What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-17 compared with 2020-02-21 · 205 added, 140 removed, 253 unchanged (58% of the section changed)

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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 to our “core” business exclude PCM’s results subsequent to the PCM acquisition.

Today, every business is a technology business.

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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.

As a Fortune 500-ranked global provider of digital innovation, cloud/data center transformation, connected workforce solutions, together with our supply chain optimization expertise, 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.

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Full year 2020 financial and operational highlights included the following:

We generated growth in earnings from operations on a consolidated basis and in our North America and EMEA reporting segments.

We grew our services business by 20% on a consolidated basis with growth in each of our reporting segments.

We generated growth in earnings from operations on a consolidated basis in each of our reporting segments.

We grew our services net sales by 17% on a consolidated basis with growth in each of our reporting segments.

We generated cash flows from operations of $355.6 million.

We completed the acquisition of PCM on August 30, 2019 and commenced the integration of IT systems and back office operations which we expect to complete in 2020.

The Company completed the integration of the PCM business, including onboarding PCM clients to its systems.

The Company has aligned its go-to-market structure in North America and EMEA and believes it is well positioned to compete as a single brand in the marketplace.

The Company also began to realize some benefits of its real estate consolidation efforts.

On a consolidated basis, for the year ended December 31, 2020:

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Consolidated gross margin improved approximately 90 basis points to 15.6% of net sales in 2020.

This increase reflects growth in services net sales and gross profit together with the impact of PCM from August 30, 2019.

This increase reflects growth in services net sales.

Earnings from operations increased to $271.6 million in 2020, up 13% compared to the prior year, which represented 3.3% of net sales.

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The results of operations for 2020 include the following items:

the results of the acquisition of PCM, effective August 30, 2019;

transaction costs totaling $11.3 million, $9.9 million net of tax, associated with the acquisition of PCM;

the results of the acquisition of PCM for the full year in 2020;

the results of the acquisition of vNext, effective February 28, 2020;

transaction costs totaling $2.2 million and $1.6 million net of tax, associated with the acquisition of PCM and vNext, respectively;

severance and restructuring expenses of $12.4 million, $9.3 million net of tax;

the repurchase of approximately 445,000 shares of the Company’s common stock for an aggregate of $25.0 million.

the impact of the adoption of FASB Topic 842 (“Topic 842”), effective January 1, 2019, resulting in the recording of net operating lease right-of-use assets and lease liabilities of $65.9 million and $70.5 million, respectively.

INSIGHT ENTERPRISES, INC.

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The results of operations for 2019 include the following items:

the results of the acquisition of PCM, effective August 30, 2019;

transaction costs totaling $11.3 million, $9.9 million net of tax, associated with the acquisition of PCM;

severance and restructuring expenses of $5.4 million, $4.0 million net of tax;

the repurchase of approximately 541,000 shares of the Company’s common stock for an aggregate of $27.9 million;

The results of operations for 2018 include the following items:

the impact of the adoption of FASB Topic 606 (“Topic 606”);

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the repurchase of approximately 641,000 shares of the Company’s common stock for an aggregate of $22.0 million.

The results of operations for 2017 include the following items:

the results of the acquisitions of Caase.com and Datalink, from their respective acquisition dates;

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 million, $7.3 million net of tax;

incremental income tax expense related to U.S.

federal tax reform of $13.4 million;

the loss on the sale of our Russia business totaling $3.6 million.

Impact of COVID-19 to our Business

On March 11, 2020, the World Health Organization declared a new strain of the coronavirus (“COVID-19”) a pandemic.

Throughout the pandemic, we have prioritized the safety and well-being of our teammates and have ensured that they feel supported during these uncertain times.

When COVID-19 forced the closure of most of Insight’s workplaces in March 2020, we quickly enabled remote work for roughly 10,000 teammates.

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, limiting the number of teammates attending in-person meetings, reducing the number of people in our locations at any one time, and suspending most teammate travel.

At various points throughout 2020, governments around the world 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.

While government actions have changed in certain countries, the measures taken by the Company to prioritize the safety and well-being of our teammates were in place for most 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 observed a pronounced impact of COVID-19 on our 2020 financial results when compared to internal expectations and anticipate demand for our products and services may continue to be impacted going into 2021 as clients continue to evaluate the impact of COVID-19 on their businesses, their profitability and their liquidity.

Although we exited 2020 with slightly elevated bookings going into the first quarter of 2021, continued impacts of COVID-19 and supply challenges could diminish the effect this has on our financial results.

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 temporarily to help offset some of these business impacts.

In the second half 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 plan to continue to invest in this area so that we are positioned well to compete in the marketplace in 2021, when we expect the IT market will start to recover.

