INSIGHT ENTERPRISES INC 10-Q

Item 1. Financial Statements. INSIGHT ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) (unaudited) September 30, 2021 December 31, 2020 ASSETS Current assets: Cash and cash equivalents $ 107,350 $ 128,313 Accounts receivable, net of allowance for doubtful accounts of $ 15,919 and $ 15,106 , respectively 2,754,153 2,685,448 Inventories 269,471 185,650 Other current assets 192,018 177,039 Total current assets 3,322,992 $ 3,176,450 Property and equipment, net of accumulated depreciation and amortization of $ 247,605 and $ 256,065 , respectively 152,070 146,016 Goodwill 428,637 429,368 Intangible assets, net of accumulated amortization of $ 102,588 and $ 103,483 , respectively 223,496 246,915 Other assets 308,183 311,983 $ 4,435,378 $ 4,310,732 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable—trade $ 1,363,325 $ 1,461,312 Accounts payable—inventory financing facilities 403,094 356,930 Accrued expenses and other current liabilities 379,302 408,117 Current portion of long-term debt 38 1,105 Total current liabilities 2,145,759 2,227,464 Long-term debt 527,499 437,581 Deferred income taxes 37,140 33,209 Other liabilities 276,058 270,049 2,986,456 2,968,303 Commitments and contingencies Stockholders’ equity: Preferred stock, $ 0.01 par value, 3,000 shares authorized; no shares issued — — Common stock, $ 0.01 par value, 100,000 shares authorized; 34,885 shares at September 30, 2021 and 35,103 shares at December 31, 2020 issued and outstanding 349 351 Additional paid-in capital 364,699 364,288 Retained earnings 1,105,557 993,245 Accumulated other comprehensive loss – foreign currency translation adjustments ( 21,683 ) ( 15,455 ) Total stockholders’ equity 1,448,922 1,342,429 $ 4,435,378 $ 4,310,732 See accompanying notes to consolidated financial statements. 1 INSIGHT ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net sales: Products $ 2,124,239 $ 1,661,568 $ 5,906,437 $ 5,182,817 Services 323,282 274,910 963,653 866,447 Total net sales 2,447,521 1,936,478 6,870,090 6,049,264 Costs of goods sold: Products 1,930,096 1,500,312 5,367,083 4,688,497 Services 152,880 128,603 440,305 403,479 Total costs of goods sold 2,082,976 1,628,915 5,807,388 5,091,976 Gross profit 364,545 307,563 1,062,702 957,288 Operating expenses: Selling and administrative expenses 278,998 245,155 827,275 756,598 Severance and restructuring expenses, net 2,396 808 ( 3,217 ) 9,962 Acquisition and integration related expenses — 118 — 2,195 Earnings from operations 83,151 61,482 238,644 188,533 Non-operating (income) expense: Interest expense, net 10,332 9,115 29,884 31,160 Other expense (income), net ( 1,589 ) 1,301 ( 855 ) 836 Earnings before income taxes 74,408 51,066 209,615 156,537 Income tax expense 18,925 12,160 52,403 37,285 Net earnings $ 55,483 $ 38,906 $ 157,212 $ 119,252 Net earnings per share: Basic $ 1.59 $ 1.11 $ 4.49 $ 3.40 Diluted $ 1.51 $ 1.10 $ 4.27 $ 3.37 Shares used in per share calculations: Basic 34,855 35,077 35,050 35,123 Diluted 36,745 35,348 36,860 35,418 See accompanying notes to consolidated financial statements. 2 INSIGHT ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net earnings $ 55,483 $ 38,906 $ 157,212 $ 119,252 Other comprehensive (loss) income, net of tax: Foreign currency translation adjustments ( 11,676 ) 12,492 ( 6,228 ) 2,280 Total comprehensive income $ 43,807 $ 51,398 $ 150,984 $ 121,532 See accompanying notes to consolidated financial statements. 3 INSIGHT ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) (unaudited) Common Stock Treasury Stock Additional Paid-in Accumulated Other Comprehensive Retained Total Stockholders' Shares Par Value Shares Amount Capital Loss Earnings Equity Balances at June 30, 2020 35,070 $ 351 — $ — $ 354,431 $ ( 48,376 ) $ 900,950 $ 1,207,356 Issuance of common stock under employee stock plans, net of shares withheld for payroll taxes 20 — — — ( 377 ) — 1 ( 376 ) Stock-based compensation expense — — — — 4,513 — — 4,513 Foreign currency translation adjustments, net of tax — — — — — 12,492 — 12,492 Net earnings — — — — — — 38,906 38,906 Balances at September 30, 2020 35,090 $ 351 — $ — $ 358,567 $ ( 35,884 ) $ 939,857 $ 1,262,891 Balances at June 30, 2021 34,845 $ 348 — $ — $ 361,412 $ ( 10,007 ) $ 1,050,074 $ 1,401,827 Issuance of common stock under employee stock plans, net of shares withheld for payroll taxes 40 1 — — ( 1,288 ) — — ( 1,287 ) Stock-based compensation expense — — — — 4,575 — — 4,575 Foreign currency translation adjustments, net of tax — — — — — ( 11,676 ) — ( 11,676 ) Net earnings — — — — — — 55,483 55,483 Balances at September 30, 2021 34,885 $ 349 — $ — $ 364,699 $ ( 21,683 ) $ 1,105,557 $ 1,448,922 Balances at December 31, 2019 35,263 $ 353 — $ — $ 357,032 $ ( 38,164 ) $ 841,097 $ 1,160,318 Issuance of common stock under employee stock plans, net of shares withheld for payroll taxes 272 2 — — ( 5,715 ) — — ( 5,713 ) Stock-based compensation expense — — — — 11,754 — — 11,754 Repurchase of treasury stock — — ( 445 ) ( 25,000 ) — — — ( 25,000 ) Retirement of treasury stock ( 445 ) ( 4 ) 445 25,000 ( 4,504 ) — ( 20,492 ) — Foreign currency translation adjustments, net of tax — — — — — 2,280 — 2,280 Net earnings — — — — — — 119,252 119,252 Balances at September 30, 2020 35,090 $ 351 — $ — $ 358,567 $ ( 35,884 ) $ 939,857 $ 1,262,891 Balances at December 31, 2020 35,103 $ 351 — $ — $ 364,288 $ ( 15,455 ) $ 993,245 $ 1,342,429 Issuance of common stock under employee stock plans, net of shares withheld for payroll taxes 279 3 — — ( 8,444 ) — — ( 8,441 ) Stock-based compensation expense — — — — 13,950 — — 13,950 Repurchase of treasury stock — — ( 497 ) ( 50,000 ) — — — ( 50,000 ) Retirement of treasury stock ( 497 ) ( 5 ) 497 50,000 ( 5,095 ) — ( 44,900 ) — Foreign currency translation adjustments, net of tax — — — — — ( 6,228 ) — ( 6,228 ) Net earnings — — — — — — 157,212 157,212 Balances at September 30, 2021 34,885 $ 349 — $ — $ 364,699 $ ( 21,683 ) $ 1,105,557 $ 1,448,922 See accompanying notes to consolidated financial statements. 