# INSIGHT ENTERPRISES INC (NSIT) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from INSIGHT ENTERPRISES INC's 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/932696/000162828024006391/nsit-20231231.htm Accession: 0001628280-24-006391 Filing date: 2024-02-22 Report date: 2023-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/NSIT/ All MD&A years: /company/NSIT/mda/ Previous year: /company/NSIT/mda/fy2022/ (FY 2022) Next year: /company/NSIT/mda/fy2024/ (FY 2024) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with the Consolidated Financial Statements and notes thereto included in Part II, Item 8 of this report. Our actual results could differ materially from those contained in forward-looking statements due to a number of factors, including those discussed in “Risk Factors” in Part I, Item 1A and elsewhere in this report. Overview Today, every business is a technology business. We help our clients accelerate their digital journey to modernize their businesses and maximize the value of technology. We serve these clients in North America; Europe, the Middle East and Africa (“EMEA”); and Asia-Pacific (“APAC”). As a Fortune 500-ranked solutions integrator, we enable secure, end-to-end transformation and meet the needs of our clients through a comprehensive portfolio of solutions, far-reaching partnerships and 35 years of broad IT expertise. We amplify our solutions and services with global scale, local expertise and our e-commerce experience, enabling our clients to realize their digital ambitions in multiple ways. Our offerings in North America and certain countries in EMEA and APAC include hardware, software and services, including cloud solutions. Our offerings in the remainder of our EMEA and APAC segments consist largely of software and certain software-related services and cloud solutions. Full year 2023 financial and operational highlights included the following: •We reported record gross profit of $1.7 billion and record gross margin of 18.2%, primarily driven by expansion in North America. •We generated cash flows from operations of $619.5 million. •In December 2023, we acquired SADA to strengthen our digital transformation capabilities and accelerate the growth of our cloud services and solutions. •In August 2023, we acquired Amdaris to support our EMEA services and solution offerings. On a consolidated basis, for the year ended December 31, 2023: •Net sales of $9.2 billion decreased 12% compared to 2022. •Gross profit of $1.7 billion increased 2% compared to 2022. •Consolidated gross margin expanded approximately 250 basis points to a record 18.2% of net sales in 2023. This increase reflects expansion in margin from services net sales, primarily from growth in cloud solution offerings, and an expansion in product margin. •Earnings from operations increased to $419.8 million in 2023, an increase of 1% compared to the prior year, which represented 4.6% of net sales. •Our effective tax rate in 2023 was 25.6%, which compares to our effective tax rate of 25.1% in 2022. •Net earnings and diluted net earnings per share were $281.3 million and $7.55, respectively, in 2023. In 2022, we reported net earnings of $280.6 million and diluted net earnings per share of $7.66. The results of operations for 2023 include the following items: •severance and restructuring expenses, net of $6.1 million, $4.4 million net of tax; •acquisition and integration related expenses of $7.4 million, $6.0 million net of tax; and •the repurchase of approximately 1.6 million shares of the Company’s common stock for an aggregate cost of $217.1 million. 30 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The results of operations for 2022 include the following items: •severance and restructuring expenses of $4.2 million, $3.2 million net of tax; and •the repurchase of approximately 1.1 million shares of the Company’s common stock for an aggregate cost of $107.9 million. Throughout the “Overview” and “Results of Operations” sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we refer to changes in net sales, gross profit, selling and administrative expenses and earnings from operations on a consolidated basis and in North America, EMEA and APAC excluding the effects of fluctuating foreign currency exchange rates. In computing these amounts and percentages, we compare the current period amount as translated into U.S. dollars under the applicable accounting standards to the prior period amount in local currency translated into U.S. dollars utilizing the weighted average translation rate for the current period. Net of tax amounts referenced above were computed using the statutory tax rate for the taxing jurisdictions in the operating segment in which the related expenses were recorded, adjusted for the effects of valuation allowances on net operating losses in certain jurisdictions. During 2023, we generated $619.5 million of cash from operating activities and primarily utilized cash for strategic acquisitions and to repurchase shares of our common stock. We had net borrowings of $299.6 million under our senior secured revolving credit facility (the “ABL facility”). We ended the year with $268.7 million of cash and cash equivalents and $940.5 million of debt outstanding under our long-term debt facilities, including $348.0 million related to the Notes that are classified as a current liability at December 31, 2023. Details about segment results of operations can be found in Note 19 to the Consolidated Financial Statements in Part II, Item 8 of this report. Our discussion and analysis of financial condition and results of operations is intended to assist in the understanding of our consolidated financial statements, including the changes in certain key items in those consolidated financial statements from year to year and the primary factors that contributed to those changes, as well as how certain critical accounting estimates affect our consolidated financial statements. Supply Chain Constraints and Inflation Update Supply constraints that have had an industry-wide impact since the beginning of 2020 continued to ease in the second half of 2023. We believe that the remaining supply constraints and extended lead times for certain infrastructure, including networking products have now normalized back to historic levels. However, we continue to see a general slowdown in our clients' decision making, which we believe will continue in the near term. In addition, inflation resulted in higher interest rates on all of our variable rate facilities when compared to 2022 and we expect these higher rates will continue into 2024. We are actively monitoring changes to the global macroeconomic environment, including those impacting our supply chain and interest rates, and assessing the potential impacts these challenges may have on our current results, financial condition and liquidity. We are also mindful of the potential impact these conditions could have on our clients, partners and prospects for 2024 and beyond. 31 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) RESULTS OF OPERATIONS The following table sets forth certain financial data as a percentage of net sales for the years ended December 31, 2023 and 2022: [[GREPCENT_TABLE]] [["","2023","","2022"],["Net sales","100.0","%","","100.0","%"],["Costs of goods sold","81.8","","","84.3"],["Gross profit","18.2","","","15.7"],["Operating expenses:"],["Selling and administrative expenses","13.5","","","11.7"],["Severance and restructuring expenses and acquisition-related expenses","0.1","","","\u2014"],["Earnings from operations","4.6","","","4.0"],["Non-operating expense, net","0.5","","","0.4"],["Earnings before income taxes","4.1","","","3.6"],["Income tax expense","1.0","","","0.9"],["Net earnings","3.1","%","","2.7","%"]] [[/GREPCENT_TABLE]] Our gross profit across the business and related to product versus services sales are, and will continue to be, impacted by partner incentives, which can and do change significantly in the amounts made available and the related product or services sales being incentivized by the partner. Incentives from our largest partners are significant and changes in the incentive requirements, which occur regularly, could impact our results of operations to the extent we are unable to shift our focus and respond to them. For a discussion of risks associated with our reliance on partners, see “Risk Factors – Risks related to Our Business, Operations and Industry – We rely on our partners for product availability, competitive products to sell and marketing funds and purchasing incentives, which can change significantly in the amounts made available and the requirements year over year,” in Part I, Item 1A of this report. Our results of operations include the results of Hanu, Amdaris and SADA from their respective acquisition dates. 2023 Compared to 2022 Net Sales. Net sales decreased 12%, or $1.3 billion, in 2023 compared to 2022. Net sales of products (hardware and software) decreased 15%, year to year, while net sales of services increased 4%, year over year, in 2023 compared to 2022. Our net sales by operating segment for 2023 and 2022 were as follows (dollars in thousands): [[GREPCENT_TABLE]] [["","2023","","2022","","% Change"],["North America","$","7,382,354","","","$","8,484,392","","","(13","%)"],["EMEA","1,563,654","","","1,712,521","","","(9","%)"],["APAC","229,832","","","234,278","","","(2","%)"],["Consolidated","$","9,175,840","","","$","10,431,191","","","(12","%)"]] [[/GREPCENT_TABLE]] 32 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Our net sales by offering category for North America for 2023 and 2022 were as follows (dollars in thousands): [[GREPCENT_TABLE]] [["","","North America"],["Sales Mix","","2023","","2022","","% Change"],["Hardware","","$","4,498,466","","","$","5,738,586","","","(22","%)"],["Software","","1,669,046","","","1,552,715","","","7","%"],["Services","","1,214,842","","","1,193,091","","","2","%"],["","","$","7,382,354","","","$","8,484,392","","","(13","%)"]] [[/GREPCENT_TABLE]] Net sales in North America decreased 13%, or $1.1 billion, in 2023 compared to 2022. This net decrease reflects a decrease in hardware net sales, partially offset by increases in software and services net sales. Net sales of hardware decreased 22%, year to year. Net sales of software and services increased 7% and 2%, respectively, year over year. The net decrease year to year was primarily the result of the following: •The decrease in hardware net sales was due to lower volume of sales to large enterprise and corporate clients. This decrease reflects lower sales of devices throughout the year and decreases in infrastructure sales in the latter part of 2023. We believe these decreases reflect client decisions around timing of device refreshes and investments in infrastructure in response to challenges in the broader macroeconomic environment. We expect this trend could continue into the second half of 2024. •The increase in software net sales was primarily due to higher volume of software licensing. This increase was partially offset by the continued trend toward higher sales of cloud solution offerings that are recorded on a net sales recognition basis in the services net sales category. •The increase in services net sales was primarily due to the continued trend toward higher sales of cloud solution offerings, including net sales attributable to SADA, which we acquired in December 2023, partially offset by decreases in Insight Delivered services net sales. Our net sales by offering category for EMEA for 2023 and 2022, were as follows (dollars in thousands): [[GREPCENT_TABLE]] [["","","EMEA"],["Sales Mix","","2023","","2022","","% Change"],["Hardware","","$","546,621","","","$","654,381","","","(16","%)"],["Software","","784,717","","","857,516","","","(8","%)"],["Services","","232,316","","","200,624","","","16","%"],["","","$","1,563,654","","","$","1,712,521","","","(9","%)"]] [[/GREPCENT_TABLE]] Net sales in EMEA decreased 9% (also decreased 9% excluding the effects of fluctuating foreign currency exchange rates), or $148.9 million, in 2023 compared to 2022. This net decrease reflects a decrease in hardware and software net sales, partially offset by an increase in services net sales. Net sales of hardware and software were down 16% and 8%, respectively, year to year, partially offset by an increase in services net sales of 16%, year over year. The changes were primarily the result of the following: •The decrease in hardware net sales was primarily due to lower sales to public sector, large enterprise and corporate clients. •The decrease in software net sales was due to the continued trend toward higher sales of cloud solution offerings that are recorded on a net sales recognition basis in the services net sales category. 33 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) •The increase in services net sales was due to increased sales of Insight Delivered services, including from Amdaris, which we acquired in August 2023, and higher sales of cloud solution offerings. Our net sales by offering category for APAC for 2023 and 2022, were as follows (dollars in thousands): [[GREPCENT_TABLE]] [["","","APAC"],["Sales Mix","","2023","","2022","","% Change"],["Hardware","","$","43,850","","","$","57,928","","","(24","%)"],["Software","","88,688","","","86,661","","","2","%"],["Services","","97,294","","","89,689","","","8","%"],["","","$","229,832","","","$","234,278","","","(2","%)"]] [[/GREPCENT_TABLE]] Net sales in APAC decreased 2% (increased 1% excluding the effects of fluctuating foreign currency rates), or $4.4 million, in 2023 compared to 2022. Net sales of hardware decreased 24% year to year, partially offset by increases in software and services net sales of 2% and 8%, respectively, year over year. The net changes were primarily the result of the following: •The decrease in hardware net sales was due to lower volume of sales to large enterprise and corporate clients. •The increase in services net sales was due to higher volume of Insight Delivered services and higher sales of cloud solution offerings that are recorded on a net sales recognition basis in the services net sales category. •The increase in software net sales was primarily due to higher volume of sales to corporate and public sector clients, partially offset by the continued trend toward higher sales of cloud solution offerings. Net sales by category for North America, EMEA and APAC were as follows for 2023 and 2022: [[GREPCENT_TABLE]] [["","","North America","","EMEA","","APAC"],["Sales Mix","","2023","","2022","","2023","","2022","","2023","","2022"],["Hardware","","61","%","","68","%","","35","%","","38","%","","19","%","","25","%"],["Software","","23","%","","18","%","","50","%","","50","%","","39","%","","37","%"],["Services","","16","%","","14","%","","15","%","","12","%","","42","%","","38","%"],["","","100","%","","100","%","","100","%","","100","%","","100","%","","100","%"]] [[/GREPCENT_TABLE]] Gross Profit. Gross profit increased 2%, or $33.0 million, in 2023 compared to 2022, with gross margin increasing approximately 250 basis points to 18.2% of net sales. Our gross profit and gross profit as a percent of net sales by operating segment for 2023 and 2022 were as follows (dollars in thousands): [[GREPCENT_TABLE]] [["","2023","","% of Net Sales","","2022","","% of Net Sales"],["North America","$","1,345,955","","","18.2","%","","$","1,328,333","","","15.7","%"],["EMEA","259,987","","","16.6","%","","247,269","","","14.4","%"],["APAC","63,583","","","27.7","%","","60,965","","","26.0","%"],["Consolidated","$","1,669,525","","","18.2","%","","$","1,636,567","","","15.7","%"]] [[/GREPCENT_TABLE]] 34 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) North America’s gross profit increased 1%, or $17.6 million, in 2023 compared to 2022. As a percentage of net sales, gross margin expanded by approximately 250 basis points year over year. The year over year net increase in gross margin was primarily attributable to the following: •A net increase in product margin of 41 basis points year over year. This increase was primarily due to higher margins on both hardware and software net sales compared to the prior year. The expanded margins on hardware are due in part to the decline in lower margin devices and also reflect the results of profitability and pricing initiatives started in 2022. •An expansion in services margin year over year of 216 basis points was due to higher margins generated from increased cloud solution offerings, including margin contributed by SADA, software maintenance and on Insight Core services, (consisting of Insight Delivered and managed services). EMEA’s gross profit increased 5% (increased 4% excluding the effects of fluctuating foreign currency exchange rates), or $12.7 million, in 2023 compared to 2022. As a percentage of net sales, gross margin expanded 220 basis points to 16.6%. The year over year net increase in gross margin was primarily attributable to the following: •A net increase in product margin of 50 basis points year over year. This increase was primarily due to higher margins on both hardware and software net sales compared to the prior year, partially offset by a decrease in partner funding. •An expansion in services margin year over year of 169 basis points was due to higher margins generated from increased cloud solution offerings and on Insight Core services from Amdaris. APAC’s gross profit increased 4% (increased 8% excluding the effects of fluctuating foreign currency exchange rates), or $2.6 million, in 2023 compared to 2022. As a percentage of net sales, gross margin increased by approximately 170 basis points year over year. The expanded gross margin for APAC in 2023 compared to 2022 was due primarily to changes in sales mix to services net sales, including Insight Core services at higher margins than product net sales. Our overall gross margins expanded in 2023 compared to 2022, as expected. We believe this trend could continue into future periods as we focus on selling solutions and increasing our services net sales, including cloud solution offerings. Operating Expenses. Selling and Administrative Expenses. Selling and administrative expenses increased $19.6 million in 2023 compared to 2022. Selling and administrative expenses also increased approximately 180 basis points as a percentage of net sales in 2023 compared to 2022. The overall net increase in expenses reflects a $7.3 million increase in personnel costs, including teammate benefits, and a $19.8 million increase in other expenses, year over year. The increase in personnel costs reflects increases in overall teammate headcount from the acquisitions of Amdaris and SADA. The increase in other expenses is partially due to costs incurred related to a third-party data center service outage, net of recoveries of $5.0 million and an increase of $4.2 million in transformation costs incurred and paid to third parties in 2023 compared to 2022. On July 29, 2023, a third-party data center that hosts network environments for certain Insight managed services clients, experienced a security incident that resulted in a service outage at the data center. The incident did not impact any of Insights' information systems, credentials, or data. To support our clients that were impacted, the Company paid for certain equipment and services required to resolve the outage. Transformation costs are costs we incur to transform our business to help us achieve our strategic objectives, including becoming a leading solutions integrator. We expect to continue to incur further transformation costs in 2024; however, these costs are unique in nature and are not expected to recur in the longer term. Depreciation and amortization expense also increased $6.2 million, year over year, primarily as a result of the Amdaris and SADA acquisitions. These increases were partially offset by decreases in legal and professional fees of $8.3 million and marketing costs of $3.1 million. 35 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Severance and Restructuring Expenses, Net. During 2023, we recorded severance expense, net of adjustments, totaling $12.9 million. These expenses were partially offset by net gains on the sale of properties due to restructuring of $6.8 million. During 2022, we recorded severance expense, net of adjustments, totaling $4.2 million. Acquisition and Integration-related Expenses. During 2023, we incurred $7.4 million in direct third-party costs primarily related to the acquisitions of SADA and Amdaris. During 2022, we incurred $2.0 million in direct third-party costs primarily related to the acquisition of Hanu. See Note 20 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of our acquisitions. Earnings from Operations. Earnings from operations increased 1%, or $6.1 million, year over year, in 2023 compared to 2022. Our earnings from operations and earnings from operations as a percentage of net sales by operating segment were as follows for 2023 and 2022 (dollars in thousands): [[GREPCENT_TABLE]] [["","2023","","% of Net Sales","","2022","","% of Net Sales"],["North America","$","362,082","","","4.9","%","","$","350,436","","","4.1","%"],["EMEA","38,128","","","2.4","%","","44,264","","","2.6","%"],["APAC","19,585","","","8.5","%","","19,000","","","8.1","%"],["Consolidated","$","419,795","","","4.6","%","","$","413,700","","","4.0","%"]] [[/GREPCENT_TABLE]] North America’s earnings from operations increased 3%, or $11.6 million, year over year, in 2023 compared to 2022. As a percentage of net sales, earnings from operations increased by approximately 80 basis points to 4.9%. The increase in earnings from operations was primarily driven by an increase in gross profit in excess of increases in selling and administrative expenses, severance and restructuring expenses and acquisition and integration related expenses. EMEA’s earnings from operations decreased 14% (also decreasing 14% excluding the effects of fluctuating foreign currency exchange rates), or $6.1 million, year to year, in 2023 compared to 2022. As a percentage of net sales, earnings from operations decreased by approximately 20 basis points to 2.4%. The decrease in earnings from operations was primarily driven by increases in selling and administrative expenses and acquisition and integration related expenses, partially offset by an increase in gross profit. APAC’s earnings from operations increased 3% (increasing 6% excluding the effects of fluctuating foreign currency exchange rates), or $0.6 million, year over year, in 2023 compared to 2022. As a percentage of net sales, earnings from operations increased by approximately 40 basis points to 8.5%. The increase in earnings from operations reflects an increase in gross profit, partially offset by an increase in selling and administrative expenses in 2023 compared to 2022. 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 increased 4%, or $1.6 million, in 2023 compared to 2022 primarily due to higher interest rates under our ABL facility. This was partially offset by lower average daily balances under our ABL facility, higher interest income earned in 2023 and decreased imputed interest under our inventory financing facilities. Imputed interest under our inventory financing facilities decreased $2.2 million due to lower average daily balances in 2023 compared to 2022. 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. 36 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Other Expense (Income), Net. Other expense (income), net, consists primarily of foreign currency exchange gains and losses. Foreign currency exchange gains and losses result from foreign currency transactions, including foreign currency derivative contracts and intercompany balances that are not considered long-term in nature. The changes in net foreign currency exchange gains/losses are due primarily to the underlying changes in the applicable exchange rates, partially mitigated by our use of foreign exchange forward contracts to offset the effects of fluctuations in foreign currencies on certain of our non-functional currency assets and liabilities. Income Tax Expense. Our effective tax rate for 2023 was 25.6% compared to 25.1% in 2022. The increase in the tax rate was primarily due to reduced foreign and research tax credit benefits available in 2023 as compared to 2022 and the effect of valuation allowances on certain foreign loss carryforwards. These increases were partially offset by the release of reserves related to tax years whose statute expired during the current year. The effective tax rate in 2023 was higher than the federal statutory rate of 21.0% primarily due to state income taxes and higher taxes on earnings in foreign jurisdictions. These increases were offset partially by research tax credits. See Note 11 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of income tax expense. 2022 Compared to 2021 For a comparison of our results of operations for the fiscal years ended December 31, 2022 and 2021, 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, 2022 filed with the SEC on February 16, 2023. Liquidity and Capital Resources The following table sets forth certain consolidated cash flow information for 2023 and 2022 (in thousands): [[GREPCENT_TABLE]] [["","2023","","2022"],["Net cash provided by operating activities","$","619,531","","","$","98,106"],["Net cash used in investing activities","(505,201)","","","(137,841)"],["Net cash (used in) provided by financing activities","(16,712)","","","114,007"],["Foreign currency exchange effect on cash, cash equivalentand restricted cash balances","7,449","","","(14,531)"],["Increase in cash, cash equivalents and restricted cash","105,067","","","59,741"],["Cash, cash equivalents and restricted cash at beginning of period","165,718","","","105,977"],["Cash, cash equivalents and restricted cash at end of period","$","270,785","","","$","165,718"]] [[/GREPCENT_TABLE]] Cash and Cash Flow •Our primary uses of cash during 2023 were to fund the strategic acquisitions of SADA and Amdaris, to repurchase shares of our common stock, to repay our inventory financing facilities and to purchase property and equipment. •Operating activities generated $619.5 million in cash in 2023, compared to $98.1 million in 2022. •We received proceeds from the sale of assets, including our properties held for sale, of $15.5 million in 2023, compared to $1.3 million in 2022. •We had net repayments under our inventory financing facilities of $70.4 million in 2023 compared to net repayments of $8.3 million in 2022. 37 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) •Net borrowings under our ABL facility were $299.6 million in 2023. Net borrowings under our ABL facility were $244.7 million in 2022. •Capital expenditures were $39.3 million in 2023 compared to $70.9 million in 2022. •During 2023, we repurchased an aggregate of $217.1 million of our common stock compared to an aggregate of $107.9 million repurchased during 2022. We anticipate that cash flows from operations, together with the funds available under our financing facilities, will be adequate to support our cash and working capital requirements for operations as well as other strategic investments over the next 12 months and beyond. We expect existing cash and cash flows from operations to continue to be sufficient to fund our operating cash activities and cash commitments for investing and financing activities, such as capital expenditures, strategic acquisitions, repurchases of our common stock, debt repayments, including conversion of the Notes, and repayment of our inventory financing facilities for the next 12 months. While we expect the majority of holders of the Notes will not opt to convert their Notes early, the Notes become freely convertible at the option of the holders beginning in June 2024. We believe we have sufficient funds available from capacity under our ABL facility as well as cash we expect to generate from operations, to fund any early conversions that may occur. We currently expect to fund known cash commitments beyond the next 12 months through operating cash activities or other available financing resources. Net cash provided by operating activities. •Cash flow from operating activities in 2023 was $619.5 million, a significant increase in cash generation compared to 2022. The increase in cash flow from operating activities was primarily driven by the decline in devices net sales experienced throughout 2023 when compared to 2022. We have an inverted cash cycle resulting from typically paying partners on shorter terms than we provide to our clients. This generally means in periods of declining hardware sales, and particularly of devices, we typically generate increased cash from operations. Our consolidated cash flow operating metrics for the quarters ended December 31, 2023 and 2022 were as follows: [[GREPCENT_TABLE]] [["","2023","","2022"],["Days sales outstanding in ending accountsreceivable (\u201cDSOs\u201d) (a)","147","","","120"],["Days inventory outstanding (\u201cDIOs\u201d) (b)","9","","","12"],["Days purchases outstanding in ending accountspayable (\u201cDPOs\u201d) (c)","(127)","","","(92)"],["Cash conversion cycle (days) (d)","29","","","40"]] [[/GREPCENT_TABLE]] (a)Calculated as the balance of accounts receivable, net at the end of the period divided by daily net sales. Daily net sales is calculated as net sales for the quarter divided by 92 days. (b)Calculated as average inventories divided by daily costs of goods sold. Average inventories is calculated as the sum of the balances of inventories at the beginning of the period plus inventories at the end of the period divided by two. Daily costs of goods sold is calculated as costs of goods sold for the quarter divided by 92 days. (c)Calculated as the sum of the balances of accounts payable – trade and accounts payable – inventory financing facilities at the end of the period divided by daily costs of goods sold. Daily costs of goods sold is calculated as costs of goods sold for the quarter divided by 92 days. (d)Calculated as DSOs plus DIOs, less DPOs. •Our cash conversion cycle was 29 days in the quarter ended December 31, 2023, a decrease of 11 days when compared to the fourth quarter of 2022. •The changes in our cash conversion cycle compared to the same period in the prior year resulted from the net effect of a 35 day increase in DPOs and a 3 day decrease in DIOs partially offset by a 27 day increase in DSOs. •The changes in our cash conversion cycle year over year were primarily the result of: 38 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) •the impact to DPOs of the SADA and Amdaris acquisitions combined with changes in vendor mix away from discount vendors; •the benefit to DIOs of the easing of supply constraints; and •the impact to DSOs of the SADA and Amdaris acquisitions combined with an increase in other receivables including multi-year transactions. •Our cash conversion cycle is impacted by netted costs that we apply to our services net sales to appropriately record net sales that we earn as an agent. These netted costs, while excluded from both net sales and cost of goods sold, are processed and applied to accounts receivable and accounts payable in each reporting period. As a result, our DSO and DPO calculated on the basis of unadjusted net sales and unadjusted cost of goods sold are inherently inflated. Netted costs were $1.8 billion and $1.6 billion in the fourth quarter of 2023 and 2022, respectively. Adjusting our cash conversion cycle calculation by adding netted costs to both daily net sales and daily costs of goods sold results in a reduction to our cash conversion cycle from 29 days to 22 days in the fourth quarter of 2023 and from 40 days to 28 days in the fourth quarter of 2022, which we believe provides a more accurate reflection of our cash flow operating metrics. •We expect that cash flow from operations will be used, at least partially, to fund working capital as we typically pay our partners on average terms that are shorter than the average terms we grant to our clients in order to take advantage of supplier discounts. •We intend to use cash generated in 2024, in excess of working capital needs, to pay down our ABL facility and our inventory financing facilities as well as to fund strategic acquisitions. Net cash used in investing activities. •We acquired SADA and Amdaris for approximately $398.6 million and $82.9 million, respectively, net of cash and cash equivalents acquired and excluding earn outs and hold backs in 2023. •We received proceeds from the sale of assets, including our properties held for sale, of $15.5 million and $1.3 million in 2023 and 2022, respectively. •Capital expenditures were $39.3 million and $70.9 million in 2023 and 2022, respectively. The majority of the capital expenditures in 2023 was used to fund technology related projects. •We expect total capital expenditures in 2024 to be in the range of $50.0 to $55.0 million. Net cash (used in) provided by financing activities. •During 2023, we had net borrowings on our long-term debt under our ABL facility of $299.6 million and had net repayments under our inventory financing facilities of $70.4 million. •During 2022, we had net borrowings on our long-term debt under our ABL facility of $244.7 million and had net repayments under our inventory financing facilities of $8.3 million. •In 2023, we made earn out and acquisition related payments associated with our Hanu acquisition of $15.6 million in the aggregate, with the earnout finalized in November 2023. •In 2023, we also funded $217.1 million of repurchases of our common stock, compared to $107.9 million purchased during 2022. •We expect to repurchase shares of our common stock in 2024 under our share repurchase plan to cover the dilutive impact of stock-based awards vesting. 39 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 2022 Compared to 2021 For a comparison of our cash flows for the fiscal years ended December 31, 2022 and 2021, 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, 2022 filed with the SEC on February 16, 2023. Financing Facilities As of December 31, 2023, our long-term debt balance includes $591.5 million outstanding under our $1.8 billion ABL facility. As of December 31, 2023, the current portion of our long-term debt relates to the Notes and other financing obligations. •Our objective is to pay our debt balances down while retaining adequate cash balances to meet overall business objectives. •Our Notes are subject to certain events of default and certain acceleration clauses. As of December 31, 2023, no such events have occurred. •Our ABL facility contains various covenants customary for transactions of this type, including complying with a minimum receivable and inventory requirement and meeting monthly, quarterly and annual reporting requirements. •The credit agreement contains customary affirmative and negative covenants and events of default. •At December 31, 2023, we were in compliance with all such covenants. •While the ABL facility has a stated maximum amount, the actual availability under the ABL facility is limited by a minimum accounts receivable and inventory requirement. As of December 31, 2023, eligible accounts receivables and inventory were sufficient to permit access to $1.7 billion of the full $1.8 billion under the ABL facility. We also have agreements with financial intermediaries to facilitate the purchase of inventory from certain suppliers under certain terms and conditions. These amounts are classified separately as accounts payable - inventory financing facilities in our consolidated balance sheets. Notes 7 and 8 to the Consolidated Financial Statements in Part II, Item 8 of this report also include: a description of our financing facilities; amounts outstanding; amounts available and weighted average borrowings and interest rates during the year. 40 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Cash Requirements From Contractual Obligations At December 31, 2023, our contractual obligations for continuing operations primarily consist of: •$231.9 million under our inventory financing facilities due in 2024; •$102.4 million under operating leases, the majority of which are due from 2024 through 2027; •contingent consideration (earnout payments) associated with our acquisition of SADA, up to a maximum of $390.0 million, payable upon certain defined contingencies being met from 2024 through 2027; •contingent consideration (earnout payments) associated with our acquisition of Amdaris, up to a maximum of $54.4 million, payable upon certain defined contingencies being met from 2024 through 2026; •a purchase commitment related to cloud services of $95.8 million that must be met by September 2029; •a purchase commitment related to software as a service of $33.9 million that must be met by November 2026; •$591.5 million outstanding under our ABL facility maturing in 2027; and •$350.0 million principal amount due on the Notes maturing in 2025. Undistributed Foreign Earnings Cash and cash equivalents held by foreign subsidiaries may be subject to U.S. income taxation upon repatriation to the United States. Certain of our foreign earnings were deemed distributed as a result of the Tax Cuts and Jobs Act of 2017; however, for years subsequent to 2017, we continue to assert indefinite reinvestment of foreign earnings for certain of our foreign subsidiaries. As of December 31, 2023, we had approximately $209.1 million in cash and cash equivalents in our foreign subsidiaries, the majority of which reside in Canada, The Netherlands, New Zealand and Australia. Certain of these cash balances will be remitted to the U.S. by paying down intercompany payables generated in the ordinary course of business or through dividend distributions. Off-Balance Sheet Arrangements We have entered into off-balance sheet arrangements, which include guarantees and indemnifications. These arrangements are discussed in Note 16 to the Consolidated Financial Statements in Part II, Item 8 of this report. We believe that none of our off-balance sheet arrangements have, or are reasonably likely to have, a material current or future effect on our financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources. Acquisitions Our strategy includes the possible acquisition of, or investments in, other businesses to expand or complement our operations or to add certain services capabilities. The magnitude, timing and nature of any future acquisitions or investments will depend on a number of factors, including the availability of suitable candidates, the negotiation of acceptable terms, our financial capabilities and general economic and business conditions. Financing for future transactions would result in the utilization of cash, incurrence of additional debt, issuance of stock or some combination of the three. See Note 20 to the Consolidated Financial Statements in Part II, Item 8 of this report for a discussion of our acquisitions of SADA in December 2023, Amdaris in August 2023 and Hanu in June 2022. Inflation We have historically not been adversely affected by inflation, as technological advances and competition within the IT industry have generally caused the prices of the products we sell to decline and product life cycles tend to be short. This requires our growth in unit sales to exceed 41 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) the decline in prices in order to increase our net sales. We believe that most price increases could be passed on to our clients, as prices charged by us are not set by long-term contracts; however, as a result of competitive pressure, there can be no assurance that the full effect of any such price increases could be passed on to our clients. Critical Accounting Estimates General Our consolidated financial statements have been prepared in accordance with GAAP. For a summary of significant accounting policies, see Note 1 to the Consolidated Financial Statements in Part II, Item 8 of this report. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results, however, may differ from our estimates. Members of our senior management have discussed the critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors. We consider the following to be our critical accounting estimates used in the preparation of our consolidated financial statements: Sales Recognition Description For each of our product and services offerings, 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 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 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 can be judgmental and depends upon the specific facts and circumstances for each transaction. Key assumptions used in our estimates for transactions where we have determined we are the agent are the consistency of transactions with multiple performance obligations and consistency of transactions involving security software. Based on our current methodology to recognize net sales, the amount of reported net sales is not highly sensitive to changes in these key assumptions. For example, a 5% change in one of our key assumptions would not materially affect our reported net sales. Effect if actual results differ from assumptions We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to recognize net sales. However, if actual results are not consistent with our 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 or key assumptions used to recognize net sales during the past three fiscal years. We have not made any material adjustments to our financial statements as a result of actual results not being consistent with our estimates in the past three fiscal years. 42 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 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 sales recognition and for a detailed description of our product and services offerings. Partner Funding Description We receive payments and credits from partners, including consideration pursuant to volume sales incentive programs, volume purchase incentive programs and shared marketing expense programs. Partner funding received pursuant to volume sales incentive programs is recognized as it is earned as a reduction to costs of goods sold. Partner funding received pursuant to volume purchase incentive programs is allocated as a reduction to inventories based on the applicable incentives earned from each partner and is recorded in costs of goods sold as the related inventory is sold. Partner funding received pursuant to shared marketing expense programs is recorded as it is earned as a reduction of the related selling and administrative expenses in the period the program takes place if the consideration represents a reimbursement of 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. Judgments and Uncertainties We make period-end estimates about the anticipated achievement levels under the various partner programs in order to accrue amounts earned. These estimates and assumptions primarily include whether we have met key net sales targets under the various partner programs. Based on our current methodology to recognize partner funding, the amount of reported net sales and gross profit is not highly sensitive to changes in key assumptions around achievement levels. For example, a revised assessment of the achievement level for any individual partner program would not materially affect our reported net sales or gross profit. Effect if actual results differ from assumptions We have not made any material changes in the methodology or key assumptions used to evaluate estimates of anticipated achievement levels under individual partner programs during the past three fiscal years. We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to recognize partner funding. However, if our actual results are not consistent with our assumptions it could have a material effect on our results of operations and our cash flows. We have not made any material adjustments to our financial statements as a result of actual results for partner funding not being consistent with our estimates in the past three fiscal years. See Note 1 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of our accounting policies related to partner funding. Goodwill Description 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. 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 43 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) factors, among others, could have a significant effect on the recoverability of goodwill and could have a material effect on our consolidated financial statements. Judgments 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. If it is concluded that this is the case, it is necessary to perform a quantitative goodwill impairment test. Otherwise, the goodwill impairment test is not required. In completing a quantitative test for a potential impairment of goodwill, we compare the estimated fair value of each reporting unit in which the goodwill resides to its book value, including goodwill. Our reporting units are our operating segments. Management must apply judgment in determining the reporting units and in estimating the fair value of our reporting units. Multiple valuation techniques can be used to assess the fair value of the reporting unit, including the market and income approaches. All of these techniques include the use of estimates and assumptions that are inherently uncertain. Changes in these estimates and assumptions could materially 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. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates. Management evaluates the merits of each significant assumption, both individually and in the aggregate, used to determine the fair value of the reporting units. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If the carrying amount of the reporting unit exceeds its fair value, then an impairment charge is recognized for the amount by which the carrying value exceeds the fair value. To ensure the reasonableness of the estimated fair values of our reporting units, we perform a reconciliation of our total market capitalization to the estimated fair value of all of our reporting units. Based on qualitative assessments performed in most recent years a quantitative assessment has not been determined to be necessary for any of our reporting units. As such, the amount of reported goodwill is not sensitive to changes in key assumptions. Effect if Actual Results Differ from Assumptions We have not made any material changes in the methodology or key assumptions used to evaluate impairment of goodwill during the past three fiscal years. Our assessments in the past three fiscal years have been qualitative assessments and no quantitative assessments have been deemed necessary. Additionally, during the three years ended December 31, 2023, 2022 and 2021 we analyzed each of our reporting units and determined that no impairment charge was necessary. Acquisition Accounting/Business Combinations Description We account for acquired businesses using the acquisition method of accounting, which requires that once control of a business is obtained, all of the assets acquired and liabilities assumed, be recorded at the date of acquisition at their respective fair values, or other basis as applicable. The excess purchase price over the estimated fair value of net assets acquired is recorded as goodwill. We use various models to determine the value of assets acquired and liabilities assumed such as the cost method, market method, relief from royalty method, multi-period excess earnings and discounted cash flow methods. We engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets. We may adjust the preliminary purchase price 44 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 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. Judgments and Uncertainties Significant judgment is often required in estimating the fair value of assets acquired (particularly intangible assets), liabilities assumed, and contingent consideration. We make estimates and assumptions about projected future cash flows including net sales, gross margin, attrition rates, growth rates, and discount rates based on historical results, business plans, expected synergies, if any, perceived risk and marketplace data considering the perspective of marketplace participants. Based on our current methodology to estimate the fair value of assets acquired and liabilities assumed, the amount of intangible assets recognized in each business combination is not highly sensitive to changes in these key assumptions. For example, with the exception of the discount rate, a 5% change in one of our key assumptions would not materially affect our reported intangible assets balance. Effect if Actual Results Differ from Assumptions We have not made any material changes in the methodology or key assumptions used to evaluate the fair value of assets acquired and liabilities assumed during the past three fiscal years. While management believes the expectations and assumptions used in valuing assets acquired and liabilities assumed are reasonable, they are inherently uncertain. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions, which could then result in subsequent impairment. Any such impairment charges could have a material effect on our results of operations. We completed two business combinations in fiscal 2023 and one business combination in fiscal 2022. We have not made any material adjustments to our financial statements as a result of business combination key assumptions not being consistent with our estimates in the past three fiscal years. See Notes 1 and 20 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of our accounting policies related to acquisition accounting and recent acquisitions. Recently Issued Accounting Standards The information contained in Note 1 to the Consolidated Financial Statements in Part II, Item 8 of this report concerning a description of recent accounting pronouncements, including our expected dates of adoption and the estimated effects on our results of operations and financial condition, is incorporated by reference herein.