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 Insight 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, and 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, including cloud solutions. Our offerings in the remainder of our EMEA and APAC segments are largely software and certain software-related services and cloud solutions. O n a consolidated basis, for the three months ended June 30, 2021: • Net sales of $2.2 billion increased 13% compared to the three months ended June 30, 2020. The increase in net sales reflects a double digit increase in all major offering categories of net sales. Excluding the effects of fluctuating foreign currency exchange rates, net sales increased 10% compared to the second quarter of 2020. • Gross profit of $366.7 million increased 13% compared to the three months ended June 30, 2020. Excluding the effects of fluctuating foreign currency exchange rates, gross profit increased 9% compared to the second quarter of 2020. • Compared to the three months ended June 30, 2020, gross margin contracted approximately 10 basis points to 16.4% of net sales in the three months ended June 30, 2021. This decline reflects a decrease in margins on hardware and software net sales, partially offset by an increase in the mix of higher margin services net sales compared to the same period in the prior year. • Earnings from operations increased 19%, year over year, to $88.5 million in the second quarter of 2021 compared to $74.2 million in the second quarter of 2020. The increase was primarily due to increased gross profit, a reduction in severance and restructuring expenses and no acquisition and integration related expenses in the current quarter. Excluding the effects of fluctuating foreign currency exchange rates, earnings from operations increased 15% year over year. • Net earnings and diluted earnings per share were $58.6 million and $1.58, respectively, for the second quarter of 2021. This compares to net earnings of $46.4 million and diluted earnings per share of $1.32 for the second quarter of 2020. 20 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Recent Developments – I mpact of COVID - 19 and S upply C onstraints on O ur Business On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. The pandemic has negatively impacted the global economy, disrupted global supply chains and reduced workforce participation. While we did not see a significant impact of COVID-19 on our second quarter 2021 financial results, continued supply constraints stemming from shortages of chips and displays resulted in sustained elevated bookings as we entered the third quarter. We currently expect these supply constraints and extended lead times for certain products will begin to ease by the end of 2021 and expect growth in net sales in the second half of 2021 compared to the same period in the prior year. 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 emergence and severity of its variants, the availability of vaccines and potential hesitancy to utilize them, other protective 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 2021. Accordingly, our current results and financial condition discussed herein may not be indicative of future operating results and trends. 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 9 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. 21 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Critical Accounting Estimates Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). For a summary of significant accounting policies, see Note 1 to the Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2020. 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, 2020. Results of Operations The COVID-19 pandemic negatively impacted the global economy and disrupted global supply chains and workforce participation. While we did not observe significant impacts on our second quarter financial results, we 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 six months ended June 30, 2021 and 2020: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Costs of goods sold 83.6 83.5 84.2 84.2 Gross profit 16.4 16.5 15.8 15.8 Selling and administrative expenses 12.4 12.3 12.4 12.4 Severance and restructuring expenses and acquisition and integration related expenses — 0.4 (0.1 ) 0.3 Earnings from operations 4.0 3.8 3.5 3.1 Non-operating expense, net 0.5 0.6 0.5 0.5 Earnings before income taxes 3.5 3.2 3.0 2.6 Income tax expense 0.9 0.8 0.7 0.6 Net earnings 2.6 % 2.4 % 2.3 % 2.0 % 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 22 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) markets are also stronger in our second quarter . S ales 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 incentive requirements, 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. Net Sales . Net sales for the three months ended June 30, 2021 increased 13%, year over year, to $2.2 billion compared to the three months ended June 30, 2020. This increase reflects increases in all of our operating segments. Net sales for the six months ended June 30, 2021 increased 8% year over year to $4.4 