4 INSIGHT ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Nine Months Ended September 30, 2021 2020 Cash flows from operating activities: Net earnings $ 157,212 $ 119,252 Adjustments to reconcile net earnings to net cash (used in) provided by operating activities: Depreciation and amortization 42,151 51,375 Provision for losses on accounts receivable 5,781 8,093 Non-cash stock-based compensation 13,950 11,754 Deferred income taxes 3,374 ( 2,883 ) Amortization of debt discount 12,615 12,091 Other adjustments ( 4,753 ) 4,087 Changes in assets and liabilities: (Increase) decrease in accounts receivable ( 85,853 ) 247,659 (Increase) decrease in inventories ( 88,119 ) 28,002 (Increase) decrease in other assets ( 20,844 ) 19,643 Decrease in accounts payable ( 119,525 ) ( 4,842 ) Decrease in accrued expenses and other liabilities ( 33,777 ) ( 32,137 ) Net cash (used in) provided by operating activities ( 117,788 ) 462,094 Cash flows from investing activities: Proceeds from sale of assets 29,221 14,218 Purchases of property and equipment ( 28,011 ) ( 20,688 ) Acquisitions, net of cash and cash equivalents acquired — ( 6,405 ) Net cash provided by (used in) investing activities 1,210 ( 12,875 ) Cash flows from financing activities: Borrowings on ABL revolving credit facility 3,167,044 2,111,674 Repayments on ABL revolving credit facility ( 3,085,044 ) ( 2,682,562 ) Net borrowings under inventory financing facilities 76,422 114,321 Repurchases of common stock ( 50,000 ) ( 25,000 ) Other payments ( 9,330 ) ( 7,520 ) Net cash provided by (used in) financing activities 99,092 ( 489,087 ) Foreign currency exchange effect on cash, cash equivalents and restricted cash balances ( 3,601 ) 718 Decrease in cash, cash equivalents and restricted cash ( 21,087 ) ( 39,150 ) Cash, cash equivalents and restricted cash at beginning of period 130,582 116,297 Cash, cash equivalents and restricted cash at end of period $ 109,495 $ 77,147 See accompanying notes to consolidated financial statements. 5 INSIGHT ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation and Recently Issued Accounting Standards 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 company is organized in the following three operating segments, which are primarily defined by their related geographies: Operating Segment Geography North America United States and Canada EMEA Europe, Middle East and Africa APAC Asia-Pacific Our offerings in North America and certain countries in EMEA and APAC include hardware, software and services, 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. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly our financial position as of September 30, 2021 and our results of operations for the three and nine months ended September 30, 2021 and 2020 and cash flows for the nine months ended September 30, 2021 and 2020. The consolidated balance sheet as of December 31, 2020 was derived from the audited consolidated balance sheet at such date. The accompanying unaudited consolidated financial statements and notes have been prepared in accordance with the rules and regulations promulgated by the SEC and consequently do not include all of the disclosures normally required by United States generally accepted accounting principles (“GAAP”). The results of operations for interim periods are not necessarily indicative of results for the full year, due in part to the seasonal nature of our business. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the related notes thereto, in our Annual Report on Form 10-K for the year ended December 31, 2020. The consolidated financial statements include the accounts of Insight Enterprises, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Additionally, these estimates and assumptions affect the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, we evaluate our estimates, including those related to sales recognition, anticipated achievement levels under partner funding programs, assumptions related to stock-based compensation valuation, allowances for doubtful accounts, valuation of inventories, litigation-related obligations, valuation allowances for deferred tax assets and impairment of long-lived assets, including purchased intangibles and goodwill, if indicators of potential impairment exist. 6 INSIGHT ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) Recently Issued Accounting Standards In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2019-12, “Simplifying the Accounting for Income Taxes.” The new standard is intended to simplify various aspects of accounting for income taxes by removing specific exceptions and amending certain requirements. We adopted the new standard as of January 1, 2021. The adoption of this new standard did not have a material effect on our consolidated financial statements. In August 2020, the FASB issued ASU No. 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”. The new guidance is intended to simplify the accounting for certain convertible instruments with characteristics of both liability and equity. The guidance removes certain accounting models which separate the embedded conversion features from the host contract for convertible instruments. As a result, after the adoption of this guidance, an entity’s convertible debt instrument will be wholly accounted for as debt. The guidance also expands disclosure requirements for convertible instruments and simplifies areas of the guidance for diluted earnings-per-share calculations by requiring the use of the if-converted method. The guidance will be effective for fiscal years beginning after December 15, 2021, with early adoption permitted for fiscal years beginning after December 15, 2020 and can be adopted on either a fully retrospective or modified retrospective basis. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements; however, we expect our consolidated statements of operations and consolidated balance sheets will be significantly impacted following adoption of this new standard on January 1, 2022, as we will no longer report accreted interest on the Notes and the full par value of the Notes will be reflected as debt. There have been no other material changes in or additions to the recently issued accounting standards as previously reported in Note 1 to our Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2020 that affect or may affect our current financial statements. 2 . Receivables, Contract Liabilities and Performance Obligations The following table provides information about receivables and contract liabilities as of September 30, 2021 and December 31, 2020 (in thousands): September 30, December 31, 2021 2020 Current receivables, which are included in “Accounts receivable, net” $ 2,754,153 $ 2,685,448 Non-current receivables, which are included in “Other assets” 153,751 154,662 Contract liabilities, which are included in “Accrued expenses and other current liabilities” and “Other liabilities” 109,401 107,158 C hanges in the contract liabilities balances during the nine months ended September 30, 2021 are as follows (in thousands): Increase (Decrease) Contract Liabilities Balances at December 31, 2020 $ 107,158 Reclassification of the beginning contract liabilities to revenue, as the result of performance obligations satisfied ( 67,166 ) Cash received in advance and not recognized as revenue 69,409 Balances at September 30, 2021 $ 109,401 7 INSIGHT ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) During the nine months ended September 30, 2020, the Company recognized revenue of $ 53,454,000 related to its contract liabilities. The following table includes estimated net sales related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2021 that are expected to be recognized in the future (in thousands): Services Remainder of 2021 $ 51,731 2022 91,440 2023 38,271 2024 and thereafter 33,770 Total remaining performance obligations $ 215,212 With the exception of remaining performance obligations associated with our OneCall Support Services contracts which are included in the table above regardless of original duration, r emaining performance obligations that have original expected durations of one year or less are not included in the table above. Amounts not included in the table above have an average original expected duration of nine months. Additionally, for our time and material services contracts, whereby we have the right to consideration from a client in an amount that corresponds directly with the value to the client of our performance completed to date, we recognized revenue in the amount to which we have a right to invoice as of September 30, 2021 and do not disclose information about related remaining performance obligations in the table above. Our time and material contracts have an average expected duration of 22 months. The majority of our backlog historically has been and continues to be open cancelable purchase orders. We do not believe that backlog as of any particular date is predictive of future results, therefore we do not include performance obligations under open cancelable purchase orders, which do not qualify for revenue recognition, in the table above. 3. Assets Held for Sale During the nine months ended September 30, 2021, we completed the sale of our three properties in Tempe, Arizona and the sale of our property in Woodbridge, Illinois for total net proceeds of approximately $ 27,211,000 . We intend to use the proceeds from the sales to ready our property in Chandler, Arizona to be used as our global corporate headquarters. During the nine months ended September 30, 2020, we completed the sale of our property in Irvine, California for approximately $ 14,218,000 . 8 INSIGHT ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 4 . Net Earnings Per Share (“EPS”) Basic EPS is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted EPS is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding restricted stock units (“RSUs”) and certain shares underlying the Notes. A reconciliation of the denominators of the basic and diluted EPS calculations follows (in thousands, except per share data): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Numerator: Net earnings $ 55,483 $ 38,906 $ 157,212 $ 119,252 Denominator: Weighted average shares used to compute basic EPS 34,855 35,077 35,050 35,123 Dilutive potential common shares due to dilutive RSUs, net of tax effect 381 271 407 295 Dilutive potential common shares due to the Notes 1,509 — 1,403 — Weighted average shares used to compute diluted EPS 36,745 35,348 36,860 35,418 Net earnings per share: Basic $ 1.59 $ 1.11 $ 4.49 $ 3.40 Diluted $ 1.51 $ 1.10 $ 4.27 $ 3.37 For the three and nine months ended September 30, 2021, 900 and 400 , respectively, of our RSUs were excluded from the diluted EPS calculations. Certain potential outstanding shares from the warrants relating to the Call Spread Transactions were excluded from the diluted EPS calculations because their inclusion would have been anti-dilutive. For the three and nine months ended September 30, 2020, 3,000 and 163,000 , respectively, of our RSUs and certain potential outstanding shares from the Notes and warrants were excluded from the diluted EPS calculations because their inclusion would have been anti-dilutive. 