We paid down most of our debt under our ABL facility during the year 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 senior secured revolving credit facility (the “ABL facility”), of which $1.1 billion was available as of December 31, 2020.

INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

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 resume.

We will continue to actively monitor the COVID-19 situation and will take 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 effects of any such potential alterations or modifications may have on our business, including the effects on our clients, teammates, and prospects, or on our financial results for 2021.

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.

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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 2019, we generated $127.9 million of cash from operating activities, we utilized $664.3 million, net of cash and cash equivalents acquired to fund our acquisition of PCM and for the final working capital and tax true up paid for Cardinal.

We borrowed $550.0 million under our new senior secured revolving credit facility (the “ABL facility”) and received $341.3 million from the issuance of our convertible senior notes.

During 2020, we generated $355.6 million of cash from operating activities and primarily utilized cash to repay our debt.

We repaid $431.4 million under our senior secured revolving credit facility (the “ABL facility”).

We ended the year with $128.3 million of cash and cash equivalents and $436.4 million of debt outstanding under our long-term debt facilities.

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RESULTS OF OPERATIONS

The COVID-19 pandemic has negatively impacted the global economy and has disrupted global supply chains and workforce participation.

We observed an impact on our 2020 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 years ended December 31, 2020, 2019 and 2018:

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These changes could impact our results of operations to the extent we are unable to shift our focus and respond to them.

For a discussion of risks associated with our reliance on partners, see “Risk Factors – 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.

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.

2020 Compared to 2019

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North America

Our net sales by offering category for North America for 2019 and 2018, were as follows (dollars in thousands):

North America

Net sales in North America increased 12%, or $661.3 million, in 2019 compared to 2018.

This increase reflects the addition of PCM, which reported $716.1 million in net sales in 2019, partially offset by a decline in net sales of the core business of $51.3 million.

Net sales of hardware, software and services increased 10%, 14% and 25%, respectively, year over year.

INSIGHT ENTERPRISES, INC.

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AND RESULTS OF OPERATIONS (continued)

The increases year over year were the result of the following:

PCM accounted for the higher volume of hardware net sales in 2019 compared to 2018.

This was partially offset by lower volume of hardware net sales to large enterprise clients in the core business due to a slow-down of the device refresh cycle.

PCM accounted for approximately 70% of the year over year increase in software net sales.

In our core business there was also an increase in software net sales as a result of a significant transaction during the first quarter of 2019 with a large enterprise client, with no comparable transaction in the same quarter in the prior year.

PCM accounted for approximately 56% of the year over year increase in services net sales.

In our core business, application related services net sales which is part of our digital innovation solution area accounted for approximately 30% of the increase in services net sales, including the acquisition of Cardinal Solutions which we completed in the third quarter of 2018.

The trend toward higher sales of cloud solution offerings continued, as did, higher software aintenance sales and increases in supplier reimbursements that are recorded on a net sales recognition basis.

These were offset partially by declines in warranty net sales and consulting and managed services net sales in our core business.

Our net sales by offering category for North America for 2020 and 2019, were as follows (dollars in thousands):

North America

Net sales in North America increased 10%, or $590.7 million, in 2020 compared to 2019.

This increase reflects the inclusion of PCM for the full year in 2020, partially offset by a decline in net sales as a result of the negative impacts of COVID-19 on demand for hardware.

Net sales of hardware and services increased 12% and 17%, respectively, year over year with net sales of software declining 1%, year to year.

The net changes year over year were primarily the result of the following:

PCM largely accounted for the higher volume of hardware net sales in 2020 compared to 2019, reflecting a full year of net sales in 2020 compared to only four months in 2019.

This was partially offset by lower volume of hardware net sales due to the impacts of COVID-19 on client demand and certain supply challenges.

The increase in services net sales was primarily due to higher volume of sales of Insight delivered services, reflecting the addition of PCM and the continued trend toward higher sales of cloud solution offerings.

Increases in software maintenance, warranty and supplier reimbursements that are recorded on a net sales recognition basis within services net sales also contributed to the increase.

The decrease in software net sales was primarily due to the migration towards cloud solution offerings.

Our net sales by offering category for EMEA for 2020 and 2019, were as follows (dollars in thousands):

Net sales in EMEA remained flat (increased 5% excluding the effects of fluctuating foreign currency exchange rates), or down $3.6 million, in 2019 compared to 2018.

Net sales of hardware declined 5%, year to year, while net sales of software and services were up 2% and 7%, respectively, year over year.

The changes were the result of the following:

Lower volume of net sales of networking solutions, partially offset by higher volume of net sales of devices, to large enterprise and public sector clients in hardware net sales.

Higher volume of software net sales to large enterprise and public sector clients.