billion compared to the six months ended June 30, 2020. Our net sales by operating segment were as follows for the three and six months ended June 30, 2021 and 2020 (dollars in thousands): Three Months Ended June 30, % Six Months Ended June 30, % 2021 2020 Change 2021 2020 Change North America $ 1,759,629 $ 1,539,147 14 % $ 3,414,410 $ 3,213,528 6 % EMEA 417,374 392,017 6 % 896,210 810,903 11 % APAC 52,498 37,571 40 % 111,949 88,355 27 % Consolidated $ 2,229,501 $ 1,968,735 13 % $ 4,422,569 $ 4,112,786 8 % Our net sales by offering category for North America for the three and six months ended June 30, 2021 and 2020 were as follows (dollars in thousands): Three Months Ended June 30, % Six Months Ended June 30, % Sales Mix 2021 2020 Change 2021 2020 Change Hardware $ 1,168,770 $ 1,023,970 14 % $ 2,278,259 $ 2,152,456 6 % Software 331,809 286,202 16 % 640,547 591,365 8 % Services 259,050 228,975 13 % 495,604 469,707 6 % $ 1,759,629 $ 1,539,147 14 % $ 3,414,410 $ 3,213,528 6 % Net sales in North America increased 14%, or $220.5 million, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily driven by increases in hardware net sales. Net sales of hardware, software and services increased 14%, 16% and 13%, respectively, year over year. The changes for the three months ended June 30, 2021 were the result of the following: • The increase in hardware net sales was due to higher volume of sales to large enterprise and corporate clients of devices and networking and storage products. The increase in volume of sales compared to the same period in the prior year was largely due to the impacts of COVID-19 experienced in the prior year. • The increase in software net sales was primarily due to higher volume of software licensing, partially offset by the continued migration of on-premise software to cloud solutions, reported net in services net sales. • The increase in services net sales was primarily due to an increase in net sales associated with cloud solution offerings and higher sales of Insight delivered services. 23 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Net sales in North America increased 6%, or $200.9 million, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily driven by increases in hardware and software net sales. Net sales of hardware, software and services increased 6%, 8% and 6%, respectively, year over year. The increase for the first half of 2021 was the result of the following: • The increase in hardware net sales was due to higher volume of sales to large enterprise and corporate clients. • The increase in software net sales was primarily due to a single significant transaction with a large enterprise client in the current period, partially offset by the continued migration of on-premise software to cloud solutions, reported net in services net sales. • The increase in services net sales was primarily due to an increase in net sales associated with cloud solution offerings. Our net sales by offering category for EMEA for the three and six months ended June 30, 2021 and 2020 were as follows (dollars in thousands): Three Months Ended June 30, % Six Months Ended June 30, % Sales Mix 2021 2020 Change 2021 2020 Change Hardware $ 170,406 $ 153,255 11 % $ 366,377 $ 328,224 12 % Software 184,986 186,781 (1 %) 419,409 387,863 8 % Services 61,982 51,981 19 % 110,424 94,816 16 % $ 417,374 $ 392,017 6 % $ 896,210 $ 810,903 11 % Net sales in EMEA increased 6%, or $25.4 million, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. Excluding the effects of fluctuating foreign currency exchange rates, net sales in EMEA decreased 4%, year to year. Net sales of hardware and services increased 11% and 19%, respectively, year over year. Net sales of software decreased 1%, year to year. The net changes for the three months ended June 30, 2021 were the result of the following: • The increase in hardware net sales was due primarily to higher volumes of devices and networking products to corporate clients, partially offset by a lower volume of sales to public sector clients. • The increase in services net sales was due primarily to higher volume of Insight delivered services and higher sales of cloud solutions. • The slight decrease in software net sales was primarily due to continued migration of on-premise software to cloud solutions, partially offset by higher volume of sales to public sector clients. Net sales in EMEA increased 11%, or $85.3 million, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. Excluding the effects of fluctuating foreign currency exchange rates, net sales in EMEA increased 1%, year over year. Net sales of hardware, software and services increased 12%, 8% and 16%, respectively, year over year. The net changes for the first half of 2021 were the result of the following: • The increase in hardware net sales was due primarily to higher volume sales of devices and networking products to corporate and public sector clients. • The increase in software net sales was due to higher volume of sales to public sector and corporate clients, partially offset by the continued migration of on-premise software to cloud solutions. 