5 . Debt, Inventory Financing Facilities, Finance Leases and Other Financing Obligations Debt Our long-term debt consists of the following (in thousands): September 30, 2021 December 31, 2020 ABL revolving credit facility $ 222,000 $ 140,000 Convertible senior notes due 2025 305,463 296,419 Finance leases and other financing obligations 74 2,267 Total 527,537 438,686 Less: current portion of long-term debt ( 38 ) ( 1,105 ) Long-term debt $ 527,499 $ 437,581 9 INSIGHT ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) Our senior secured revolving credit facility (the “ABL facility”), has an aggregate U.S. dollar equivalent maximum borrowing amount of $ 1,200,000,000 , including a maximum borrowing capacity that could be used for borrowing in certain foreign currencies of $ 150,000,000 . From time to time and at our option, we may request to increase the aggregate amount available for borrowing under the ABL facility by up to an aggregate of the U.S. dollar equivalent of $ 500,000,000 , subject to customary conditions, including receipt of commitments from lenders. The ABL facility is guaranteed by certain of our material subsidiaries and is secured by a lien on certain of our assets and certain of each other borrower’s and each guarantor’s assets. The interest rates applicable to borrowings under the ABL facility are based on the average aggregate excess availability under the ABL facility as set forth on a pricing grid in the credit agreement. The ABL facility matures on August 30, 2024 . As of September 30, 2021, eligible accounts receivable and inventory were sufficient to permit access to the full $ 1,200,000,000 facility amount, of which $ 222,000,000 was outstanding. The ABL facility contains customary affirmative and negative covenants and events of default. If a default occurs (subject to customary grace periods and materiality thresholds) under the credit agreement, certain actions may be taken, including, but not limited to, possible termination of commitments and required payment of all outstanding principal amounts plus accrued interest and fees payable under the credit agreement. Convertible Senior Notes due 2025 In August 2019, we issued $ 350,000,000 aggregate principal amount of Notes that mature on February 15, 2025 . The Notes bear interest at an annual rate of 0.75 % payable semiannually, in arrears, on February 15 th and August 15 th of each year. The Notes are general unsecured obligations of Insight and are guaranteed on a senior unsecured basis by Insight Direct USA, Inc., a wholly owned subsidiary of Insight. Holders of the Notes may convert their notes at their option at any time prior to the close of business on the business day immediately preceding June 15, 2024, under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2019 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day (the “market price trigger”); (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $ 1,000 principal amount of Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) if we call any or all of the Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after June 15, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date, the holders may convert their notes at any time, regardless of the foregoing circumstances. Upon conversion, we will pay or deliver cash, shares of our common stock or a combination of the two, at our discretion. We have made a policy election to settle the par value of the Notes in cash with only the conversion spread being settled in shares of our common stock. The conversion rate will initially be 14.6376 shares of common stock per $ 1,000 principal amount of the Notes (equivalent to an initial conversion price of approximately $ 68.32 per share of common stock). The conversion rate is subject to change in certain circumstances and will not be adjusted for any accrued and unpaid interest. In addition, following certain events that occur prior to the maturity date or following our issuance of a notice of redemption, the conversion rate is subject to an 10 INSIGHT ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) increase for a holder who elects to convert their N otes in connection with those event s or during the related redemption period in certain circumstances. Our convertible notes exceeded the market price trigger of $ 88.82 in the third quarter of 2021 making the notes convertible at the option of the holders through December 31, 2021. No ne of the note holders have exercised their rights at this time. If we undergo a fundamental change, the holders may require us to repurchase for cash all or any portion of their notes at a fundamental change repurchase price equal to 100 % of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. As of September 30, 2021 , none of the criteria for a fundamental change or a conversion rate adjustment had been met. The maximum number of shares issuable upon conversion, including the effect of a fundamental change and subject to other conversion rate adjustments, would be 6,788,208 . The Notes are subject to certain customary events of default and acceleration clauses. As of September 30, 2021, no such events have occurred. The Notes consist of the following balances reported within the consolidated balance sheets (in thousands): September 30, 2021 December 31, 2020 Liability: Principal $ 350,000 $ 350,000 Less: debt discount and issuance costs, net of accumulated accretion ( 44,537 ) ( 53,581 ) Net carrying amount $ 305,463 $ 296,419 Equity, net of deferred tax $ 44,731 $ 44,731 The remaining