Net sales in EMEA increased 2% (increased 1% excluding the effects of fluctuating foreign currency exchange rates), or up $28.6 million, in 2020 compared to 2019.

Net sales of services and software were up 18% and 1%, respectively, year over year, while net sales of hardware declined 1%, year to year.

The net changes were primarily the result of the following:

Higher volume of net sales of cloud solution offerings and increased software referral fees that are recorded on a net sales recognition basis.

In addition, there was an increase in the volume of Insight delivered services.

Our net sales by offering category for APAC for 2019 and 2018, were as follows (dollars in thousands):

Net sales in APAC decreased 4% (increased 2% excluding the effects of fluctuating foreign currency rates), or $6.7 million, in 2019 compared to 2018.

In APAC, increases in hardware and services net sales year over year were offset by a decrease in software net sales during 2019 compared to 2018.

The changes were the result of the following:

Continued expansion of hardware offerings in the APAC market resulted in higher net sales in this category.

Higher volume of software net sales to public sector clients, partially offset by the continued trend toward higher sales of cloud solution offerings that are recorded on a net sales recognition basis in the services net sales category.

Lower volume of net sales of storage hardware, reflecting lower volume of net sales to large enterprise clients.

This was partially offset by increases in net sales of devices, including higher net sales to public sector clients.

INSIGHT ENTERPRISES, INC.

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AND RESULTS OF OPERATIONS (continued)

Continued trend toward higher sales of cloud solution offerings that are recorded on a net sales recognition basis in the services net sales category resulted in declines in the software net sales category.

Our net sales by offering category for APAC for 20 20 and 201 9 , were as follows (dollars in thousands):

Net sales in APAC decreased 6% (decreased 4% excluding the effects of fluctuating foreign currency rates), or $9.9 million, in 2020 compared to 2019.

In APAC, decreases in software and hardware net sales of 11% and 9%, year to year, respectively were partially offset by an increase in services net sales of 6% during 2020 compared to 2019.

The net changes were primarily the result of the following:

Lower volume of software net sales primarily due to the loss of a significant public sector client in 2020 and lower volume sales to large enterprise clients.

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 also contributed to the decline in this sales category.

Lower volume of hardware net sales primarily as a result of decreased demand associated with client responses to COVID-19.

Higher volume of net sales of cloud solution offerings and software referral fees that are recorded on a net sales recognition basis positively impacted services net sales.

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A net increase in product margin, which includes partner funding and freight, of 34 basis points year over year.

This increase was due primarily to improvements in hardware and software product margin partially as a result of improvements in core business margins on product net sales and also as a result of PCM.

Services margin improvement year over year of 50 basis points was generated from increased vendor funding, cloud solution offerings and referral fees.

In addition, there was a 21 basis point improvement in margins from Insight delivered services.

This increase was primarily due to improvements in hardware product margin.

INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

Services margin improvement year over year of 64 basis points was generated from increased cloud solution offerings and an increase in I nsight delivered services at higher margins than in the prior year .

EMEA’s gross profit in 2020 increased 4% (increased 3% excluding the effects of fluctuating foreign currency exchange rates), compared to 2019.

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The improvement in gross margin for both EMEA and APAC in 2020 compared to 2019 was due primarily to changes in sales mix to higher margin products and services.

INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

While we expanded gross margins in 2020 compared to 2019, we expect that in future periods our gross margin expansion will be muted as our product mix returns to previous levels, including a higher mix of hardware sales with our large enterprise clients which typically carry lower margins.

Operating Expenses.

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Facility expenses

Travel and entertainment

Legal and professional fees

Travel and entertainment

Percentage of net sales

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The addition of PCM and increased variable compensation resulting from increased sales and gross profit in 2020 compared to 2019 were the primary drivers for the $98.1 million increase in personnel costs.

PCM was also the primary driver for year over year increases in facilities, travel and entertainment, and marketing expenses.

Depreciation and amortization expense increased approximately $8.8 million year over year, primarily due to additional amortization expense on newly acquired intangible assets.

Depreciation and amortization expense also increased approximately $16.9 million year over year, primarily due to additional amortization expense on our newly acquired intangible assets.

PCM was also the primary driver for year over year increases in other and facility expenses.

Legal and professional fees increased as a result of one-time project costs incurred in 2020 with no comparable activity in 2019.

These increased costs were partially offset by decreases in travel and entertainment and marketing costs reflecting cost control measures taken in response to COVID-19.

Severance and Restructuring Expenses.

During 2020, we recorded severance expense, net of adjustments, totaling $12.4 million.

The North America and EMEA charges related to severance actions taken to realign roles and responsibilities subsequent to the acquisition of PCM in August 2019, as well as a headcount reduction as part of cost reduction initiatives in the fourth quarter of 2019.

For 2019, charges were partially offset by immaterial adjustments for changes in estimates of previous accruals as cash payments were made during the year.

The charges in all three operating segments primarily related to a realignment of certain roles and responsibilities for North America and EMEA, and to the acquisition of PCM.

During 2019, we recorded severance expense, net of adjustments, totaling $5.4 million.

Acquisition-related Expenses .

During 2019, we incurred $11.3 million in direct third-party costs related to the acquisition of PCM.

Comparatively, during 2018, we incurred $282,000 in such costs related to the acquisition of Cardinal.

During 2020 and 2019, we incurred $2.2 million and $11.3 million, respectively, in direct third-party costs related to the acquisitions of PCM and vNext.

See Note 20 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)

Earnings from Operations.

Earnings from operations increased 13%, or $31.0 million, year over year, in 2020 compared 2019.

Our earnings from operations and earnings from operations as a percentage of net sales by operating segment were as follows for the year ended December 31, 2020 and 2019 (dollars in thousands):

North America

North America’s earnings from operations increased 15%, or $28.7 million, year over year, in 2020 compared to 2019.

As a percentage of net sales, earnings from operations increased by approximately 10 basis points to 3.3%.

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.

Acquisition and restructuring expenses also decreased $9.3 million in 2020 compared to 2019.

EMEA’s earnings from operations increased 1%, or $576,000, year over year, in 2020 compared to 2019.

As a percentage of net sales, earnings from operations remained flat with the prior year at 2.6%.

The increase in earnings from operations was primarily driven by an increase in gross profit, partially offset by the increase in selling and administrative expenses and severance and restructuring expenses in 2020 compared to 2019.

APAC’s earnings from operations increased 16% (increased 18% excluding the effects of fluctuating foreign currency exchange rates), or $1.7 million, year over year, in 2020 compared to 2019.

As a percentage of net sales, earnings from operations increased by more than 100 basis points to 7.1%.

The increase in earnings from operations reflects an increase in gross profit, partially offset by an increase in selling and administrative expenses in 2020 compared to 2019.

Non-Operating (Income) Expense.

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Interest expense, net primarily relates to borrowings under our financing facilities and imputed interest under our convertible notes and inventory financing facilities, partially offset by interest income generated from interest earned on cash and cash equivalent bank balances.

Interest expense increased 30%, or $6.8 million, in 2019 compared to 2018 due primarily to higher average daily balances under our debt facilities, in 2019 compared to 2018, while imputed interest under our inventory financing facilities increased $200,000 to $10.8 million in 2019 and imputed interest under our convertible senior notes was $3.7 million in 2019.

Interest expense increased 46%, or $13.1 million, in 2020 compared to 2019 due primarily to imputed interest under our convertible senior notes, higher average daily balances under our ABL facility and convertible senior notes in comparison to our facilities in the prior year and higher imputed interest on our inventory financing facilities.

Imputed interest under our convertible senior notes, which were issued in August 2019, was $10.2 million in 2020 compared to $3.7 million in 2019.

The higher average daily balances under our ABL facility and convertible senior notes in comparison to our facilities in the prior year were largely the result of the PCM acquisition and were substantially paid down in the later part of 2020.

Imputed interest under our inventory financing facilities increased $2.3 million due to higher average daily balances in 2020 compared to 2019.

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 2020.

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 Expense (Income), Net .

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Income Tax Expense .

Our effective ta x rate for 2019 was 24.7% compared to 22.8% in 2018.

The increase in the tax rate from 2018 to 2019 was primarily due to a non-recurring benefit recorded in 2018 to true-up provisional amounts related to U.S tax reform .

The effective tax rate in 2019 was higher than the federal statutory rate of 21.0% primarily due to state income taxes, net of federal income tax benefits, and higher taxes on earnings in foreign jurisdictions.

These increases to the federal statutory rate in 2019 were offset partially by decreases in the valuation allowance in certain foreign jurisdictions and the recognition of tax benefits, net of reserves, related to research and development activities.

See No te 11 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of income tax expense.

Our effective tax rate for 20 20 was 24.

4 % compared to 2 4 .

7 % in 201 9 .

The de crease in the tax rate from 201 9 to 20 20 was primarily due to the remeasurement of certain state deferred tax liabilities as well as acquired net operating losses to be carried back to higher tax rate years under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) , partially offset by reduced research and development tax credit benefits.

The effective tax rate in 20 20 was higher than the federal statutory rate of 21.0% primarily due to state income taxes, net of federal income tax benefits, higher taxes on earnings in foreign jurisdictions and non-deductible compensation .

These increases to the federal statutory rate in 20 20 were offset partially by the recognition of tax benefits, net of reserves, related to research and development activities and the remeasurement of acquired net operating losses to be carried back to higher tax rate years under the CARES Act.

See Note 11 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of income tax expense .

2019 Compared to 2018

For a comparison of our results of operations for the fiscal years ended December 31, 2019 and 2018, 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, 2019 filed with the SEC on February 21, 2020.

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The following table sets forth certain consolidated cash flow information for 2020, 2019 and 2018 (in thousands):

Net cash provided by (used in) operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

Net cash provided by operating activities

Net cash provided by (used in) investing activities

Net cash (used in) provided by financing activities

Foreign currency exchange effect on cash and cash

equivalent and restricted cash balances

(Decrease) increase in cash and cash equivalents and restricted cash

Increase (decrease) in cash and cash equivalents and restricted cash

Cash and cash equivalents and restricted cash at beginning of year

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Cash and Cash Flow

Our primary uses of cash during 2019 were to fund the acquisition of PCM, fund working capital requirements, fund capital expenditures, including the purchase of real estate, and to repurchase shares of our common stock.

Our primary uses of cash during 2020 were to pay down our debt balances.

Operating activities generated $355.6 million in cash in 2020.

During 2019, we drew down net combined borrowings on our long-term debt facilities of $356.0 million and acquired PCM for $660.9 million, net of cash and cash equivalents acquired.

We received net proceeds of $341.3 million from the issuance of our convertible senior notes in 2019.

In connection with the issuance of our convertible senior notes, we entered into certain convertible note hedge and warrant transactions with respect to our common stock.

We paid approximately $66.3 million for the convertible note hedge transaction using proceeds from the convertible senior notes offering.

In addition, we received aggregate proceeds of approximately $34.4 million for the sale of related warrants.

In August 2019, we terminated our senior revolving credit facility (“revolving credit facility”) and accounts receivable securitization financing facility (the “ABS facility”) and entered into a new $1.2 billion ABL facility .

Net repayments of the revolving credit facility and ABS facility combined during 2019 were $194.0 million.

Net borrowings under the ABL revolving credit facility during 2019 were $550.0 million.

We acquired vNext in February 2020 for $6.4 million and received proceeds from the sale of properties held for sale of $40.3 million in 2020.

We had net borrowings under our inventory financing facilities of $103.3 million in 2020 compared to net repayments of $50.5 million in 2019.

Net repayments under our ABL facility were $431.4 million in 2020.

Net borrowings under our ABL facility and our prior senior revolving credit facility and ABS facility combined were $356.0 million in 2019.

Capital expenditures were $24.2 million in 2020, a significant decrease from 2019, which included our purchase of real estate for future use as our global corporate headquarters.

During 2020, we repurchased an aggregate of $25.0 million of our common stock, pursuant to a repurchase program approved in February 2020, compared to $27.9 million repurchased during 2019.

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

INSIGHT ENTERPRISES, INC.

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AND RESULTS OF OPERATIONS (continued)

In July 2019, we entered into an unsecured inventory financing facility with MUFG Bank Ltd and in August 2019 we terminated our existing inventory financing facility with Wells Fargo Capital Finance, LLC (“Wells Fargo”) and entered into a new unsecured facility with Wells Fargo, creating a combined total maximum capacity of $450.0 million, of which $2 53 .7 million was outstanding as of December 31, 2019.

Capital expenditures were $69.1 million in 2019, a significant increase from 2018, reflecting our purchase of real estate for future use as our global corporate headquarters and continued IT investments in our core ERP systems and e-commerce and digital marketing platforms.

During 2019, we repurchased an aggregate of $27.9 million of our common stock, using proceeds from the convertible notes offering, under a previously announced repurchase program compared to $22.1 million repurchased during 2018.

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 provided by (used in) operating activities.

Cash flow from operating activities in 2019 was $127.9 million, a significant decrease in cash generation compared to 2018.

This decrease is the result of timing of payment of accounts payable 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.

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

In 2018, cash flow from operating activities was $292.6 million, a significant increase in cash generation compared to 2017.

This increase is the result of our focus on expense control, optimizing working capital, including an enhanced focus on collection of receivables, and reducing our investments in inventory.

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 provided by operating activities.

Cash flow from operating activities in 2020 was $355.6 million, a significant increase in cash generation compared to 2019.

The increase in cash flow from operating activities was primarily driven by an increase in accounts payable compared to prior year.

The significant changes in both other assets and accrued expenses and other liabilities for 2019 compared to 2020 resulted from a single significant transaction in 2019 with no comparable activity in the current year.

Our consolidated cash flow operating metrics for the quarters ended December 31, 2020, 2019 and 2018 were as follows:

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Daily net sales is calculated as net sales for the quarter divided by 92 days.

Calculated as average inventories (excluding inventories not available for sale in 2017) divided by daily costs of goods sold.

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.

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Our cash conversion cycle was 30 days in the quarter ended December 31, 2020, compared to 38 days in the fourth quarter of 2019.

The increase resulted from the net effect of a two day decrease in DSO and a seven day decrease in DPOs due to the impact of the addition of PCM and the relative timing of client receipts and supplier payments during the respective quarters.

The decrease resulted from the net effect of an eight day increase in DSOs offset by a two day decrease in DIOs and a fourteen day increase in DPOs.

Excluding the impact of netting on DSOs and DPOs, the changes in our cash conversion cycle year over year were primarily the result of:

the benefit to DPOs of expanded use of our inventory financing facilities, including the effect of recently negotiated extended payment terms;

the benefit to DIOs of tight discipline around investments in inventory;

the benefit to DSOs of improved aging performance of our accounts receivable as we deployed Insight’s collection practices to the PC M business.

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 2021 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 2021 our cash flows from operations will normalize as our business mix returns to previous levels.

INSIGHT ENTERPRISES, INC.

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AND RESULTS OF OPERATIONS (continued)

We intend to use cash generated in 2020 in excess of working capital needs to support our capital expenditures for the year and to pay down our debt balances.

We also may use cash to fund potential acquisitions.

Net cash used in investing activities .

In 2019, we acquired PCM for $660.9 million net of cash and cash equivalents acquired of $84.6 million and including the payment of PCM’s outstanding debt.

Capital expenditures of $69.1 million in 2019 was due primarily to our purchase of real estate to be used in the future for our global corporate headquarters.

Capital expenditures of $17.3 million in 2018 were primarily related to technology and facility enhancements.

We expect total capital expenditures in 2020 to be between $55.0 million and $60.0 million, of which approximately $35.0 million is for the build out of our global corporate headquarters, and the remainder is for technology-related upgrade projects and the integration of prior acquisitions.

During 2018, we acquired Cardinal for $78.8 million net of cash and cash equivalents acquired.

We paid the final working capital and tax adjustments of approximately $3.4 million related to this acquisition in 2019.

Net cash provided by /( used in ) investing activities .

We acquired vNext in February 2020 for $6.4 million and received proceeds from the sale of properties held for sale of $40.3 million.

Capital expenditures of $24.2 million in 2020 were used primarily for technology-related upgrade projects and the integration of our prior acquisitions.

During 2020 we decided to defer the buildout of our new global corporate headquarters until early 2021.

We expect total capital expenditures in 2021 to be in the range of $75.0 to $85.0 million, of which approximately $60.0 million will be used to ready our global corporate headquarters, and the remaining amount will be used primarily for technology-related upgrade projects.

Net cash provided by/(used in) financing activities .

During 2019, we had net combined borrowings on our long-term debt under our new ABL revolving credit facility, our revolving credit facility and ABS facility of $356.0 million and had net repayments under our inventory financing facilities of $50.5 million.

During 2020, we had net repayments on our long-term debt under our ABL facility of $431.4 million and had net borrowings under our inventory financing facilities of $103.3 million.

In 2020, we also funded $25.0 million of repurchases of our common stock, compared to $27.9 million purchased during 2019.

During 2019, we had net combined borrowing on our long-term debt under our revolving credit facility, our Term Loan A and ABS facility of $356.0 million and had net repayments under our inventory financing facility of $50.5 million.

During 2019 we issued convertible senior notes with an aggregate principal value of $350.0 million, receiving proceeds upon issuance of $341.3 million.

In connection with the issuance of our convertible senior notes, we entered into certain convertible note hedge and warrant transactions with respect to our common stock.

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In addition, we received aggregate proceeds of approximately $34.4 million for the sale of related warrants.

In 2019, we also funded $27.9 million of repurchases of our common stock.

During 2018, we had net combined repayments on our long-term debt under our revolving credit facility, our Term Loan A and ABS facility of $114.8 million and had net repayments under our inventory financing facility of $15.3 million.

In 2018, we also funded $22.1 million of repurchases of our common stock.

2019 Compared to 2018

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As of December 31, 2020, no such events have occurred.

Our ABL revolving credit facility contains various covenants customary for transactions of this type, including complying with a minimum receivable and inventory requirement and meeting monthly, quarterly and annual reporting requirements.

INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

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.

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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:

INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

Note s 7 and 8 to the Consolidated Financial Statements in Part II, Item 8 of this report also include :

a description of our financing facilities ;

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As a result of U.S.