24 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 volume of Insight delivered services and higher sales of cloud solutions. Our net sales by offering category for APAC for the three months ended June 30, 2021 and 2020 were as follows (dollars in thousands): Three Months Ended June 30, % Six Months Ended June 30, % Sales Mix 2021 2020 Change 2021 2020 Change Hardware $ 11,768 $ 6,834 72 % $ 21,333 $ 14,580 46 % Software 21,439 15,891 35 % 56,273 46,761 20 % Services 19,291 14,846 30 % 34,343 27,014 27 % $ 52,498 $ 37,571 40 % $ 111,949 $ 88,355 27 % Net sales in APAC increased 40%, or $14.9 million, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. Excluding the effects of fluctuating foreign currency exchange rates, net sales in APAC increased 24%, year over year. Net sales of hardware, software and services increased by 72%, 35% and 30%, respectively, year over year. The changes for the three months ended June 30, 2021 were the result of the following: • The increase in software net sales was primarily due to an increase in sales to corporate and public sector clients. • The increase in hardware net sales was primarily the result of large transactions with corporate and enterprise clients combined with a return to sales volumes experienced before COVID-19. • The increase in services net sales was primarily due to higher sales of Insight delivered services and higher sales of cloud solutions. Net sales in APAC increased 27%, or $23.6 million, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. Excluding the effects of fluctuating foreign currency exchange rates, net sales in APAC increased 11%, year over year. Net sales of hardware, software and services increased by 46%, 20% and 27%, respectively, year over year. The net changes for the first half of 2020 were the result of the following: • The increase in software net sales was primarily due to an increase in net sales to corporate and public sector clients. • The increase in services net sales was primarily due to higher sales of Insight delivered services and cloud solutions. • The increase in hardware net sales was primarily the result of large transactions with corporate and enterprise clients combined with a return to sales volumes experienced before COVID-19. 25 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The percentage of net sales by category for North America, EMEA and APAC were as follows for the three and six months ended June 30, 2021 and 2020: North America EMEA APAC Three Months Ended June 30, Three Months Ended June 30, Three Months Ended June 30, Sales Mix 2021 2020 2021 2020 2021 2020 Hardware 66 % 66 % 41 % 39 % 22 % 18 % Software 19 % 19 % 44 % 48 % 41 % 42 % Services 15 % 15 % 15 % 13 % 37 % 40 % 100 % 100 % 100 % 100 % 100 % 100 % North America EMEA APAC Six Months Ended June 30, Six Months Ended June 30, Six Months Ended June 30, Sales Mix 2021 2020 2021 2020 2021 2020 Hardware 67 % 67 % 41 % 40 % 19 % 16 % Software 19 % 18 % 47 % 48 % 50 % 53 % Services 14 % 15 % 12 % 12 % 31 % 31 % 100 % 100 % 100 % 100 % 100 % 100 % Gross Profit . Gross profit increased 13%, or $42.3 million, for the three months ended June 30, 2021 , compared to the three months ended June 30, 2020 , with gross margin contracting approximately 10 basis points to 16.4% for the three months ended June 30, 2021 compared to 16.5% for the three months ended June 30, 2020. Gross profit increased 7%, or $48.4 million, in the six months ended June 30, 2021 compared to the six months ended June 30, 2020 , with gross margin remaining flat at 15.8% for the first half of 2021 compared to the first half of 2020. Our gross profit and gross profit as a percentage of net sales by operating segment were as follows for the three and six months ended June 30, 2021 and 2020 (dollars in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 % of Net Sales 2020 % of Net Sales 2021 % of Net Sales 2020 % of Net Sales North America $ 278,897 15.8 % $ 244,896 15.9 % $ 532,386 15.6 % $ 501,824 15.6 % EMEA 73,529 17.6 % 68,180 17.4 % 139,564 15.6 % 126,954 15.7 % APAC 14,257 27.2 % 11,313 30.1 % 26,207 23.4 % 20,947 23.7 % Consolidated $ 366,683 16.4 % $ 324,389 16.5 % $ 698,157 15.8 % $ 649,725 15.8 % North America’s gross profit for the three months ended June 30, 2021 increased 14%, or $34.0 million, compared to the three months ended June 30, 2020. As a percentage of net sales, gross margin contracted 10 basis points to 15.8% for the second quarter of 2021 . The year over year changes in gross margin were primarily attributable to the following: • There was a decrease in margin from services net sales of 15 basis points, partially offset by an increase in product margin, which includes partner funding and freight, of 9 basis points compared to the same period in the prior year. • The decrease in margin from services net sales during the current quarter reflects a contraction in margin from Insight delivered services and a reduction of referral fees . • The increase in product margin is primarily the result of sales of hardware and software at higher margins than in the same period in the prior year . 