life of the debt discount and issuance cost accretion is approximately 3.375 years. The effective interest rate on the liability component of the Notes is 4.325 %. Interest expense resulting from the Notes reported within the consolidated statement of operations for the three and nine months ended September 30, 2021 and 2020 is made up of contractual coupon interest, amortization of debt discount and amortization of debt issuance costs. Convertible Note Hedge and Warrant Transaction In connection with the issuance of the Notes, we entered into the Call Spread Transactions with respect to the Company’s common stock. The convertible note hedge consists of an option to purchase up to 5,123,160 common stock shares at a price of $ 68.32 per share. The hedge expires on February 15, 2025 and can only be concurrently executed upon the conversion of the Notes. We paid approximately $ 66,325,000 for the convertible note hedge transaction. Additionally, we sold warrants to purchase 5,123,160 shares of common stock at a price of $ 103.12 per share. The warrants expire on May 15, 2025 and can only be exercised at maturity. The Company received aggregate proceeds of approximately $ 34,440,000 for the sale of the warrants. 11 INSIGHT ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) The Call Spread Transactions have no effect on the terms of the Notes and reduce potential dilution by effectively increasing the initial conversion price of the Notes to $ 103.12 per share of the Company’s common stock. Inventory Financing Facilities On June 28, 2021, we entered into an unsecured inventory financing facility in Canada (the “Canada facility”) with a maximum borrowing capacity of $ 25,000,000 . This facility will stay in effect until it is terminated by any of the parties. If balances are not paid within stated vendor terms, they will accrue interest at Canadian Dollar Offered Rate plus 4.50 %. Amounts outstanding under this facility will be classified as accounts payable – inventory financing facilities in the accompanying balance sheets. On August 6, 2021, we increased our maximum availability for vendor purchases under our unsecured inventory financing facility with MUFG Bank Ltd (“MUFG”) from $ 250,000,000 to $ 280,000,000 . Additionally, we increased our maximum availability under our unsecured inventory financing facility with PNC Bank, N.A. (“PNC”) to $ 300,000,000 , including the $ 25,000,000 facility in Canada. In addition, we have a $ 40,000,000 unsecured inventory financing facility in EMEA. The inventory financing facilities will remain in effect until they are terminated by any of the parties. If balances are not paid within stated vendor terms, they will accrue interest at prime plus 2.00 % , LIBOR plus 4.50 % and 0.25 % on the MUFG, PNC and EMEA facilities, respectively. The PNC facility allows for an alternative rate to be identified if LIBOR is no longer available. Amounts outstanding under these facilities are classified separately as accounts payable – inventory financing facilities in the accompanying consolidated balance sheets and within cash flows from financing activities in the accompanying consolidated statements of cash flows. As of September 30, 2021, our combined inventory financing facilities had a total maximum capacity of $ 620,000,000 , of which $ 403,094,000 was outstanding. 6 . Income Taxes Our effective tax rate for the three and nine months ended September 30, 2021 was 25.4 % and 25.0 %, respectively. For the three months ended September 30, 2021, our effective tax rate was higher than the United States federal statutory rate of 21.0 % due primarily to state income taxes and higher taxes on earnings in foreign jurisdictions, partially offset by tax benefits related to research and development activities. For the nine months ended September 30, 2021, our effective tax rate was higher than the United States federal statutory rate of 21.0 % due primarily to state income taxes and higher taxes on earnings in foreign jurisdictions, partially offset by excess tax benefits on the settlement of employee share based compensation and tax benefits related to research and development activities. Our effective tax rate for both the three and nine months ended September 30, 2020 was 23.8 %. For the three months ended September 30, 2020, our effective tax rate was higher than the United States federal statutory rate of 21.0 % due primarily to state income taxes and higher taxes on earnings in foreign jurisdictions, partially offset by tax benefits related to research and development activities and the beneficial impact of certain income tax regulations issued during the quarter. For the nine months ended September 30, 2020, our effective tax rate was higher than the United States federal statutory rate of 21.0 % due primarily to state income taxes and higher taxes on earnings in foreign jurisdictions, partially offset by the remeasurement of acquired net operating losses under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and the recognition of tax benefits related to research and development activities. As of September 30, 2021 and December 31, 2020, we had approximately $ 11,579,000 and $ 10,546,000 , respectively, of unrecognized tax benefits. Of these amounts, approximately 12 INSIGHT ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) $ 878,000 and $ 749,000 , respectively, relate d to accrued interest. In the future, if recognized, the liability associated with uncertain tax positions would affect our effective tax rate. We do not believe there will be any changes to our unrecognized tax benefits over the next 12 months that would have a material effect on our effective tax rate. We are currently under audit in various jurisdictions for tax years 2013 through 2018 . Although the timing of the resolutions and/or closures of audits is highly uncertain, it is reasonably possible that the examination phase of these audits may be concluded within the next 12 months, which could increase or decrease the balance of our gross unrecognized tax benefits. However, based on the status of the various examinations in multiple jurisdictions, an estimate of the range of reasonably possible outcomes cannot be made at this time, but the estimated effect on our income tax expense and net earnings is not expected to be significant. 