Federal tax reform enacted in December 2017, all undistributed foreign earnings as of December 31, 2017 were deemed distributed and we provided for U.S.

tax reform enacted in December 2017, all undistributed foreign earnings as of December 31, 2017 were deemed distributed and we provided for U.S.

income and withholding taxes on those earnings.

For years subsequent to December 31, 2017, we continue to assert indefinite reinvestment of foreign earnings for certain foreign entities.

As of December 31, 2019, we had approximately $101.7 million in cash and cash equivalents in certain of our foreign subsidiaries.

As of December 31, 2019, the majority of our foreign cash resides in the Netherlands, Canada and Australia.

For years subsequent to 2017, we continue to assert indefinite reinvestment of foreign earnings for certain of our foreign subsidiaries.

As of December 31, 2020, we had approximately $112.4 million in cash and cash equivalents in our foreign subsidiaries, the majority of which reside in the Netherlands and Australia.

Certain of these cash balances will be remitted to the U.S.

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Off-Balance Sheet Arrangements

We have entered into off-balance sheet arrangements, which include guaranties and indemnifications.

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.

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See further discussion in Note 8 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)

The table above includes:

Estimated interest payments of $2.0 million in each of 2021 through 2023, and $1.3 million in the first eight months of 2024, based on the current debt balance at December 31, 2020 of $140.0 million under our ABL facility, multiplied by the floating interest rate applicable at December 31, 2020 of 1.40% per annum.

Estimated interest payments of $2.6 million in each of 2020 though 2024, and $1.8 million in the first eight months of 2025, based on the principal debt balance at December 31, 2019 of $350.0 million under our senior convertible notes, multiplied by the stated interest rate applicable at December 31, 2019 of 0.75% per annum.

Estimated interest payments of $2.6 million in each of 2021 through 2024, and $1.8 million in the first eight months of 2025, based on the principal debt balance at December 31, 2020 of $350.0 million under our senior convertible notes, multiplied by the stated interest rate applicable at December 31, 2020 of 0.75% per annum.

As of December 31, 2020, this amount has been included in our contractual obligations table above as being due in less than 1 year due to the 30- to 120-day stated vendor terms.

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Amounts in the table above exclude non-cancellable rental income.

INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

The table above excludes unrecognized tax benefits, which include accrued interest, as we are unable to reasonably estimate the ultimate amount or timing of settlement.

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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.

INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

Critical Accounting Estimates

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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 as the distinct goods (hardware and/or software products) or services that will be provided.

For each of our product and services offerings, described in detail at Note 1 to the Consolidated Financial Statements in Part II, Item 8 of this report, the determination needs to be made as to whether we are the principal or the agent in the transaction.

This determination leads to how the revenue for each offering is recognized, either gross, where we are the principal in the

INSIGHT ENTERPRISES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

transaction, or net, where we are the agent in the transaction.

This determination is made by assessing whether or not we control the product or service prior to delivery to the client .

Judgments and Uncertainties

The total transaction price for an arrangement with multiple performance obligations is allocated at contract inception to each distinct performance obligation in proportion to its stand-alone selling price.

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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.

This determination leads to how the revenue for each offering is recognized, either gross, where we are the principal in the transaction, or net, where we are the agent in the transaction.

This determination is made by assessing whether or not we control the product or service at any time during the transaction.

If we take control of the product or service prior to delivery to the client, then we are the principal in the transaction.

With respect to recognition of transactions as a principal or agent, if we take control of the product or service prior to delivery to the client, then we are the principal in the transaction.

If we do not take control of the product or service prior to delivery to the client, we are the agent in the transaction.

The determination of whether we take control of products or services prior to delivery to the client is judgmental and depends upon the specific facts and circumstances for each transaction.

Effect if actual results differ from assumptions

We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to recognize net sales.

However, if actual results are not consistent with our estimates or assumptions, it could have a material effect on our reported net sales, timing of revenue recognition and our results of operations.

We have not made any material changes in accounting methodology used to recognize net sales during the past three fiscal years.

Partner Funding

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Partner funding received pursuant to shared marketing expense programs is recorded as it is earned as a reduction of the related selling and administrative expenses in the period the program takes place if the consideration represents a reimbursement of specific, incremental, identifiable costs.

Partner funding received pursuant to certain services delivered is recorded as services net sales.

Consideration that exceeds the specific, incremental, identifiable costs is classified as a reduction of costs of goods sold.

Changes in estimates of anticipated achievement levels under individual partner programs could have a material effect on our results of operations and our cash flows.

Judgements and Uncertainties

We make period-end estimates about the anticipated achievement levels under the various partner programs in order to accrue amounts earned and establish reserves for any uncollectible amounts.

These estimates and assumptions primarily include whether we have met key net sales targets under the various partner programs.

Effect if actual results differ from assumptions

We have not made any material changes in the methodology used to evaluate estimates of anticipated achievement levels under individual partner programs during the past three fiscal years.

We believe that we have made reasonable estimates and assumptions to calculate the achievement levels.

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.

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.

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AND RESULTS OF OPERATIONS (continued)

Acquisition Accounting

We allocate the purchase price of an acquired business, using the acquisition method of accounting, to its 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 is recorded as goodwill.

Certain assumptions and judgements are used to estimate the fair value of acquired assets and liabilities.

We engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets.

We may adjust the preliminary purchase price allocation, after the acquisition closing date and through the end of the measurement period of one year or less, as we finalize the valuation of acquired assets and liabilities.

Changes in estimates used in the preliminary purchase price allocation could have a material effect on the final valuation and result in changes to goodwill and intangible assets.

Additionally, if forecasts supporting the valuation of intangible assets or goodwill are not achieved, then an impairment charge could be recorded.

See further information on acquisition accounting in Notes 1 and 20 to the Consolidated Financial Statements in Part II, Item 8 of this report.

We perform an annual review of our goodwill in the fourth quarter of every year.

We continually assess if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value and assess whether any indicators of impairment exist.

The assessment requires a significant amount of judgment.

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.

Judgements and Uncertainties

We may first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.

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All of these 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.

Changes in these estimates and assumptions could materially impact the determination of fair value or goodwill impairment, or both.

These estimates and assumptions primarily include, but are not limited to, an appropriate control premium in excess of the market capitalization of the Company, future market growth, forecasted sales and costs and appropriate discount rates.

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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 on the carrying value of goodwill in Note 5 to the Consolidated Financial Statements in Part II, Item 8 of this report.

Effect if Actual Results Differ from Assumptions

We have not made any material changes in the methodology used to evaluate impairment of goodwill during the past three fiscal years.

Additionally, during the three years ended December 31, 2020, 2019 and 2018 we analyzed each of our reporting units and determined that no impairment charge was necessary.

We record a provision for income taxes which reflects a mix of earnings in the jurisdictions in which we operate.

Our provision for income taxes primarily reflects a combination of income earned and taxed in the various US federal and state, as well as foreign, jurisdictions.

Our annual effective tax rate is based on our income, the jurisdiction(s) in which the income is earned and subjected to taxation, the tax laws in those various jurisdictions and any tax law changes which may occur, increases or decreases in permanent differences between book and tax items, and accruals or adjustments of accruals for unrecognized tax benefits or valuation allowances.

INSIGHT ENTERPRISES, INC.

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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, future market growth, forecasted earnings, historical and projected taxable income, the mix of earnings in the jurisdictions in which we operate, prudent and feasible tax planning strategies and statutory tax law changes in determining the need for a valuation allowance.

We consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations.

If we were to determine that it is more likely than not that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period such determination is made.

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.

We establish liabilities for potentially unfavorable outcomes associated with uncertain tax positions taken on specific tax matters.

We record liabilities for potentially unfavorable outcomes associated with uncertain tax positions taken on specific tax matters using a two-step process.

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.

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If material adjustments are warranted, it could affect our effective tax rate.

Judgements and Uncertainties

The determination of our provision and evaluation of our tax positions requires significant judgment, the use of estimates and the interpretation and application of complex tax laws.

Changes in tax laws and rates could affect recorded assets and liabilities in the future.

Changes in projected earnings could affect the recorded valuation allowances in the future.

Our calculations related to income taxes contain uncertainties due to judgment used to calculate tax liabilities in the application of complex tax regulations across the tax jurisdictions where we operate.

Our analysis of unrecognized tax benefits contains uncertainties based on judgment used to apply the more likely than not recognition and measurement thresholds.

Effect if Actual Results Differ from Assumptions

We do not believe there is a reasonable likelihood there will be a material change in the tax related balances or valuation allowances.

However, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities.

To the extent we prevail in matters for which unrecognized tax benefit liabilities have been established or are required to pay amounts in excess of recorded unrecognized tax benefit liabilities, our effective tax rate in a given financial statement period could be materially affected.

An unfavorable tax settlement would require use of our cash and generally result in an increase in our effective tax rate in the period of resolution.

A favorable tax settlement would generally be recognized as a reduction in our effective tax rate in the period of resolution.

Additional information about the valuation allowance and uncertain tax positions can be found in Note 11 to the Consolidated Financial Statements in Part II, Item 8 of this report.

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What changed 10-K

Item 7. Management’s Discussion and Analysis