26 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) North America’s gross profit for the six months ended June 30, 2021 in creased 6 %, or $3 0 . 6 million, compared to the three months ended June 30, 2020. As a percentage of net sal es, gross margin was flat at 15. 6 % for the first half of 2021 . The year over year net cha nges in gross margin were primarily attributable to the following: • There was a decrease in product margin, which includes partner funding and freight, of 25 basis points offset by an increase in margin from services net sales of 23 basis points compared to the same period in the prior year. • The decrease in product margin is primarily the result of sales of hardware and software at lower margins than in the same period in the prior year . • The increase in margin from services net sales during the current quarter reflects an increase in margin from cloud solutions and other services that are recorded net. EMEA’s gross profit for the three months ended June 30, 2021 increased $5.3 million, or 8%, year over year (decreasing 3% when excluding the effects of fluctuating foreign currency exchange rates), compared to the three months ended June 30, 2020. As a percentage of net sales, gross margin increased approximately 20 basis points, year over year. The year over year net increase in gross margin was primarily attributable to an increase in higher margin services net sales, including cloud solutions and Insight delivered services, of 115 basis points, partially offset by a decrease in product margin, which includes partner funding and freight, of 92 basis points . EMEA’s gross profit for the six months ended June 30, 20 21, increased $12.6 million, or 10% (flat when excluding the effects of fluctuating foreign currency exchange rates), compared to the first half of 2020. As a percentage of net sales, gross margin contracted approximately 10 basis points, year to year. The year to year decline in gross margin was primarily attributable to a decrease in product margin, which includes partner funding and freight, of 48 basis points, partially offset by a net increase in services margin, including cloud solutions and Insight delivered services, of 40 basis points . APAC’s gross profit for the three months ended June 30, 2021 increased $2.9 million, or 26%, compared to the three months ended June 30, 2020 (increasing 11% when excluding fluctuating foreign currency exchange rates). As a percentage of net sales, gross margin contracted approximately 290 basis points, year to year. The decrease in gross margin in the second quarter of 2021 compared to the second quarter of 2020 was due to a decrease in gross margin on services net sales of 345 basis points. This was primarily due to changes in sales mix including from Insight delivered services. The decline was partially offset by an increase in gross margin on product net sales, which includes partner funding and freight, of 50 basis points. APAC’s gross profit for the first half of 20 21 increased $5.3 million, or 25% compared to the first half of 2020 (increasing 10% excludi ng fluctuating foreign currency exchange rates). As a perc entage of net sales, gross margin contracted approximately 30 basis points, year to year. The decrease in gross margin in the first six months of 2021 compared to the first six months of 2020 was primarily due to a decline in gross margins from services net sales of 102 basis points, parti ally offset by an increase in gross margin on product net sales, which includes partner funding and freight, of 72 basis points. 27 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 $34.5 million, or 14% (increasing 11% when excluding fluctuating foreign currency exchange rates), for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 . Selling and administrative expenses increased $36.8 million, or 7% (increasing 2% when excluding fluctuating foreign currency exchange rates), for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 . Selling and administrative expenses increased approximately 10 basis points as a percentage of net sales in the second quarter of 2021 compared to the second quarter of 2020. The overall net increase in selling and administrative expenses reflects a $36.3 million net increase in personnel costs, including teammate benefits expenses primarily related to increases in overall teammate headcount and increases in variable compensation in the current year. This increase was partially offset by decreases in depreciation and amortization and other expenses of $3.1 million and $2.4 million respectively, year to year. Selling and administrative expenses remained flat as a percentage of net sales in the first half of 2021 compared to the first half of 20 20. The overall ne t increase in selling and administrative expenses reflects a $55.2 million increase in personnel costs, inclu ding teammate benefits expenses primarily due to increased headcount and increases in variable compensation in the current year. Th is increase was partially offset by decreases in depreciation