7. Share Repurchase Program On February 26, 2020, we announced that our Board of Directors had authorized the repurchase of up to $ 50,000,000 of our common stock. On May 6, 2021, we announced that our Board of Directors had authorized the repurchase of up to $ 125,000,000 of our common stock, including the $ 25,000,000 that remained available from the February 2020 authorization. Our share repurchases may be made on the open market, subject to Rule 10b-18 or in privately negotiated transactions, through block trades, through 10b5-1 plans or otherwise, at management’s discretion. The amount of shares purchased and the timing of the purchases will be based on market conditions, working capital requirements, general business conditions and other factors. We intend to retire the repurchased shares. During the nine months ended September 30, 2021, we repurchased 497,243 shares of our common stock on the open market at a total cost of $ 49,999,979 (an average price of $ 100.55 per share). During the nine months ended September 30, 2020, we repurchased 444,813 shares of our common stock on the open market at a total cost of $ 24,999,996 (an average price of $ 56.20 per share). All shares repurchased during the nine months ended September 30, 2021 and 2020 were retired . 8 . Commitments and Contingencies Contractual In the ordinary course of business, we issue performance bonds to secure our performance under certain contracts or state tax requirements. These bonds are issued on our behalf by a surety company on an unsecured basis; however, if the surety company is ever required to pay out under the bonds, we have contractually agreed to reimburse the surety company. Management believes that payments, if any, related to these performance bonds are not probable at September 30, 2021. Accordingly, we have not accrued any liabilities related to such performance bonds in our consolidated financial statements. Employment Contracts and Severance Plans We have employment contracts with, and severance plans covering, certain officers and management teammates under which severance payments would become payable in the event of specified terminations without cause or terminations under certain circumstances after a change in control. In addition, vesting of outstanding nonvested RSUs would accelerate following a change in control. If severance payments under the current employment agreements or plan payments were to become payable, the severance payments would generally range from three to twenty-four months of salary. 13 INSIGHT ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) Indemnifications From time to time, in the ordinary course of business, we enter into contractual arrangements under which we agree to indemnify either our clients or third-party service providers from certain losses incurred relating to services performed on our behalf or for losses arising from defined events, which may include litigation or claims relating to past performance. These arrangements include, but are not limited to, the indemnification of our clients for certain claims arising out of our performance under our sales contracts, the indemnification of our landlords for certain claims arising from our use of leased facilities and the indemnification of the lenders that provide our credit facilities for certain claims arising from their extension of credit to us. Such indemnification obligations may not be subject to maximum loss clauses. Management believes that payments, if any, related to these indemnifications are not probable at September 30, 2021. Accordingly, we have not accrued any liabilities related to such indemnifications in our consolidated financial statements. We have entered into separate indemnification agreements with certain of our executive officers and with each of our directors. These agreements require us, among other requirements, to indemnify such officers and directors against expenses (including attorneys’ fees), judgments and settlements incurred by such individual in connection with any action arising out of such individual’s status or service as our executive officer or director (subject to exceptions such as where the individual failed to act in good faith or in a manner the individual reasonably believed to be in, or not opposed to, the best interests of the Company) and to advance expenses incurred by such individual with respect to which such individual may be entitled to indemnification by us. There are no pending legal proceedings that involve the indemnification of any of the Company’s directors or officers. Contingencies Related to Third-Party Review From time to time, we are subject to potential claims and assessments from third parties. We are also subject to various governmental, client and partner audits. We continually assess whether or not such claims have merit and warrant accrual. Where appropriate, we accrue estimates of anticipated liabilities in the consolidated financial statements. Such estimates are subject to change and may affect our results of operations and our cash