7 % 29,631 2.6 % APAC 2,395 6.5 % 2,006 4.8 % 8,807 7.0 % 8,397 5.8 % Consolidated $ 61,482 3.2 % $ 44,422 2.3 % $ 188,533 3.1 % $ 173,578 3.2 % North America’s earnings from operations for the three months ended September 30, 2020 increased $14.9 million, or 38%, compared to the three months ended September 30, 2019. As a percentage of net sales, earnings from operations increased by approximately 90 basis points to 3.5%. The increase in earnings from operations was primarily driven by an increase in gross profit and decrease in acquisition and integration related expenses, partially offset by increases in selling and administrative expenses when compared to the three months ended September 30, 2019. North America’s earnings from operations for the nine months ended September 30, 2020 increased $13.1 million, or 10%, compared to the nine months ended September 30, 2019. As a percentage of net sales, earnings from operations decreased by approximately 20 basis points to 3.1%. 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 when compared to the nine months ended September 30, 2019. EMEA’s earnings from operations for the three months ended September 30, 2020 increased $1.7 million, or 56%, compared to the three months ended September 30, 2019. As a percentage of net sales, earnings from operations increased by approximately 50 basis points to 1.4%. The increase in earnings from operations was primarily driven by an increase in gross profit, partially offset by the increase in selling and administrative expenses compared to the three months ended September 30, 2019. EMEA’s earnings from operations for the nine months ended September 30, 2020 increased $1.4 million, or 5%, compared to the nine months ended September 30, 2019. As a percentage of net sales, earnings from operations increased by approximately 10 basis points to 2.7%. The increase in earnings from operations was primarily driven by an increase in gross profit, partially offset by the increase in selling and administrative expenses compared to the nine months ended September 30, 2019. APAC’s earnings from operations for the three months ended September 30, 2020 increased $389,000, or 19%, compared to the three months ended September 30, 2019. As a percentage of net sales, earnings from operations increased by approximately 170 basis points to 6.5%. The increase in earnings from operations was primarily driven by an increase in gross profit when compared to the three months ended September 30, 2019. APAC’s earnings from operations for the nine months ended September 30, 2020 increased $410,000, or 5%, compared to the nine months ended September 30, 2019. As a percentage of net sales, earnings from operations increased by approximately 120 basis points to 7.0%. The increase in earnings from operations reflects an increase in gross profit and reduction in severance and 36 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) restructuring expenses , partially offset by an increase in selling and administrative expenses when compared to the nine months ended September 30 , 2019. 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 our convertible senior notes, partially offset by interest income generated from interest earned on cash and cash equivalent bank balances. Interest expense, net for the three months ended September 30, 2020 increased 18%, or $1.4 million, compared to the three months ended September 30, 2019. Interest expense, net for the nine months ended September 30, 2020 increased 88%, or $14.6 million, compared to the nine months ended September 30, 2019. The increase was due primarily to higher average daily balances under our ABL facility in comparison to our facilities in the prior year and imputed interest under our convertible senior notes. The higher average daily balances under our ABL facility are largely the result of the PCM acquisition. Imputed interest under our convertible senior notes, which were issued in August 2019, was $2.6 million and $7.6 million for the three and nine months ended September 30, 2020, respectively. Imputed interest under our convertible senior notes was $1.2 million for both the three and nine months ended September 30, 2019. Imputed interest under our inventory financing facilities was $3.2 million and $8.8 million for the three and nine months ended September 30, 2020, respectively, compared to $2.7 million and $8.6 million for the three and nine months ended September 30, 2019, respectively. The increases were a result of expanded use of the facilities, including the addition of PCM, in part as a result of extended payment terms during the 2020 periods. For a description of our various financing facilities, see Note 5 to our Consolidated Financial Statements in Part I, Item 1 of this report. Income Tax Expense. Our effective tax rate of 23.8% for the three months ended September 30, 2020 was lower than our effective tax rate of 27.2% for the three months ended September 30, 2019. The decrease in our effective tax rate for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was due to the rate impact of acquisition-related costs which did not recur in 2020 and the beneficial impact of certain income tax regulations issued during the current quarter. Our effective tax rate of 23.8% for the nine months ended September 30, 2020 was lower than our effective tax rate of 25.4% for the nine months ended September 30, 2019. The decrease in our effective tax rate for the first nine months of 2020 compared to the first nine months of 2019 was due primarily to the remeasurement of acquired net operating losses to be carried back to higher tax rate years under the CARES Act and the rate impact of acquisition-related costs which did not recur in 2020. 37 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 the nine months ended September 30, 2020 and 2019 (in thousands): Nine Months Ended September 30, 2020 2019 Net cash provided by operating activities $ 462,094 $ 168,595 Net cash used in investing activities (12,875 ) (681,209 ) Net cash (used in) provided by financing activities (489,087 ) 514,442 Foreign currency exchange effect on cash, cash equivalent and restricted cash balances 718 (3,960 ) Decrease in cash, cash equivalents and restricted cash (39,150 ) (2,132 ) Cash, cash equivalents and restricted cash at beginning of period 116,297 144,293 Cash, cash equivalents and restricted cash at end of period $ 77,147 $ 142,161 Cash and Cash Flow • Our primary uses of cash during the nine months ended September 30, 2020 were to pay down our debt balances and to fund our working capital requirements. • Operating activities provided $462.1 million in cash during the nine months ended September 30, 2020, compared to $168.6 million during the nine months ended September 30, 2019 partially driven by a non-recurring item in the third quarter of 2020. In the fourth quarter of 2020, we expect that this non-recurring item will reverse, and we will use cash from operating activities for the quarter. Our cash cycle is inverted which allows us to generate more cash flows from operating activities in sequential periods of declining sales, particularly of our hardware offerings. • We had net borrowings under our inventory financing facilities of $114.3 million during the nine months ended September 30, 2020, compared to net repayments of $96.5 million during the nine months ended September 30, 2019. • Net repayments under our ABL facility during the nine months ended September 30, 2020 were $570.9 million. Net borrowings under our ABL facility and our prior senior revolving credit facility and ABS facility combined during the nine months ended September 30, 2019 were $338.2 million. • Capital expenditures were $20.7 million and $16.9 million for the nine months ended September 30, 2020 and 2019, respectively. • We acquired vNext in February 2020 for $6.4 million and received proceeds from the sale of a property held for sale of $14.2 million in the nine months ended September 30, 2020. • During the nine months ended September 30, 2020, we repurchased an aggregate of $25.0 million of our common stock, pursuant to a repurchase program approved in February 2020. During the nine months ended September 30, 2019, we repurchased an aggregate of $27.9 million of our common stock We expect that cash flows from operations, together with the funds available under our financing facilities, will be adequate to support our presently anticipated cash and working capital requirements for operations over the next 12 months. We believe that we have a strong balance sheet and healthy liquidity position. The Company had capacity of up to $1.2 billion under our ABL facility as of September 30, 2020. For the remainder of 2020, we plan to be prudent in our use of cash, deferring discretionary capital investments and using available cash to fund business operations and pay down our inventory financing facilities. 38 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Net cash provided by operating activities • Cash flow from operating activities in the first nine months of 2020 was $462.1 million compared to $168.6 million in the first nine months of 2019. • The increase in cash flow from operating activities was partially driven by a non-recurring item in the third quarter of 2020. A payment of $107.0 million that was due to be paid to a partner in the third quarter of 2020 was deferred in response to COVID-19 and will be paid in the fourth quarter of 2020. Our cash cycle is inverted which allows us to generate more cash flows from operating activities in sequential periods of declining sales, particularly of our hardware offerings. • The significant decreases in both other assets and accrued expenses and other liabilities for the three months ended September 30, 2020 resulted from a single significant transaction in 2019 with no comparable activity in the current year. Our consolidated cash flow operating metrics were as follows: Three Months Ended September 30, 2020 2019 Days sales outstanding in ending accounts receivable (“DSOs”) (a) 108 111 Days inventory outstanding (“DIOs”) (b) 10 11 Days purchases outstanding in ending accounts payable (“DPOs”) (c) (93 ) (80 ) Cash conversion cycle (days) (d) 25 42 (a) Calculated as the balance of current accounts receivable, net at the end of the quarter divided by daily net sales. Daily net sales is calculated as net sales for the quarter divided by 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 quarter plus inventories at the end of the quarter divided by two. Daily costs of goods sold is calculated as costs of goods sold for the quarter divided by 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 quarter divided by daily costs of goods sold. Daily costs of goods sold is calculated as costs of goods sold for the quarter divided by 92 days. (d) Calculated as DSOs plus DIOs, less DPOs. • Our cash conversion cycle was 25 days in the third quarter of 2020, down 17 days from the third quarter of 2019. • The net changes were a result of a 3 day decrease in DSOs, a 1 day decrease in DIOs and a 13 day increase in DPOs. Excluding the impacts of software netting, the decrease in DSOs was due to better collections experience on our accounts receivable. Excluding the impacts of software netting, the increase in DPOs was primarily due to the extension of terms (certain of which are temporary) on our inventory financing facilities and timing of transactions during the respective quarters, including deferral of payments to certain partners in response to COVID-19. • We expect that cash flow from operations will be used, at least partially, to fund working capital as we typically pay our partners on average terms that are shorter than the average terms we grant to our clients to take advantage of supplier discounts. • We intend to use cash generated in the remainder of 2020 in excess of working capital needs, given current market conditions, to pay down our inventory financing facilities. 39 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Net cash used in investing activities • Capital expenditures were $20.7 million and $16.9 million for the nine months ended September 30, 2020 and 2019, respectively. • We acquired vNext in February 2020 for $6.4 million and received proceeds from the sale of a property held for sale of $14.2 million in the first nine months of 2020. • We expect capital expenditures for the full year 2020 to be in a range of up to $25.0 million, of which approximately $1.0 million will be used to ready our global corporate headquarters, and the remaining amount will be used primarily for technology-related upgrade projects. • We have decided to defer the buildout of our new global corporate headquarters until early 2021. Net cash (used in) provided by financing activities • During the nine months ended September 30, 2020, we had net repayments under our ABL facility that decreased our outstanding long-term debt balance by $570.9 million. • During the nine months ended September 30, 2019, we had net combined borrowings under our ABL facility, our prior senior revolving credit facility and our ABS facility that increased our outstanding long-term debt balance by $338.2 million. • We had net borrowings under our inventory financing facilities of $114.3 million during the nine months ended September 30, 2020 compared to net repayments of $96.5 million during the nine months ended September 30, 2019. • During the nine months ended September 30, 2020, we repurchased an aggregate of $25.0 million of our common stock, pursuant to a repurchase program approved in February 2020. In comparison, during the nine months ended September 30, 2019, we repurchased an aggregate of $27.9 million of our common stock. Financing Facilities Our debt balance as of September 30, 2020 was $296.1 million, including our finance lease obligations for certain IT equipment and other financing obligations. • Our objective is to pay our debt balances down while retaining adequate cash balances to meet overall business objectives. • Our convertible senior notes are subject to certain events of default and certain acceleration clauses. As of September 30, 2020, 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 September 30, 2020, we were in compliance with all such covenants. We also have agreements with financial intermediaries to facilitate the purchase of inventory from various suppliers under certain terms and conditions. • These amounts are classified separately as accounts payable – inventory financing facilities in our consolidated balance sheets. • Our inventory financing facilities have an aggregate availability for vendor purchases of $500.0 million, of which $368.0 million was outstanding at September 30, 2020. 40 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Undistributed Foreign Earnings Cash and cash equivalents held by foreign subsidiaries are generally subject to U.S. income taxation upon repatriation to the United States. As of September 30, 2020, we had approximately $56.7 million in cash and cash equivalents in certain of our foreign subsidiaries, primarily residing in Australia, Canada and the Netherlands. Certain of these cash balances will be remitted to the United States by paying down intercompany payables generated in the ordinary course of business or through actual dividend distributions. Off-Balance Sheet Arrangements We have entered into off-balance sheet arrangements, which include indemnifications. The indemnifications are discussed in Note 10 to the Consolidated Financial Statements in Part I, Item 1 of this report and such discussion is incorporated by reference herein. We believe that none of our off-balance sheet arrangements have, or are reasonably likely to have, a material current or future effect on our business, financial condition or results of operations. Recently Issued Accounting Standards The information contained in Note 1 to the Consolidated Financial Statements in Part I, Item 1 of this report concerning a description of recently issued accounting standards which affect or may affect our financial statements, including our expected dates of adoption and the estimated effects on our results of operations and financial condition, is incorporated by reference herein. Contractual Obligations There have been no material changes in our reported contractual obligations, as described under “Contractual Obligations” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019. 41 INSIGHT ENTERPRISES, INC.