and amortization, travel and entertainment costs and other expenses of $7.1 million, $5.4 million and $5.1 million, respectively, yea r to year. The decreases in travel and entertainment costs reflect cost control measures taken in response to COVID-19 in the prior year that have been maintained in the current year. Severance and Restructuring Expenses, Net. During the three months ended June 30, 2021, we recorded severance expense, net of adjustments, of approximately $1.1 million. Comparatively, during the three months ended June 30, 2020, we recorded severance expense, net of adjustments, of approximately $7.0 million. The charges primarily related to a realignment of certain roles and responsibilities and for North America and EMEA in the prior year period due to the acquisition of PCM. During the six months ended June 30, 2021, we recorded severance expense, net of adjustments, of approximately $2.4 million. Comparatively, during the six months ended June 30, 2020, we recorded severance expense, net of adjustments, of approximately $9.2 million. The charges primarily related to a realignment of certain roles and responsibilities and for North America and EMEA in the prior year period due to the acquisition of PCM. In the six months ended June 30, 2021, severance charges were offset by gains on sale of properties of $8.0 million. 28 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Earnings from Operations . Earnings from operations increased 19%, or $14.3 million, for the three months ended June 30, 2021 , compared to the three months ended June 30, 2020 . Earnings from operations increased 22%, or $28.4 million, for the six months ended June 30, 2021 , compared to the six months ended June 30, 2020 . Our earnings from operations and earnings from operations as a percentage of net sales by operating segment were as follows for the three and six months ended June 30, 2021 and 2020 (dollars in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 % of Net Sales 2020 % of Net Sales 2021 % of Net Sales 2020 % of Net Sales North America $ 64,119 3.6 % $ 52,068 3.4 % $ 118,040 3.5 % $ 94,409 2.9 % EMEA 19,332 4.6 % 17,910 4.6 % 29,422 3.3 % 26,230 3.2 % APAC 5,018 9.6 % 4,210 11.2 % 8,031 7.2 % 6,412 7.3 % Consolidated $ 88,469 4.0 % $ 74,188 3.8 % $ 155,493 3.5 % $ 127,051 3.1 % North America’s earnings from operations for the three months ended June 30, 2021 increased $12.1 million, or 23%, compared to the three months ended June 30, 2020. As a percentage of net sales, earnings from operations increased by approximately 20 basis points to 3.6%. The increase in earnings from operations was primarily driven by an increase in gross profit, a decrease in severance and restructuring expenses and no acquisition and integration related expenses in the current period, partially offset by a net increase in selling and administrative expenses when compared to the three months ended June 30, 2020. North America’s earnings from operations for the six months ended June 30, 2021 increased $23.6 million, or 25%, compared to the six months ended June 30, 2020. As a percen tage of net sales, earnings from operations increased by approximately 60 basis points to 3.5%. T he increase in earnings from operations was primarily driven by an increase in gross profit, a decrease in severance and restructuring expenses (including gains recognized on sale of properties) and no acquisition and integration related expenses in the current period, partially offset by an increase in selling and administrative expenses when compared to the six months ended June 30, 2020. EMEA’s earnings from operations for the three months ended June 30, 2021 increased $1.4 million, or 8% (decreasing 1% when excluding the effects of fluctuating foreign currency exchange rates), compared to the three months ended June 30, 2020. As a percentage of net sales, earnings from operations was flat with prior year at 4.6%. The increase in earnings from operations was primarily driven by an increase in gross profit and a decrease in severance and restructuring expenses, partially offset by an increase in selling and administrative expenses compared to the three months ended June 30, 2020. EMEA’s earnings from operations for the six months ended June 30, 2021 increased $3.2 million, or 12% (increasing 2% when excluding the effects of fluctuating foreign currency exchange rates) , compared to the six months ended June 30, 2020. As a percentage o f net sales, earnings from operation s increased by approximately 10 basis points to 3.3%. The increase in earnings from operations was primarily driven by an increase in gross profit and a decrease in severance and restructuring expenses, partially offset by an increase in selling and administrative expenses compared to the six months ended June 3 0, 2020. APAC’s earnings from operations for the three months ended June 30, 2021 increased $800,000, or 19% (increasing 6% when excluding the effects of fluctuating foreign currency exchange rates) , compared to the three months ended June 30, 2020. As a percentage of net sales, earnings from operations decreased by approximately 160 basis points to 9.6%. The increase in earnings from operations was primarily driven by an increase in gross profit, partially offset by an increase in selling and administrative expenses compared to the three months ended June 30, 2020. 29 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) APAC’s earnings from operations for the six months ended June 30, 2021 increased $1.6 million, or 25% (increasing 12% when excluding the effects of fluctuating foreign currency exchange rates) , compared to the six months ended June 30, 2020. As a percentage of net sales, earnings from operations decreased by approximately 10 basis points to 7.2%. Ear nings from operations reflects an increase in gross profit partially offset by an increase in sellin g and administrative expenses when compared to the six months ended June 30, 2020. Non-Operating (Income) Expense. Interest Expense, Net. Interest expense, net primarily relates to borrowings under our financing facilities and imputed interest under our inventory financing facilities and the Notes, partially offset by interest income generated from interest earned on cash and cash equivalent bank balances. Interest expense, net for the three months ended June 30, 2021 decreased 6%, or $636,000, compared to the three months ended June 30, 2020. Interest expense, net for the six months ended June 30, 2021 decreased 11%, or $2.5 million, compared to the six months ended June 30, 2020. The decreases were due primarily to lower average daily balances and lower borrowing rates under our ABL facility, which was partially offset by increased imputed interest under our inventory financing facilities and the Notes. Imputed interest under the Notes was $2.7 million and $5.3 million for the three and six months ended June 30, 2021, respectively compared to $2.5 million and $5.0 million for the three and six months ended June 20, 2020, respectively. Imputed interest under our inventory financing facilities was $3.1 million and $6.7 million for the three and six months ended June 30, 2021, respectively, compared to $2.8 million and $5.6 million for the three and six months ended June 30, 2020, respectively. The increase in imputed interest under our inventory financing facilities was a result of expanded use of the facilities, in part as a result of expanded payment terms during the current period. 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 25.4% for the three months ended June 30, 2021 was lower than our effective tax rate of 26.2% for the three months ended June 30, 2020. The decrease in our effective tax rate was due primarily to the remeasurement of deferred tax balances from the enactment of foreign tax rate changes and from excess tax benefits on settlement of employee share-based awards, offset in part by an increase in the state income tax base. Our effective tax rate of 24.8% for the six months ended June 30, 2021 was higher than our effective tax rate of 23.8% for the six months ended June 30, 2020. The increase in our effective tax rate for the first half of 2021 compared to the first half of 2020 was due primarily to the rate impact of tax benefits associated with the CARES Act which did not recur in 2021, partially offset by an increase in excess tax benefits on the settlement of employee share-based compensation. 30 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 six months ended June 30, 2021 and 2020 (in thousands): Six Months Ended June 30, 2021 2020 Net cash provided by operating activities $ 5,187 $ 497,529 Net cash provided by (used in) investing activities 10,374 (6,682 ) Net cash used in financing activities (35,482 ) (450,576 ) Foreign currency exchange effect on cash, cash equivalent and restricted cash balances (594 ) (814 ) (Decrease) increase in cash, cash equivalents and restricted cash (20,515 ) 39,457 Cash, cash equivalents and restricted cash at beginning of period 130,582 116,297 Cash, cash equivalents and restricted cash at end of period $ 110,067 $ 155,754 Cash and Cash Flow • Our primary uses of cash during the six months ended June 30, 2021 were to fund our working capital requirements, to repurchase shares of our common stock and to pay down our inventory financing facilities. • Operating activities provided $5.2 million in cash during the six months ended June 30, 2021, compared to $497.5 million during the six months ended June 30, 2020. • We received proceeds from the sale of our properties held for sale of $27.2 million in the six months ended June 30, 2021 compared to proceeds of $14.2 million in the six months ended June 30, 2020. • Capital expenditures were $16.8 million and $14.5 million for the six months ended June 30, 2021 and 2020, respectively. • During the six months ended June 30, 2021, we repurchased an aggregate of $50.0 million of our common stock, pursuant to a repurchase program approved in February 2020, which was subsequently increased in May 2021. During the six months ended June 30, 2020, we repurchased an aggregate of $25.0 million of our common stock, pursuant to the repurchase program approved in February 2020. • Net borrowings under our ABL facility during the six months ended June 30, 2021 were $40.0 million compared to net repayments of $426.2 million during the six months ended June 30, 2020. • We had net repayments under our inventory financing facilities of $17.5 million during the six months ended June 30, 2021, compared to net borrowings of $7.5 million during the six months ended June 30, 2020. 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 June 30, 2021. For the remainder of 2021, we plan to be prudent in our use of cash, using available cash to fund business operations and to pay down our ABL facility and inventory financing facilities. 31 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 half of 2021 was $5.2 million compared to $497.5 million in the first half of 2020. • The decrease in cash flow from operating activities was primarily driven by partner payment deferrals and a large customer advance payment in the prior year with no comparable activity in the current year. Changes in partner mix and growth in net sales also contributed to the decrease during the current period. We deferred, and in some cases reduced, our federal and other taxes paid through COVID-19 relief measures in the first half of 2020. The discrete items described above combined with the change in partner mix and impact of growth on our inverted cash cycle resulted in lower cash from operations generated in the first half of 2021 compared to the first half of 2020. Our consolidated cash flow operating metrics were as follows: Three Months Ended June 30, 2021 2020 Days sales outstanding in ending accounts receivable (“DSOs”) (a) 124 124 Days inventory outstanding (“DIOs”) (b) 11 12 Days purchases outstanding in ending accounts payable (“DPOs”) (c) (101 ) (114 ) Cash conversion cycle (days) (d) 34 22 (a) Calculated as the balance of current accounts receivable, net at the end of the quarter divided by daily net sales. Daily net sales is calculated as net sales for the quarter divided by 91 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 91 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 91 days. (d) Calculated as DSOs plus DIOs, less DPOs. • Our cash conversion cycle was 34 days in the second quarter of 2021, up 12 days from the second quarter of 2020. • The net changes were a result of a 13 day decrease in DPOs partially offset by a one day decrease in DIOs. The decrease in DPOs was primarily due to change in partner mix and growth in the current year, partially offset by increases in balances on our inventory financing facilities. • 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 2021 in excess of working capital needs, to pay down our ABL facility and inventory financing facilities. Net cash provided by (used in) investing activities • We received proceeds from the sale of properties held for sale of $27.2 million and $14.2 million for the six months ended June 30, 2021 and 2020, respectively. • Capital expenditures were $16.8 million and $14.5 million for the six months ended June 30, 2021 and 2020, respectively. 32 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) • We expect capital expenditures for the full year 2 0 2 1 to be in a range of $ 6 5 .0 million to $ 7 5.0 million , the majority of which will be used to ready our global corporate headquarters and to fund technology - related projects . Net cash used in financing activities • During the six months ended June 30, 2021, we had net borrowings under our ABL facility that increased our outstanding long-term debt balance by $40.0 million. • During the six months ended June 30, 2020, we had net repayments under our ABL facility that decreased our outstanding long-term debt balance by $426.2 million. • We had net repayments under our inventory financing facilities of $17.5 million during the six months ended June 30, 2021 compared to net borrowings of $7.5 million during the six months ended June 30, 2020. • During the six months ended June 30, 2021 and 2020, we repurchased an aggregate of $50.0 million and $25.0 million of our common stock, respectively, pursuant to our repurchase program approved in February 2020 and subsequently increased in May 2021. Financing Facilities Our debt balance as of June 30, 2021 was $483.9 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. • The Notes are subject to certain events of default and certain acceleration clauses. As of June 30, 2021, 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 June 30, 2021, 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 $565.0 million, of which $309.3 million was outstanding at June 30, 2021. 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 June 30, 2021, we had approximately $76.1 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. 33 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Off-Balance Sheet Arrangements We have entered into off-balance sheet arrangements, which include indemnifications. The indemnifications are discussed in Note 8 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, 2020. 34 INSIGHT ENTERPRISES, INC.