flows. Legal Proceedings From time to time, we are party to various legal proceedings incidental to the business, including preference payment claims asserted in client bankruptcy proceedings, indemnification claims, claims of alleged infringement of patents, trademarks, copyrights and other intellectual property rights, employment claims, claims of alleged non-compliance with contract provisions and claims related to alleged violations of laws and regulations. We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable or there is a reasonable possibility that a loss, or an additional loss, may have been incurred and determine if accruals are required. If accruals are not required, we further evaluate each legal proceeding to assess whether an estimate of possible loss or range of possible loss can be made. Although litigation is inherently unpredictable, we believe that we have adequate provisions for any probable and estimable losses. It is possible, nevertheless, that our consolidated financial position, results of operations or liquidity could be materially and adversely affected in any particular period by the work required pursuant to any legal proceedings or the resolution of any legal proceedings during such period. Legal expenses related to defense of any legal proceeding or the negotiations, 14 INSIGHT ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) settlements, rulings and advice of outside legal counsel in connection with any legal proceedings are expensed as incurred . In connection with the acquisition of PCM, the Company has effectively assumed responsibility for PCM litigation matters, including various disputes related to PCM’s acquisition of certain assets of En Pointe Technologies in 2015. The seller of En Pointe Technologies and related entities providing various post-closing support functions to PCM have asserted claims regarding the sufficiency of earnout payments paid by PCM under the asset purchase agreement and the unwinding of the support functions post-closing. PCM has rejected and vigorously responded to those claims and is pursuing various counterclaims. The disputes are being heard by multiple courts and arbitrators in several different jurisdictions including California, Delaware and Pakistan. The Company cannot determine with certainty the costs or outcome of these matters. However, the Company is not involved in any pending or threatened legal proceedings, including the PCM litigation matters, that it believes would reasonably be expected to have a material adverse effect on its business, financial condition or results of operations. 9. Segment Information We operate in three reportable geographic operating segments: North America; EMEA; and APAC. Our offerings in North America and certain countries in EMEA and APAC include IT 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. In the following table, revenue is disaggregated by our reportable operating segments, which are primarily defined by their related geographies, as well as by major product offering, by major client group and by recognition on either a gross basis as a principal in the arrangement, or on a net basis as an agent, for the three and nine months ended September 30, 2021 and 2020 (in thousands): Three Months Ended September 30, 2021 North America EMEA APAC Consolidated Major Offerings Hardware $ 1,418,335 $ 160,645 $ 13,515 $ 1,592,495 Software 338,440 178,868 14,436 $ 531,744 Services 263,101 41,935 18,246 $ 323,282 $ 2,019,876 $ 381,448 $ 46,197 $ 2,447,521 Major Client Groups Large Enterprise / Corporate $ 1,447,246 $ 276,292 $ 21,947 $ 1,745,485 Commercial 384,458 13,209 17,277 414,944 Public Sector 188,172 91,947 6,973 287,092 $ 2,019,876 $ 381,448 $ 46,197 $ 2,447,521 Revenue Recognition based on acting as Principal or Agent in the Transaction Gross revenue recognition (Principal) $ 1,926,059 $ 358,981 $ 39,849 $ 2,324,889 Net revenue recognition (Agent) 93,817 22,467 6,348 122,632 $ 2,019,876 $ 381,448 $ 46,197 $ 2,447,521 15 INSIGHT ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) Three Months Ended September 30, 2020 North America EMEA APAC Consolidated Major Offerings Hardware $ 1,028,045 $ 138,685 $ 6,421 $ 1,173,151 Software 306,925 165,301 16,191 488,417 Services 223,198 37,294 14,418 274,910 $ 1,558,168 $ 341,280 $ 37,030 $ 1,936,478 Major Client Groups Large Enterprise / Corporate $ 1,043,303 $ 242,925 $ 15,416 $ 1,301,644 Commercial 312,080 13,647 16,197 341,924 Public Sector 202,785 84,708 5,417 292,910 $ 1,558,168 $ 341,280 $ 37,030 $ 1,936,478 Revenue Recognition based on acting as Principal or Agent in the Transaction Gross revenue recognition (Principal) $ 1,477,716 $ 320,445 $ 31,256 $ 1,829,417 Net revenue recognition (Agent) 80,452 20,835 5,774 107,061 $ 1,558,168 $ 341,280 $ 37,030 $ 1,936,478 Nine Months Ended September 30, 2021 North America EMEA APAC Consolidated Major Offerings Hardware $ 3,696,594 $ 527,022 $ 34,848 $ 4,258,464 Software 978,987 598,277 70,709 $ 1,647,973 Services 758,705 152,359 52,589 $ 963,653 $ 5,434,286 $ 1,277,658 $ 158,146 $ 6,870,090 Major Client Groups Large Enterprise / Corporate $ 3,838,627 $ 883,044 $ 66,686 $ 4,788,357 Commercial 1,091,247 50,908 46,054 1,188,209 Public Sector 504,412 343,706 45,406 893,524 $ 5,434,286 $ 1,277,658 $ 158,146 $ 6,870,090 Revenue Recognition based on acting as Principal or Agent in the Transaction Gross revenue recognition (Principal) $ 5,157,086 $ 1,190,283 $ 137,547 $ 6,484,916 Net revenue recognition (Agent) 277,200 87,375 20,599 385,174 $ 5,434,286 $ 1,277,658 $ 158,146 $ 6,870,090 16 INSIGHT ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) Nine Months Ended September 30, 2020 North America EMEA APAC Consolidated Major Offerings Hardware $ 3,180,501 $ 466,909 $ 21,001 $ 3,668,411 Software 898,290 553,164 62,952 1,514,406 Services 692,905 132,110 41,432 866,447 $ 4,771,696 $ 1,152,183 $ 125,385 $ 6,049,264 Major Client Groups Large Enterprise / Corporate $ 3,227,613 $ 808,360 $ 44,543 $ 4,080,516 Commercial 1,030,540 44,567 45,413 1,120,520 Public Sector 513,543 299,256 35,429 848,228 $ 4,771,696 $ 1,152,183 $ 125,385 $ 6,049,264 Revenue Recognition based on acting as Principal or Agent in the Transaction Gross revenue recognition (Principal) $ 4,530,152 $ 1,071,910 $ 108,073 $ 5,710,135 Net revenue recognition (Agent) 241,544 80,273 17,312 339,129 $ 4,771,696 $ 1,152,183 $ 125,385 $ 6,049,264 All significant intercompany transactions are eliminated upon consolidation, and there are no differences between the accounting policies used to measure profit and loss for our segments or on a consolidated basis. Net sales are defined as net sales to external clients. None of our clients exceeded ten percent of consolidated net sales for the three and nine months ended September 30, 2021 or 2020. A portion of our operating segments’ selling and administrative expenses arise from shared services and infrastructure that we have historically provided to them in order to realize economies of scale and to use resources efficiently. These expenses, collectively identified as corporate charges, include senior management expenses, internal audit, legal, tax, insurance services, treasury and other corporate infrastructure expenses. Charges are allocated to our operating segments, and the allocations have been determined on a basis that we consider to be a reasonable reflection of the utilization of services provided to or benefits received by the operating segments. The following tables present our results of operations by reportable operating segment for the periods indicated (in thousands): Three Months Ended September 30, 2021 North America EMEA APAC Consolidated Net sales: Products $ 1,756,775 $ 339,513 $ 27,951 $ 2,124,239 Services 263,101 41,935 18,246 323,282 Total net sales 2,019,876 381,448 46,197 2,447,521 Costs of goods sold: Products 1,595,184 310,242 24,670 1,930,096 Services 128,710 15,759 8,411 152,880 Total costs of goods sold 1,723,894 326,001 33,081 2,082,976 Gross profit 295,982 55,447 13,116 364,545 Operating expenses: Selling and administrative expenses 219,714 50,062 9,222 278,998 Severance and restructuring expenses 1,999 397 — 2,396 Earnings from operations $ 74,269 $ 4,988 $ 3,894 $ 83,151 17 INSIGHT ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) Three Months Ended September 30, 2020 North America EMEA APAC Consolidated Net sales: Products $ 1,334,970 $ 303,986 $ 22,612 $ 1,661,568 Services 223,198 37,294 14,418 274,910 Total net sales 1,558,168 341,280 37,030 1,936,478 Costs of goods sold: Products 1,202,743 277,025 20,544 1,500,312 Services 108,257 13,955 6,391 128,603 Total costs of goods sold 1,311,000 290,980 26,935 1,628,915 Gross profit 247,168 50,300 10,095 307,563 Operating expenses: Selling and administrative expenses 192,033 45,438 7,684 245,155 Severance and restructuring expenses 773 19 16 808 Acquisition and integration related expenses 118 — — 118 Earnings from operations $ 54,244 $ 4,843 $ 2,395 $ 61,482 Nine Months Ended September 30, 2021 North America EMEA APAC Consolidated Net sales: Products $ 4,675,581 $ 1,125,299 $ 105,557 $ 5,906,437 Services 758,705 152,359 52,589 963,653 Total net sales 5,434,286 1,277,658 158,146 6,870,090 Costs of goods sold: Products 4,237,417 1,033,976 95,690 5,367,083 Services 368,501 48,671 23,133 440,305 Total costs of goods sold 4,605,918 1,082,647 118,823 5,807,388 Gross profit 828,368 195,011 39,323 1,062,702 Operating expenses: Selling and administrative expenses $ 640,420 $ 159,466 $ 27,389 827,275 Severance and restructuring expenses ( 4,361 ) 1,135 9 ( 3,217 ) Earnings from operations $ 192,309 $ 34,410 $ 11,925 $ 238,644 Nine Months Ended September 30, 2020 North America EMEA APAC Consolidated Net sales: Products $ 4,078,791 $ 1,020,073 $ 83,953 $ 5,182,817 Services 692,905 132,110 41,432 866,447 Total net sales 4,771,696 1,152,183 125,385 6,049,264 Costs of goods sold: Products 3,678,118 933,053 77,326 4,688,497 Services 344,586 41,876 17,017 403,479 Total costs of goods sold 4,022,704 974,929 94,343 5,091,976 Gross profit 748,992 177,254 31,042 957,288 Operating expenses: Selling and administrative expenses 590,549 143,859 22,190 756,598 Severance and restructuring expenses 7,799 2,118 45 9,962 Acquisition-related expenses 1,991 204 — 2,195 Earnings from operations $ 148,653 $ 31,073 $ 8,807 $ 188,533 18 INSIGHT ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) The following is a summary of our total assets by reportable operating segment (in thousands): September 30, 2021 December 31, 2020 North America $ 4,690,727 $ 4,837,155 EMEA 717,883 735,771 APAC 124,908 155,761 Corporate assets and intercompany eliminations, net ( 1,098,140 ) ( 1,417,955 ) Total assets $ 4,435,378 $ 4,310,732 We recorded the following pre-tax amounts, by reportable operating segment, for depreciation and amortization in the accompanying consolidated financial statements (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Depreciation and amortization of property and equipment: North America $ 4,376 $ 5,907 $ 14,047 $ 17,559 EMEA 1,141 1,269 3,575 3,846 APAC 148 143 432 415 5,665 7,319 18,054 21,820 Amortization of intangible assets: North America 7,372 8,730 22,229 27,594 EMEA 494 585 1,491 1,625 APAC 122 118 377 336 7,988 9,433 24,097 29,555 Total $ 13,653 $ 16,752 $ 42,151 $ 51,375 19 INSIGHT ENTERPRISES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS