# CDW Corp: Form 10-Q for the period ended Sep 30, 2020

- Company: [CDW Corp](/companies/cdw.md) (CIK 1402057)
- Form: 10-Q
- Filed: 2020-11-02
- Accepted by EDGAR: Nov 2, 2020, 16:02 ET
- Period: 2020-09-30
- Accession: 0001402057-20-000157
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1402057/000140205720000157/cdw-20200930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1402057/000140205720000157/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-07-01 to 2020-09-30 | $4.76bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2020-01-01 to 2020-09-30 | $13.51bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2020-07-01 to 2020-09-30 | $3.93bn | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2020-01-01 to 2020-09-30 | $11.18bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2020-07-01 to 2020-09-30 | $825.5m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2020-01-01 to 2020-09-30 | $2.33bn | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2020-07-01 to 2020-09-30 | $507.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2020-01-01 to 2020-09-30 | $1.48bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-07-01 to 2020-09-30 | $317.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2020-01-01 to 2020-09-30 | $847.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2020-07-01 to 2020-09-30 | $56.9m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2020-01-01 to 2020-09-30 | $157.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-07-01 to 2020-09-30 | $193.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2020-01-01 to 2020-09-30 | $550.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-07-01 to 2020-09-30 | $1.33 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2020-01-01 to 2020-09-30 | $3.80 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-07-01 to 2020-09-30 | $1.36 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2020-01-01 to 2020-09-30 | $3.86 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-07-01 to 2020-09-30 | 144,800,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2020-01-01 to 2020-09-30 | 144,700,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2020-01-01 to 2020-09-30 | $738.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2020-01-01 to 2020-09-30 | $133.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2020-01-01 to 2020-09-30 | $162.4m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2020-01-01 to 2020-09-30 | $140.8m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-09-30 | $1.25bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-09-30 | $5.76bn | us-gaap:AssetsCurrent |
| Total assets | at 2020-09-30 | $9.22bn | us-gaap:Assets |
| Current liabilities | at 2020-09-30 | $3.84bn | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2020-09-30 | $3.86bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2020-09-30 | $72.3m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2020-09-30 | $1.24bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 70,650 characters.

*Unless otherwise indicated or the context otherwise requires, as used in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," the terms "we," "us," "the Company," "our," "CDW" and similar terms refer to CDW Corporation and its subsidiaries. "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with the unaudited interim Consolidated Financial Statements and the related notes included elsewhere in this report and with the audited Consolidated Financial Statements and the related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. This discussion contains forward-looking statements that are subject to numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements. See "Forward-Looking Statements" at the end of this discussion.*

### Overview

CDW Corporation, a Fortune 500 company and member of the S&P 500 Index, is a market-leading provider of integrated information technology ("IT") solutions to small, medium and large business, government, education and healthcare customers in the US, the UK and Canada. Our broad array of offerings ranges from discrete hardware and software products to integrated IT solutions such as mobility, security, data center optimization, cloud computing, virtualization and collaboration.

We are technology "agnostic," with a solutions portfolio including more than 100,000 products and services from more than 1,000 leading and emerging brands. Our solutions are delivered in physical, virtual and cloud-based environments through approximately 6,800 customer-facing coworkers, including sellers, highly-skilled technology specialists and advanced service delivery engineers. We are a leading sales channel partner for many original equipment manufacturers ("OEMs"), software publishers and cloud providers (collectively, our "vendor partners"), whose products we sell or include in the solutions we offer. We provide our vendor partners with a cost-effective way to reach customers and deliver a consistent brand experience through our established end-market coverage, technical expertise and extensive customer access.

We have three reportable segments, Corporate, Small Business and Public. Our Corporate segment primarily serves US private sector business customers with more than 250 employees. Our Small Business segment primarily serves US private sector business customers with up to 250 employees. Our Public segment is comprised of government agencies and education and healthcare institutions in the US. We also have two other operating segments: CDW UK and CDW Canada, each of which do not meet the reportable segment quantitative thresholds and, accordingly, are included in an all other category ("Other").

We may sell all or only select products that our vendor partners offer. Each vendor partner agreement provides for specific terms and conditions, which may include one or more of the following: product return privileges, price protection policies, purchase discounts and vendor incentive programs, such as purchase or sales rebates and cooperative advertising reimbursements. We also resell software for major software publishers. Our agreements with software publishers allow the end-user customer to acquire software or licensed products and services. In addition to helping our customers determine the best software solutions for their needs, we help them manage their software agreements, including warranties and renewals. A significant portion of our advertising and marketing expenses are reimbursed through cooperative advertising programs with our vendor partners. These programs are at the discretion of our vendor partners and are typically tied to sales or other commitments to be met by us within a specified period of time.

### Key Business Metrics

We monitor a number of financial and non-financial measures and ratios on a regular basis in order to track the progress of our business and make adjustments as necessary. We believe that the most important of these measures and ratios include average daily sales, gross margin, operating margin, Net income, Non-GAAP operating income, Non-GAAP operating income margin, Non-GAAP income before income taxes, Non-GAAP net income, Net sales growth on a constant currency basis, Net income per diluted share, Non-GAAP net income per diluted share, free cash flow, return on working capital, Cash and cash equivalents, net working capital, cash conversion cycle, debt levels including available credit, sales per coworker and coworker turnover. These measures and ratios are compared to standards or objectives set by management, so that actions can be taken, as necessary, in order to achieve the standards and objectives.

In this report, we discuss Non-GAAP operating income, Non-GAAP operating income margin, Non-GAAP income before income taxes, Non-GAAP net income and Net sales growth on a constant currency basis, which are non-GAAP financial measures.

We believe these measures provide analysts, investors and management with helpful information regarding the underlying operating performance of our business, as they remove the impact of items that management believes are not reflective of underlying operating performance. Management uses these measures to evaluate period-over-period performance as management believes they provide a more comparable measure of the underlying business. For the definitions of Non-GAAP operating income, Non-GAAP operating income margin, Non-GAAP income before income taxes, Non-GAAP net income, Net sales growth on a constant currency basis and reconciliations to the most directly comparable US GAAP measure, see "Results of Operations - Non-GAAP Financial Measure Reconciliations."

### Third Quarter Overview

The results of certain business metrics are as follows:

*(dollars in millions)*

|  | Three Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: |
| Net sales | $4,756.4 | $4,907.7 |
| Gross profit | 825.5 | 816.5 |
| Operating income | 317.8 | 320.6 |
| Net income | 193.2 | 201.7 |
| Non-GAAP operating income | 386.3 | 380.4 |
| Non-GAAP net income | 265.4 | 249.9 |
| Average daily sales(1) | 74.3 | 76.7 |
| Net debt(2) | 2,681.4 | 3,117.5 |
| Cash conversion cycle (in days)(3) | 16 | 17 |

(1) There were 64 selling days for both the three months ended September 30, 2020 and 2019.

(2) Defined as Total debt minus Cash and cash equivalents.

(3) Cash conversion cycle is defined as days of sales outstanding in Accounts receivable and certain receivables due from vendors plus days of supply in Merchandise inventory minus days of purchases outstanding in Accounts payable and Accounts payable-inventory financing, based on a rolling three-month average.

### Trends and Key Factors Affecting our Financial Performance

We believe the following key factors may have a meaningful impact on our business performance, influencing our ability to generate sales and achieve our targeted financial and operating results:

- General economic conditions are a key factor affecting our results as they impact our customers' willingness to spend on information technology. This is particularly the case for our Corporate and Small Business customers, as their purchases tend to reflect confidence in their business prospects, which are driven by their discrete perceptions of business and general economic conditions. Additionally, changes in trade policy and product constraints from suppliers could have an adverse impact on our business.
- The global spread of the novel coronavirus ("COVID-19") pandemic continues to create significant macroeconomic uncertainty, volatility and disruption. The extent to which the COVID-19 pandemic continues to impact our business, results of operations, cash flows, financial condition and liquidity will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration, severity and further spread of the outbreak, future resurgences and reimplementation of closures, actions taken to contain the virus or treat its impact and the effectiveness of these actions and how quickly and to what extent normal economic and operating conditions can resume and be sustained. We have mobilized our resources to help ensure the well-being and safety of our coworkers, business continuity, a strong capital position and adequate liquidity. Our efforts have included:
- Continued focus on the well-being and safety of our coworkers, leveraging standing crisis management protocols and following guidelines from public health authorities and state and local governments. During the first quarter of 2020, we implemented precautions to help keep our coworkers healthy and safe, including activating a cross-functional response team led by senior leadership, moving to remote work for our office coworkers, and implementing safety protocols at our distribution centers, including social distancing measures, segmented shifts, additional personal protective equipment, enhanced facility cleanings, and temperature screening for anyone entering the facilities. All distribution and configuration centers continue to be operational. Our office coworkers continue to work remotely.
- Remote enablement, operations continuity, and security are customer focus areas to manage remote environments at scale and to prepare to be remote longer. Customers are focused on initiatives to reduce costs, optimize resources, and leverage technology for better customer and employee experiences through digital transformation. We have orchestrated solutions by leveraging client devices, accessories, collaboration tools, security, software and cloud offerings to help customers build these capabilities and achieve their objectives.
- Increasing our provision for credit losses during the nine months ended September 30, 2020 as a result of the expected economic impact of the COVID-19 pandemic. We continue to monitor cash collections and credit limits of our customers to manage the risk of uncollectible receivables.
- Closely monitoring our cost structure relative to the overall demand environment. We have taken measures to enhance liquidity, including completing a $600 million senior notes issuance in April 2020, leveraging the lower interest rate environment by refinancing one of our higher interest rate senior notes in August 2020, and implementing cost savings initiatives. We temporarily suspended share repurchases from March 2020 through October 2020. In November 2020, we announced the resumption of our share repurchase program.
- Changes in spending policies, budget priorities and funding levels are a key factor influencing the purchasing levels of Government, Healthcare and Education customers. Given the COVID-19 pandemic, Education customers have prioritized their budgets towards IT spending while Healthcare customer budgets have been pressured. As the duration and ongoing economic impacts of the COVID-19 pandemic remain uncertain, current and future budget priorities and funding levels for Government, Healthcare and Education customers may be adversely affected.
- Technology trends drive customer purchasing behaviors in the market. Current technology trends are focused on delivering greater flexibility and efficiency, as well as designing IT securely. These trends are driving customer adoption of solutions such as those delivered via cloud, software defined architectures and hybrid on-premise and off-premise combinations, as well as the evolution of the IT consumption model to more "as a service" offerings, including Device as a Service and managed services. Technology trends could also change as customers consider the impact of the COVID-19 pandemic on their operations.
- There continues to be substantial uncertainty regarding the impact of the UK's exit from the European Union ("EU") (referred to as "Brexit"), with the UK/EU future trade deal still being negotiated. Potential adverse consequences of Brexit such as global market uncertainty, volatility in currency exchange rates, greater restrictions on imports and exports between UK and EU countries and increased regulatory complexities could have a negative impact on our business, financial condition and results of operations. Prior to the impact of the COVID-19 pandemic, CDW UK had not experienced significant changes in the buying behavior of its customers. We have established a presence in the Netherlands to support CDW UK's broader growth opportunities in the EU and to help address future developments, as needed, for Brexit.

### Results of Operations

### Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Results of operations, in dollars and as a percentage of Net sales are as follows:

*Dollars in Millions*

*Dollars in Millions*

|  | Three Months Ended September 30, 2020 | Percentage of Net Sales | 2019 | Percentage of Net Sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $4,756.4 | 100.0% | $4,907.7 | 100.0% |
| Cost of sales | 3,930.9 | 82.6 | 4,091.2 | 83.4 |
| Gross profit | 825.5 | 17.4 | 816.5 | 16.6 |
| Selling and administrative expenses | 507.7 | 10.7 | 495.9 | 10.1 |
| Operating income | 317.8 | 6.7 | 320.6 | 6.5 |
| Interest expense, net | (40.2) | (0.8) | (42.3) | (0.9) |
| Other expense, net | (27.5) | (0.6) | (17.4) | (0.3) |
| Income before income taxes | 250.1 | 5.3 | 260.9 | 5.3 |
| Income tax expense | (56.9) | (1.2) | (59.2) | (1.2) |
| Net income | $193.2 | 4.1% | $201.7 | 4.1% |

#### Net sales

Net sales by segment, in dollars and as a percentage of total Net sales, and the year-over-year dollar and percentage change in Net sales are as follows:

*(dollars in millions)*

|  | Three Months Ended September 30, 2020 Net Sales | Percentage of Total Net Sales | 2019 Net Sales | Percentage of Total Net Sales | Dollar Change | Percent Change(1) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Corporate | $1,660.0 | 34.9% | $1,913.5 | 39.0% | $(253.5) | (13.2)% |
| Small Business | 337.0 | 7.1 | 386.2 | 7.9 | (49.2) | (12.7) |
| Public: |  |  |  |  |  |  |
| Government | 847.7 | 17.8 | 793.4 | 16.2 | 54.3 | 6.8 |
| Education | 1,078.2 | 22.7 | 807.0 | 16.4 | 271.2 | 33.6 |
| Healthcare | 367.9 | 7.7 | 500.5 | 10.2 | (132.6) | (26.5) |
| Total Public | 2,293.8 | 48.2 | 2,100.9 | 42.8 | 192.9 | 9.2 |
| Other | 465.6 | 9.8 | 507.1 | 10.3 | (41.5) | (8.2) |
| Total Net sales | $4,756.4 | 100.0% | $4,907.7 | 100.0% | $(151.3) | (3.1)% |

(1) There were 64 selling days for both the three months ended September 30, 2020 and 2019.

Total Net sales for the three months ended September 30, 2020 decreased $151 million, or 3.1%, to $4,756 million, compared to the three months ended September 30, 2019. Excluding the impact of foreign currency fluctuations, constant currency Net sales decreased 3.3%. For additional information, see "Non-GAAP Financial Measure Reconciliations" below regarding constant currency Net sales growth.

For the three months ended September 30, 2020, Net sales decreased across all major hardware categories, with the exception of notebooks/mobile devices, compared to the three months ended September 30, 2019, due to the impact of the COVID-19 pandemic on customer demand. The Census project contributed to growth in other hardware, including accessories and smartphones, and services. For additional information, see Note 10 (Segment Information) to the accompanying Consolidated Financial Statements.

Corporate segment Net sales for the three months ended September 30, 2020 decreased $254 million, or 13.2%, compared to the three months ended September 30, 2019 driven by decreases across most major hardware categories, due to the impact of the COVID-19 pandemic on customer demand, partially offset by an increase in software.

Small Business segment Net sales for the three months ended September 30, 2020 decreased $49 million, or 12.7%, compared to the three months ended September 30, 2019 driven by decreases across all major hardware categories due to the impact of the COVID-19 pandemic on customer demand.

Public segment Net sales for the three months ended September 30, 2020 increased $193 million, or 9.2%, compared to the three months ended September 30, 2019. Net sales to Government customers increased 6.8% primarily driven by Other hardware, including accessories and smartphones, and services as we continued to deliver on the Census project, as well as notebooks/mobile devices, partially offset by a decrease in enterprise storage and software. Net sales to Education customers increased 33.6% primarily driven by notebooks/mobile devices and related accessories and software, as schools become more enabled for remote learning. Net sales to Healthcare customers decreased 26.5% primarily driven by decreases across all major hardware categories as hospitals experienced budget pressures and delayed projects.

Net sales in Other, which is comprised of results from our UK and Canadian operations, for the three months ended September 30, 2020 decreased $42 million, or 8.2% compared to the three months ended September 30, 2019. Both operations declined in local currency due to the impact of the COVID-19 pandemic on customer demand. The impact of foreign currency exchange increased Other Net sales by approximately 220 basis points due to the favorable impact of the British pound to US dollar and unfavorable impact resulting from the Canadian dollar to US dollar translations.

#### Gross profit

Gross profit increased $9 million, or 1.1%, to $826 million for the three months ended September 30, 2020, compared to $817 million for the three months ended September 30, 2019. As a percentage of Net sales, Gross profit margin increased 80 basis points to 17.4% for the three months ended September 30, 2020. The increase in Gross profit margin was primarily due to increased product margin and the mix of netted down revenues that are booked net of cost of goods sold, primarily software as a service.

#### Selling and administrative expenses

Selling and administrative expenses increased $12 million, or 2.4%, to $508 million for the three months ended September 30, 2020, compared to $496 million for the three months ended September 30, 2019. The increase was primarily driven by costs associated with a workforce reduction program. Total coworker count was 9,980, up 137 from 9,843 at September 30, 2019 due to our two most recent acquisitions.

As a percentage of total Net sales, Selling and administrative expenses increased 60 basis points to 10.7% during the three months ended September 30, 2020, compared to 10.1% in the three months ended September 30, 2019 due to higher payroll expenses as a result of higher coworker count and costs associated with a workforce reduction program.

#### Operating income

Operating income by segment, in dollars and as a percentage of Net sales, and the year-over-year percentage change are as follows:

*Dollars in Millions*

*Dollars in Millions*

| Segments:(1) | Three Months Ended September 30, 2020 | Operating Margin | 2019 | Operating Margin | Percent Change in Operating Income |
| --- | ---: | ---: | ---: | ---: | ---: |
| Corporate | $128.5 | 7.7% | $138.9 | 7.3% | (7.5)% |
| Small Business | 24.3 | 7.2 | 27.2 | 7.0 | (10.7) |
| Public | 196.1 | 8.5 | 168.4 | 8.0 | 16.4 |
| Other(2) | 18.7 | 4.0 | 21.9 | 4.3 | (14.6) |
| Headquarters(3) | (49.8) | nm\* | (35.8) | nm\* | (39.1) |
| Total Operating income | $317.8 | 6.7% | $320.6 | 6.5% | (0.9)% |

\* Not meaningful

(1) Segment operating income includes the segment's direct operating income, allocations for Headquarters' costs, allocations for income and expenses from logistics services, certain inventory adjustments and volume rebates and cooperative advertising from vendors.

(2) Includes the financial results for our other operating segments, CDW UK and CDW Canada, which do not meet the reportable segment quantitative thresholds.

(3) Includes certain Headquarters' function costs that are not allocated to the segments.

Operating income was $318 million for the three months ended September 30, 2020, a decrease of $3 million, or 0.9%, compared to $321 million for the three months ended September 30, 2019. Operating income decreased primarily due to higher payroll expenses and costs associated with a workforce reduction program, partially offset by higher Gross profit dollars. Total operating margin percentage increased 20 basis points to 6.7% for the three months ended September 30, 2020, compared to 6.5% for the three months ended September 30, 2019 primarily due to an increase in Gross profit margin, partially offset by higher payroll expenses as a percentage of Net sales and costs associated with a workforce reduction program.

Corporate segment Operating income was $129 million for the three months ended September 30, 2020, a decrease of $10 million, or 7.5%, compared to $139 million for the three months ended September 30, 2019. Corporate segment Operating income decreased primarily due to lower Gross profit dollars, partially offset by lower sales payroll. Corporate segment operating margin percentage increased 40 basis points to 7.7% for the three months ended September 30, 2020, compared to 7.3% for the three months ended September 30, 2019 primarily due to higher product margin, partially offset by higher payroll expenses and higher intangible asset amortization as a percentage of Net sales.

Small Business segment Operating income was $24 million for the three months ended September 30, 2020, a decrease of $3 million, or 10.7%, compared to $27 million for the three months ended September 30, 2019. Small Business segment Operating income decreased primarily due to lower Gross profit dollars, partially offset by lower sales payroll expenses. Small Business segment operating margin percentage increased 20 basis point to 7.2% for the three months ended September 30, 2020, compared to 7.0% for the three months ended September 30, 2019 primarily due to higher product margin, partially offset by a higher provision for credit losses and higher intangible asset amortization as a percentage of Net sales.

Public segment Operating income was $196 million for the three months ended September 30, 2020, an increase of $28 million, or 16.4%, compared to $168 million for the three months ended September 30, 2019. Public segment Operating income increased primarily due to higher Gross profit dollars, partially offset by higher sales payroll. Public segment operating margin percentage increased 50 basis points to 8.5% for the three months ended September 30, 2020, compared to 8.0% for the three months ended September 30, 2019 primarily due to a mix into more profitable product offerings and services and benefits from cost saving measures, such as decreased travel and entertainment, and ongoing productivity and efficiency efforts.

Other Operating income was $19 million for the three months ended September 30, 2020, a decrease of $3 million, or 14.6%, compared to $22 million for the three months ended September 30, 2019. Other Operating income decreased primarily due to lower Gross profit dollars. Other operating margin percentage decreased 30 basis points to 4.0% for the three months ended September 30, 2020, compared to 4.3% for the three months ended September 30, 2019 primarily due to higher payroll expenses as a percentage of Net sales and costs associated with a workforce reduction program, partially offset by higher product margin.

#### Income tax expense

Income tax expense was $57 million and $59 million for the three months ended September 30, 2020 and 2019, respectively. The effective income tax rate, expressed by calculating the income tax expense as a percentage of Income before income taxes, was 22.7% for both the three months ended September 30, 2020 and 2019. The effective tax rate differed from the US statutory rate of 21.0% for three months ended September 30, 2020 primarily due to state and local income taxes and a discrete deferred tax expense as a result of an increase in the UK corporate tax rate, partially offset by excess tax benefits on equity-based compensation. The effective tax rate differed from the US statutory rate of 21.0% for the three months ended September 30, 2019 primarily due to state and local income taxes, partially offset by excess tax benefits on equity-based compensation.

The effective tax rate was the same for the three months ended September 30, 2020 and 2019. The effective tax rate for the three months ended September 30, 2020 had a discrete deferred tax expense to reflect the increase in the UK corporate tax rate and lower excess tax benefits on equity compensation as compared to the same period of the prior year, the impacts of which were offset by a discrete benefit from a state tax refund claim, lower global intangible low-taxed income ("GILTI") and lower non-deductible expenses as compared to the same period of the prior year.

#### Non-GAAP Financial Measure Reconciliations

We have included reconciliations of Non-GAAP operating income, Non-GAAP operating income margin, Non-GAAP income before income taxes, Non-GAAP net income, and Net sales growth on a constant currency basis for the three months ended September 30, 2020 and 2019 below.

Non-GAAP operating income excludes, among other things, charges related to the amortization of acquisition-related intangible assets, equity-based compensation and the associated payroll taxes, a workforce reduction program, and acquisition and integration expenses. Non-GAAP operating income margin is defined as Non-GAAP operating income as a percentage of Net sales. Non-GAAP income before income taxes and Non-GAAP net income exclude, among other things, charges related to acquisition-related intangible asset amortization, equity-based compensation, net loss on extinguishment of long-term debt, a workforce reduction program, acquisition and integration expenses, and the associated tax effects of each. Net sales growth on a constant currency basis is defined as Net sales growth excluding the impact of foreign currency translation on Net sales compared to the prior period.

Non-GAAP operating income, Non-GAAP operating income margin, Non-GAAP income before income taxes, Non-GAAP net income and Net sales growth on a constant currency basis are considered non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a company's performance or financial position that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with US GAAP. Non-GAAP measures used by management may differ from similar measures used by other companies, even when similar terms are used to identify such measures.

We believe these measures provide analysts, investors and management with helpful information regarding the underlying operating performance of our business, as they remove the impact of items that management believes are not reflective of underlying operating performance. Management uses these measures to evaluate period-over-period performance as management believes they provide a more comparable measure of the underlying business.

#### Non-GAAP operating income

Non-GAAP operating income was $386 million for the three months ended September 30, 2020, an increase of $6 million, or 1.5%, compared to $380 million for the three months ended September 30, 2019. As a percentage of Net sales, Non-GAAP operating income was 8.1% and 7.8% for the three months ended September 30, 2020 and 2019, respectively.

*(dollars in millions)*

|  | Three Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: |
| Operating income | $317.8 | $320.6 |
| Amortization of intangibles(1) | 44.9 | 44.6 |
| Equity-based compensation | 11.5 | 12.8 |
| Workforce reduction charges | 8.5 | — |
| Other adjustments(2) | 3.6 | 2.4 |
| Non-GAAP operating income | $386.3 | $380.4 |
| Non-GAAP operating income margin | 8.1% | 7.8% |

(1) Includes amortization expense for acquisition-related intangible assets, primarily customer relationships, customer contracts and trade names.

(2) Includes other expenses such as payroll taxes on equity-based compensation, expenses related to the relocation of the downtown Chicago office, and acquisition and integration expenses.

#### Non-GAAP net income

Non-GAAP net income was $265 million for the three months ended September 30, 2020, an increase of $15.0 million, or 6.2%, compared to $250 million for the three months ended September 30, 2019.

*(in millions)*

|  | Three Months Ended September 30, 2020 Income before income taxes | Income tax expense(1) | Net income | 2019 Income before income taxes | Income tax expense(1) | Net income |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| US GAAP (as reported) | $250.1 | $(56.9) | $193.2 | $260.9 | $(59.2) | $201.7 |
| Amortization of intangibles(2) | 44.9 | (8.6) | 36.3 | 44.6 | (11.3) | 33.3 |
| Equity-based compensation | 11.5 | (5.1) | 6.4 | 12.8 | (11.8) | 1.0 |
| Net loss on extinguishment of long-term debt | 27.3 | (6.8) | 20.5 | 16.1 | (4.0) | 12.1 |
| Workforce reduction charges | 8.5 | (2.1) | 6.4 | — | — | — |
| Other adjustments(3) | 3.6 | (1.0) | 2.6 | 2.4 | (0.6) | 1.8 |
| Non-GAAP | $345.9 | $(80.5) | $265.4 | $336.8 | $(86.9) | $249.9 |

(1) Income tax on non-GAAP adjustments includes excess tax benefits associated with equity-based compensation.

(2) Includes amortization expense for acquisition-related intangible assets, primarily customer relationships, customer contracts and trade names.

(3) Includes other expenses such as payroll taxes on equity-based compensation, expenses related to the relocation of the downtown Chicago office, and acquisition and integration expenses.

#### Net sales growth on a constant currency basis

Net sales decreased $151 million, or 3.1%, to $4,756 million for the three months ended September 30, 2020, compared to $4,908 million for the three months ended September 30, 2019. Net sales on a constant currency basis, which excludes the impact of foreign currency translation, decreased $164 million, or 3.3%.

*(dollars in millions)*

|  | Three Months Ended September 30, 2020 | 2019 | % Change(1) |
| --- | ---: | ---: | ---: |
| Net sales, as reported | $4,756.4 | $4,907.7 | (3.1)% |
| Foreign currency translation(2) | — | 12.8 |  |
| Net sales, on a constant currency basis | $4,756.4 | $4,920.5 | (3.3)% |

(1) There were 64 selling days for both the three months ended September 30, 2020 and 2019.

(2) Represents the effect of translating the prior year results of CDW UK and CDW Canada at the average exchange rates applicable in the current year.

### Nine Months Overview

The results of certain business metrics are as follows:

*(dollars in millions)*

|  | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: |
| Net sales | $13,511.3 | $13,495.5 |
| Gross profit | 2,329.2 | 2,262.4 |
| Operating income | 847.0 | 849.8 |
| Net income | 550.2 | 551.2 |
| Non-GAAP operating income | 1,028.4 | 1,026.1 |
| Non-GAAP net income | 690.7 | 673.0 |
| Average daily sales(1) | 70.4 | 70.7 |
| Net debt(2) | 2,681.4 | 3,117.5 |
| Cash conversion cycle (in days)(3) | 16 | 17 |

(1) There were 192 and 191 selling days for the nine months ended September 30, 2020 and 2019, respectively.

(2) Defined as Total debt minus Cash and cash equivalents.

(3) Cash conversion cycle is defined as days of sales outstanding in Accounts receivable and certain receivables due from vendors plus days of supply in Merchandise inventory minus days of purchases outstanding in Accounts payable and Accounts payable-inventory financing, based on a rolling three-month average.

### Results of Operations

### Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Results of operations, in dollars and as a percentage of Net sales are as follows:

*Dollars in Millions*

*Dollars in Millions*

|  | Nine Months Ended September 30, 2020 | Percentage of Net Sales | 2019 | Percentage of Net Sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $13,511.3 | 100.0% | $13,495.5 | 100.0% |
| Cost of sales | 11,182.1 | 82.8 | 11,233.1 | 83.2 |
| Gross profit | 2,329.2 | 17.2 | 2,262.4 | 16.8 |
| Selling and administrative expenses | 1,482.2 | 11.0 | 1,412.6 | 10.5 |
| Operating income | 847.0 | 6.3 | 849.8 | 6.3 |
| Interest expense, net | (117.8) | (0.9) | (121.1) | (0.9) |
| Other expense, net | (21.9) | (0.1) | (15.0) | (0.1) |
| Income before income taxes | 707.3 | 5.3 | 713.7 | 5.3 |
| Income tax expense | (157.1) | (1.2) | (162.5) | (1.2) |
| Net income | $550.2 | 4.1% | $551.2 | 4.1% |

#### Net sales

Net sales by segment, in dollars and as a percentage of total Net sales, and the year-over-year dollar and percentage change in Net sales are as follows:

*(dollars in millions)*

|  | Nine Months Ended September 30, 2020 Net Sales | Percentage of Total Net Sales | 2019 Net Sales | Percentage of Total Net Sales | Dollar Change | Percent Change | Average Daily Sales Percent Change(1) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Corporate | $5,128.5 | 38.0% | $5,533.6 | 41.0% | $(405.1) | (7.3)% | (7.8)% |
| Small Business | 1,030.6 | 7.6 | 1,119.2 | 8.3 | (88.6) | (7.9) | (8.4) |
| Public: |  |  |  |  |  |  |  |
| Government | 2,135.9 | 15.8 | 1,860.2 | 13.8 | 275.7 | 14.8 | 14.2 |
| Education | 2,431.2 | 18.0 | 1,981.0 | 14.7 | 450.2 | 22.7 | 22.1 |
| Healthcare | 1,274.1 | 9.4 | 1,430.5 | 10.6 | (156.4) | (10.9) | (11.4) |
| Total Public | 5,841.2 | 43.2 | 5,271.7 | 39.1 | 569.5 | 10.8 | 10.2 |
| Other | 1,511.0 | 11.2 | 1,571.0 | 11.6 | (60.0) | (3.8) | (4.3) |
| Total Net sales | $13,511.3 | 100.0% | $13,495.5 | 100.0% | $15.8 | 0.1% | (0.4)% |

(1) There were 192 and 191 selling days for the nine months ended September 30, 2020 and 2019, respectively.

Total Net sales for the nine months ended September 30, 2020 increased $16 million to $13,511 million, compared to the nine months ended September 30, 2019. There was one more selling day in the nine months ended September 30, 2020 compared to the same period of 2019. For additional information, see "Non-GAAP Financial Measure Reconciliations" below regarding constant currency Net sales growth.

For the nine months ended September 30, 2020, Net sales grew in notebooks/mobile devices from robust customer demand for remote enablement in response to the COVID-19 pandemic. The Census project further contributed to growth in other hardware, including accessories and smartphones, and services. These increases were nearly fully offset by decreases in all other hardware categories due to the impact of the COVID-19 pandemic on customer demand. For additional information, see Note 10 (Segment Information) to the accompanying Consolidated Financial Statements.

Corporate segment Net sales for the nine months ended September 30, 2020 decreased $405 million, or 7.3%, compared to the nine months ended September 30, 2019. On an average daily sales basis, Corporate segment Net sales decreased 7.8%. The decrease was primarily driven by all hardware categories, partially offset by increases in software and services.

Small Business segment Net sales for the nine months ended September 30, 2020 decreased $89 million, or 7.9%, compared to the nine months ended September 30, 2019. On an average daily sales basis, Small Business segment Net sales decreased 8.4%. The decrease was driven by all hardware categories.

Public segment Net sales for the nine months ended September 30, 2020 increased $570 million, or 10.8%, compared to the nine months ended September 30, 2019. On an average daily sales basis, Public segment Net sales increased 10.2%. Net sales to Education customers increased 22.1% on an average daily sales basis, primarily driven by notebooks/mobile devices as schools become more enabled for remote learning. Net sales to Government customers increased 14.2% on an average daily sales basis primarily driven by notebooks/mobile devices and the continued delivery on the Census project within other hardware, including accessories and smartphones, and services. Net sales to Healthcare customers decreased 11.4% on an average daily sales basis, primarily driven by all categories with the exception of notebooks/mobile devices as hospitals experienced budget pressures and delayed projects.

Net sales in Other, which is comprised of results from our UK and Canadian operations, for the nine months ended September 30, 2020 decreased $60 million, or 3.8%, compared to the nine months ended September 30, 2019. On an average daily sales basis, Other decreased 4.3%. Net sales for Canadian operations decreased across all hardware categories, with the exception of notebooks/mobile devices. Net sales for UK operations increased primarily driven by notebooks/mobile devices and software, partially offset by all other hardware categories. The impact of foreign currency exchange further decreased Other Net sales by approximately 90 basis points, primarily due to the unfavorable translation of the Canadian dollar and British pound to the US dollar.

#### Gross profit

Gross profit increased $67 million, or 3.0%, to $2,329 million for the nine months ended September 30, 2020, compared to $2,262 million for the nine months ended September 30, 2019. As a percentage of Net sales, Gross profit margin increased 50 basis points to 17.2% for the nine months ended September 30, 2020. Gross profit margin was positively impacted by product margin and by the mix of netted down revenues that are booked net of cost of goods sold, primarily software as a service.

#### Selling and administrative expenses

Selling and administrative expenses increased $70 million, or 4.9%, to $1,482 million for the nine months ended September 30, 2020, compared to $1,413 million for the nine months ended September 30, 2019. The increase was primarily due to higher payroll expenses consistent with higher coworker count and higher Gross profit and a higher provision for credit losses driven by a $30 million increase in reserves, which predominately reflects the expected economic impact of the COVID-19 pandemic. Total coworker count was 9,980, up 137 from 9,843 at September 30, 2019 due to our two most recent acquisitions.

As a percentage of Net sales, Selling and administrative expenses increased 50 basis points to 11.0% during the nine months ended September 30, 2020, compared to 10.5% for the nine months ended September 30, 2019, due to higher payroll expenses and a higher provision for credit losses.

#### Operating income

Operating income by segment, in dollars and as a percentage of Net sales, and the year-over-year percentage change are as follows:

*Dollars in Millions*

*Dollars in Millions*

| Segments:(1) | Nine Months Ended September 30, 2020 | Operating Margin | 2019 | Operating Margin | Percent Change in Operating Income |
| --- | ---: | ---: | ---: | ---: | ---: |
| Corporate | $378.9 | 7.4% | $430.8 | 7.8% | (12.0)% |
| Small Business | 72.6 | 7.0 | 78.2 | 7.0 | (7.2) |
| Public | 468.4 | 8.0 | 373.9 | 7.1 | 25.3 |
| Other(2) | 49.9 | 3.3 | 66.6 | 4.2 | (25.1) |
| Headquarters(3) | (122.8) | nm\* | (99.7) | nm\* | (23.2) |
| Total Operating income | $847.0 | 6.3% | $849.8 | 6.3% | (0.3)% |

\* Not meaningful

(1) Segment operating income includes the segment's direct operating income, allocations for certain Headquarters costs, allocations for income and expenses from logistics services, certain inventory adjustments and volume rebates and cooperative advertising from vendors.

(2) Includes the financial results for our other operating segments, CDW UK and CDW Canada, which do not meet the reportable segment quantitative thresholds.

(3) Includes certain Headquarters' function costs that are not allocated to the segments.

Operating income was $847 million for the nine months ended September 30, 2020, a decrease of $3 million, or 0.3%, compared to $850 million for the nine months ended September 30, 2019. Operating income decreased primarily due to higher payroll expenses and a higher provision for credit losses, partially offset by higher Gross profit dollars. Total operating margin percentage remained flat at 6.3% for both the nine months ended September 30, 2020 and 2019 primarily due higher Gross profit margin, offset by higher payroll expenses and a higher provision for credit losses as percentage of Net sales.

Corporate segment Operating income was $379 million for the nine months ended September 30, 2020, a decrease of $52 million, or 12.0%, compared to $431 million for the nine months ended September 30, 2019. Corporate segment Operating income decreased primarily due to lower Gross profit dollars and a higher provision for credit losses, partially offset by lower payroll expenses. Corporate segment operating margin percentage decreased 40 basis points to 7.4% for the nine months ended September 30, 2020, from 7.8% for the nine months ended September 30, 2019 primarily due to a higher provision for credit losses and higher payroll expenses as a percentage of Net sales, partially offset by higher product margin.

Small Business segment Operating income was $73 million for the nine months ended September 30, 2020, a decrease of $6 million, or 7.2%, compared to $78 million for the nine months ended September 30, 2019. Small Business segment Operating income decreased primarily due to lower Gross profit dollars and a higher provision for credit losses, partially offset by lower sales payroll expenses. Small Business segment operating margin percentage remained flat at 7.0% for both the nine months ended September 30, 2020 and 2019.

Public segment Operating income was $468 million for the nine months ended September 30, 2020, an increase of $94 million, or 25.3%, compared to $374 million for the nine months ended September 30, 2019. Public segment Operating income increased primarily due to higher Gross profit dollars, partially offset by higher sales payroll expenses. Public segment operating margin percentage increased 90 basis points to 8.0% for the nine months ended September 30, 2020, from 7.1% for the nine months ended September 30, 2019 primarily due to a mix into more profitable product offerings and services.

Other Operating income was $50 million for the nine months ended September 30, 2020, a decrease of $17 million, or 25.1%, compared to $67 million for the nine months ended September 30, 2019. Other Operating income decreased primarily due to lower Gross profit dollars, higher payroll expenses and a higher provision for credit losses. Other operating margin percentage decreased 90 basis points to 3.3% for the nine months ended September 30, 2020, from 4.2% for the nine months ended September 30, 2019 primarily due to higher payroll expenses and a higher provision for credit losses as a percentage of Net sales, partially offset by higher product margin.

#### Income tax expense

Income tax expense was $157 million and $163 million for the nine months ended September 30, 2020 and 2019, respectively. The effective tax rate, expressed by calculating the income tax expense as a percentage of Income before income taxes, was 22.2% for the nine months ended September 30, 2020 and differed from the US federal statutory rate of 21.0% with state and local income taxes and a discrete deferred tax expense as a result of an increase in the UK corporate tax rate being largely offset by excess tax benefits on equity-based compensation. The effective income tax rate for the nine months ended September 30, 2019 was 22.8% and differed from the US federal statutory rate of 21.0% primarily due to state and local income taxes partially offset by excess tax benefits on equity-based compensation and a discrete tax benefit related to CDW Canada’s acquisition of Scalar in 2019.

The decrease in the effective tax rate for the nine months ended September 30, 2020 as compared to the same period of the prior year was primarily due to a discrete benefit from a state tax refund claim, lower GILTI and lower non-deductible expenses as compared to the same period of the prior year, partially offset by a discrete deferred tax expense as a result of an increase in the UK corporate tax rate and a discrete tax benefit related to CDW Canada's acquisition of Scalar in 2019.

#### Non-GAAP Financial Measure Reconciliations

We have included reconciliations of Non-GAAP operating income, Non-GAAP operating income margin, Non-GAAP income before income taxes, Non-GAAP net income, and Net sales growth on a constant currency basis for the nine months ended September 30, 2020 and 2019 below.

#### Non-GAAP operating income

Non-GAAP operating income was $1,028 million for the nine months ended September 30, 2020, an increase of $2 million, or 0.2%, compared to $1,026 million for the nine months ended September 30, 2019. As a percentage of Net sales, Non-GAAP operating income was 7.6% for both the nine months ended September 30, 2020 and 2019.

*(dollars in millions)*

|  | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: |
| Operating income | $847.0 | $849.8 |
| Amortization of intangibles(1) | 133.9 | 133.7 |
| Equity-based compensation | 25.9 | 37.7 |
| Workforce reduction charges | 8.5 | — |
| Other adjustments(2) | 13.1 | 4.9 |
| Non-GAAP operating income | $1,028.4 | $1,026.1 |
| Non-GAAP operating income margin | 7.6% | 7.6% |

(1) Includes amortization expense for acquisition-related intangible assets, primarily customer relationships, customer contracts and trade names.

(2) Includes other expenses such as payroll taxes on equity-based compensation, expenses related to the relocation of the downtown Chicago office, and acquisition and integration expenses.

#### Non-GAAP net income

Non-GAAP net income was $691 million for the nine months ended September 30, 2020, an increase of $18 million, or 2.6%, compared to $673 million for the nine months ended September 30, 2019.

*(dollars in millions)*

|  | Nine Months Ended September 30, 2020 Income before income taxes | Income tax expense(1) | Net income | 2019 Income before income taxes | Income tax expense(1) | Net income |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| US GAAP (as reported) | $707.3 | $(157.1) | $550.2 | $713.7 | $(162.5) | $551.2 |
| Amortization of intangibles(2) | 133.9 | (30.8) | 103.1 | 133.7 | (33.8) | 99.9 |
| Equity-based compensation | 25.9 | (25.2) | 0.7 | 37.7 | (28.7) | 9.0 |
| Net loss on extinguishment of long-term debt | 27.3 | (6.8) | 20.5 | 16.1 | (4.0) | 12.1 |
| Workforce reduction charges | 8.5 | (2.1) | 6.4 | — | — | — |
| Other adjustments(3) | 13.1 | (3.3) | 9.8 | 4.9 | (4.1) | 0.8 |
| Non-GAAP | $916.0 | $(225.3) | $690.7 | $906.1 | $(233.1) | $673.0 |

(1) Income tax on non-GAAP adjustments includes excess tax benefits associated with equity-based compensation.

(2) Includes amortization expense for acquisition-related intangible assets, primarily customer relationships, customer contracts and trade names.

(3) Includes other expenses such as payroll taxes on equity-based compensation, expenses related to the relocation of the downtown Chicago office, and acquisition and integration expenses.

#### Net sales growth on a constant currency basis

Net sales increased $15 million, or 0.1%, to $13,511 million for the nine months ended September 30, 2020, compared to $13,496 million for the nine months ended September 30, 2019. Net sales on a constant currency basis, which excludes the impact of foreign currency translation, increased $30 million, or 0.2%.

*(dollars in millions)*

|  | Nine Months Ended September 30, 2020 | 2019 | % Change | Average Daily % Change(1) |
| --- | ---: | ---: | ---: | ---: |
| Net sales, as reported | $13,511.3 | $13,495.5 | 0.1% | (0.4)% |
| Foreign currency translation(2) | — | (14.9) |  |  |
| Net sales, on a constant currency basis | $13,511.3 | $13,480.6 | 0.2% | (0.3)% |

(1) There were 192 and 191 selling days for the nine months ended September 30, 2020 and 2019, respectively.

(2) Represents the effect of translating the prior year results of CDW UK and CDW Canada at the average exchange rates applicable in the current year.

### Seasonality

While we have not historically experienced significant seasonality throughout the year, sales in our Corporate segment, which primarily serves US private sector business customers with more than 250 employees, are typically higher in the fourth quarter than in other quarters due to customers spending their remaining technology budget dollars at the end of the year. Additionally, sales in our Public segment have historically been higher in the third quarter than in other quarters primarily due to the buying patterns of the federal government and education customers.

### Liquidity and Capital Resources

### Overview

We finance our operations and capital expenditures with internally generated cash from operations and borrowings under our revolving credit facility. As of September 30, 2020, we had $856 million of availability for borrowings under our senior secured asset-based revolving credit facility and an additional £50 million ($65 million) under the CDW UK revolving credit facility. Our liquidity and borrowing plans are established to align with our financial and strategic planning processes and ensure we have the necessary funding to meet our operating commitments, which primarily include the purchase of inventory, payroll and general expenses. We also take into consideration our overall capital allocation strategy, which includes investment for future growth, dividend payments, acquisitions and share repurchases. During 2020, we bolstered our liquidity position by completing a $600 million senior notes issuance in April 2020 and leveraging the lower interest rate environment by refinancing one of our higher interest rate senior notes in August 2020. We also temporarily suspended share repurchases from March 2020 through October 2020. In November 2020, we announced the resumption of our share repurchase program. We took additional measures to enhance our liquidity by implementing various cost savings initiatives. We believe we have adequate sources of liquidity and funding available for at least the next year; however, there are a number of factors that may negatively impact our available sources of funds. The amount of cash generated from operations will be dependent upon factors such as the successful execution of our business plan, general economic conditions and working capital management, including accounts receivable.

#### Long-Term Debt and Financing Arrangements

On April 21, 2020, we completed the issuance of $600 million aggregate principal amount of 4.125% Senior Notes due May 2025 at par.

On August 13, 2020, we completed the refinance of $600 million aggregate principal amount of 5.000% Senior Notes due September 2025 through the issuance of $700 million aggregate principal amount of 3.250% Senior Notes due 2029 at par.

As of September 30, 2020, we had total indebtedness of $3.9 billion, of which $1.5 billion was secured indebtedness. At September 30, 2020, we were in compliance with the covenants under our various credit agreements and indentures.

For additional information regarding our debt and refinancing activities, see Note 6 (Long-Term Debt) to the accompanying Consolidated Financial Statements.

#### Inventory Financing Agreements

We have entered into agreements with certain financial intermediaries to facilitate the purchase of inventory from various suppliers under certain terms and conditions. These amounts are classified separately as Accounts payable-inventory financing on the Consolidated Balance Sheets. We do not incur any interest expense associated with these agreements as balances are paid when they are due. For additional information, see Note 3 (Inventory Financing Agreements) to the accompanying Consolidated Financial Statements.

#### Share Repurchase Program

During the first quarter of 2020, we repurchased 1.1 million shares of our common stock for $141 million under the previously announced share repurchase program. In March 2020, we elected to temporarily suspend share repurchases as a precautionary measure in light of the COVID-19 pandemic. We made no share purchases during the second and third quarters of 2020. In November 2020, we announced the resumption of our share repurchase program. For additional information on our share repurchase program, see "Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds."

#### Dividends

A summary of 2020 dividend activity for our common stock is as follows:

|  |  |  |  |
| ---: | --- | --- | --- |
| Dividend Amount | Declaration Date | Record Date | Payment Date |
| $0.380 | February 6, 2020 | February 25, 2020 | March 10, 2020 |
| $0.380 | May 6, 2020 | May 25, 2020 | June 10, 2020 |
| $0.380 | August 4, 2020 | August 25, 2020 | September 10, 2020 |

On November 2, 2020, we announced that our Board of Directors declared a quarterly cash dividend of $0.400 per common share. The dividend will be paid on December 10, 2020 to all stockholders of record as of the close of business on November 25, 2020.

The payment of any future dividends will be at the discretion of our Board of Directors and will depend upon our results of operations, financial condition, business prospects, capital requirements, contractual restrictions, any potential indebtedness we may incur, restrictions imposed by applicable law, tax considerations and other factors that our Board of Directors deems relevant. In addition, our ability to pay dividends on our common stock will be limited by restrictions on our ability to pay dividends or make distributions to our stockholders and on the ability of our subsidiaries to pay dividends or make distributions to us, in each case, under the terms of our current and any future agreements governing our indebtedness.

#### Coronavirus Aid, Relief, and Economic Security Act

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted into law. The primary impact to our financial statements as a result of the CARES Act was the deferral of US corporate income tax payments from the second quarter of 2020 to July 2020 as well as the deferral of employer related payroll tax payments from the second, third and fourth quarters of 2020 with 50% to be paid in the fourth quarter of 2021 and the remaining 50% to be paid in the fourth quarter of 2022.

### Cash Flows

Cash flows from operating, investing and financing activities are as follows:

*(dollars in millions)*

| Net cash provided by (used in): | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: |
| Operating activities | $738.4 | $682.3 |
| Investing activities | (172.1) | (150.0) |
| Net change in accounts payable-inventory financing | 232.5 | (17.4) |
| Other financing activities | 299.2 | (551.1) |
| Financing activities | 531.7 | (568.5) |
| Effect of exchange rate changes on cash and cash equivalents | (2.5) | (2.7) |
| Net increase (decrease) in cash and cash equivalents | $1,095.5 | $(38.9) |

#### Operating Activities

Cash flows from operating activities are as follows:

*(dollars in millions)*

|  | Nine Months Ended September 30, 2020 | 2019 | Change |
| --- | ---: | ---: | ---: |
| Net income | $550.2 | $551.2 | $(1.0) |
| Adjustments for the impact of non-cash items(1) | 441.3 | 226.9 | 214.4 |
| Net income adjusted for the impact of non-cash items(2) | 991.5 | 778.1 | 213.4 |
| Changes in assets and liabilities: |  |  |  |
| Accounts receivable(3) | (304.9) | (171.8) | (133.1) |
| Merchandise inventory(4) | (34.2) | (151.1) | 116.9 |
| Accounts payable-trade(5) | 106.8 | 264.0 | (157.2) |
| Other(6) | (20.8) | (36.9) | 16.1 |
| Net cash provided by operating activities | $738.4 | $682.3 | $56.1 |

(1) Includes items such as depreciation and amortization, deferred income taxes, provision for credit losses and equity-based compensation expense.

(2) The change is due to stronger operating results driven by Gross profit growth and higher depreciation and amortization.

(3) The change is primarily driven by mixing into customers with longer payment cycles, customers taking longer to pay due to the current economic environment and favorable timing of collections in 2019.

(4) The change is primarily due to lower growth in inventory balances, partially offset by higher customer-driven stocking positions in 2020 compared to 2019.

(5) The change is primarily due to lower growth in sales in 2020 compared to 2019.

(6) The change is primarily driven by improved collection performance and a lower balance of our receivables from vendors, partially offset by reduced contract liabilities.

In order to manage our working capital and operating cash needs, we monitor our cash conversion cycle, defined as days of sales outstanding in accounts receivable plus days of supply in inventory minus days of purchases outstanding in accounts payable, based on a rolling three-month average. Components of our cash conversion cycle are as follows:

| (in days) | September 30, 2020 | 2019 |
| --- | ---: | ---: |
| Days of sales outstanding (DSO)(1) | 61 | 56 |
| Days of supply in inventory (DIO)(2) | 13 | 13 |
| Days of purchases outstanding (DPO)(3) | (58) | (52) |
| Cash conversion cycle | 16 | 17 |

(1) Represents the rolling three-month average of the balance of Accounts receivable, net at the end of the period, divided by average daily Net sales for the same three-month period. Also incorporates components of other miscellaneous receivables.

(2) Represents the rolling three-month average of the balance of Merchandise inventory at the end of the period divided by average daily Cost of sales for the same three-month period.

(3) Represents the rolling three-month average of the combined balance of Accounts payable-trade, excluding cash overdrafts, and Accounts payable-inventory financing at the end of the period divided by average daily Cost of sales for the same three-month period.

The cash conversion cycle decreased to 16 days at September 30, 2020, compared to 17 days at September 30, 2019. DSO and DPO increased 5 days and 6 days, respectively. The increase in DSO was primarily driven by a greater impact of third-party services, such as software as a service and warranties, and higher receivable balances due to mixing into customers with longer payment cycles and customers generally taking longer to pay due to the current economic environment. These third-party services and mixing into vendors with extended payment terms drove DPO higher.

#### Investing Activities

Net cash used in investing activities increased $22 million in the nine months ended September 30, 2020 compared to September 30, 2019. This increase was primarily due to increased Capital expenditures of $59 million, primarily due to purchases of devices for the Census project, and the acquisition of IGNW on July 1, 2020, partially offset by the acquisition of Scalar in 2019.

#### Financing Activities

Net cash provided by financing activities increased $1.1 billion in the nine months ended September 30, 2020 compared to September 30, 2019. The increase was primarily driven by the $600 million debt offering completed in April 2020, refinancing a series of senior notes in August 2020, lower share repurchases and increased volume through our inventory financing arrangements, partially offset by decreased borrowings under our revolving credit facilities and higher dividend payments. For additional information regarding the inventory financing agreements and debt activities, see Note 3 (Inventory Financing Agreements) and Note 6 (Long-Term Debt) to the accompanying Consolidated Financial Statements.

### Contractual Obligations

Except as disclosed above under "Long-Term Debt and Financing Arrangements," there have been no material changes to our contractual obligations from those reported in our Annual Report on Form 10-K for the year ended December 31, 2019.

### Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

### Issuers and Guarantors of Debt Securities

On March 2, 2020, the SEC adopted final rules that amend the financial disclosure requirements for subsidiary issuers and guarantors of registered debt securities in Rule 3-10 of Regulation S-X. Although the disclosures required by the amendments do not become mandatory until January 4, 2021, voluntary early compliance is permitted. We have elected to voluntarily comply beginning with the quarterly period ended March 31, 2020.

Each series of our outstanding unsecured senior notes (the "Notes") are issued by CDW LLC and CDW Finance Corporation (the "Issuers") and are guaranteed by CDW Corporation ("Parent") and each of CDW LLC's direct and indirect, 100% owned, domestic subsidiaries (the "Guarantor Subsidiaries" and, together with Parent, the "Guarantors"). All guarantees by Parent and the Guarantors are joint and several, and full and unconditional; provided that guarantees by the Guarantor Subsidiaries are subject to certain customary release provisions contained in the indentures governing the Notes.

The Notes and the related guarantees are the Issuers’ and the Guarantors’ senior unsecured obligations and are:

- structurally subordinated to all existing and future indebtedness and other liabilities of our non-guarantor subsidiaries and;
- rank equal in right of payment with all of the Issuers' and the Guarantors’ existing and future unsecured senior debt.

The following tables set forth Balance Sheet information as of September 30, 2020 and December 31, 2019, and Statement of Operations information for the nine months ended September 30, 2020 and for the year ended December 31, 2019. The financial information includes the accounts of the Issuers and the accounts of the Guarantors (the "Obligor Group"). The financial information of the Obligor Group is presented on a combined basis and the intercompany balances and transactions between the Obligor Group have been eliminated.

#### Balance Sheet Information

*(dollars in millions)*

|  | September 30, 2020 | December 31, 2019 |
| --- | ---: | ---: |
| Current assets | $5,084.5 | $3,601.6 |
| Goodwill | 2,235.2 | 2,206.1 |
| Other assets | 678.3 | 903.1 |
| Total Non-current assets | 2,913.5 | 3,109.2 |
| Current liabilities | 3,309.1 | 2,975.3 |
| Long-term debt | 3,859.1 | 3,229.5 |
| Other liabilities | 205.8 | 188.3 |
| Total Long-term liabilities | 4,064.9 | 3,417.8 |

#### Statement of Operations Information

*(dollars in millions)*

|  | Nine Months Ended September 30, 2020 | Year Ended December 31, 2019 |
| --- | ---: | ---: |
| Net sales | $12,000.3 | $15,874.1 |
| Gross profit | 2,072.5 | 2,666.8 |
| Operating income | 797.0 | 1,032.1 |
| Net income | 511.1 | 656.7 |

### Commitments and Contingencies

The information set forth in Note 9 (Commitments and Contingencies) to the accompanying Consolidated Financial Statements is incorporated herein by reference.

### Critical Accounting Policies and Estimates

We estimate an allowance for credit losses related to accounts receivable for future expected credit losses by using relevant information such as historical information, current conditions, and reasonable and supportable forecasts. The allowance is measured on a pool basis when similar risk characteristics exist, and a loss-rate for each pool is determined using historical credit loss experience as the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current conditions, as well as changes in forecasted macroeconomic conditions, such as changes in the unemployment rate or gross domestic product growth. We have typically experienced a higher loss-rate experience with customers in the pools associated with our Corporate and Small Business segments, as compared to the pools associated with the Public segment. During the nine months ended September 30, 2020, we recognized an allowance to reflect the forecasted credit deterioration due to the COVID-19 pandemic, which considered the customer makeup and overall size of our pools, the impacts experienced to date and the impacts from the last significant economic downturn in 2008-2009. Due to the higher inherent risk in the pools associated with our Corporate and Small Business segments and the overall size of certain pools within the Public segment, the majority of the additional allowance relates to these segments. As the overall impact and duration of the COVID-19 pandemic remains uncertain, our estimates and assumptions may evolve as conditions change.

Our other critical accounting policies have not changed from those reported in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2019.

### Recent Accounting Pronouncements

The information set forth in Note 2 (Recent Accounting Pronouncements) to the accompanying Consolidated Financial Statements is incorporated herein by reference.

### Forward-Looking Statements

This report contains "forward-looking statements" within the meaning of the federal securities laws. All statements other than statements of historical fact are forward-looking statements. These statements relate to analyses and other information, which are based on forecasts of future results or events and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies. We claim the protection of The Private Securities Litigation Reform Act of 1995 for all forward-looking statements in this report.

These forward-looking statements are identified by the use of terms and phrases such as "anticipate," "assume," "believe," "estimate," "expect," "goal," "intend," "plan," "potential," "predict," "project," "target" and similar terms and phrases or future or conditional verbs such as "could," "may," "should," "will," and "would." However, these words are not the exclusive means of identifying such statements. Although we believe that our plans, intentions and other expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that we will achieve those plans, intentions or expectations. All forward-looking statements are subject to risks and uncertainties that may cause actual results or events to differ materially from those that we expected.

Important factors that could cause actual results or events to differ materially from our expectations, or cautionary statements, are disclosed under the section entitled "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2019 and from time to time in our subsequent Quarterly Reports on Form 10-Q and our other US Securities and Exchange Commission ("SEC") filings. These factors include, among others, the COVID-19 pandemic and actions taken in response thereto and the associated impact on our business, results of operations, cash flows, financial condition and liquidity; global and regional economic and political conditions; decreases in spending on technology products and services; CDW's relationships with vendor partners and terms of their agreements; continued innovations in hardware, software and services offerings by CDW's vendor partners; substantial competition that could reduce CDW's market share; potential interruptions of the flow of products from suppliers; CDW's level of indebtedness and ability to generate sufficient cash to service such indebtedness; restrictions imposed by agreements relating to CDW's indebtedness on its operations and liquidity; changes in, or the discontinuation of, CDW's share repurchase program or dividend payments; the continuing development, maintenance and operation of CDW's information technology systems; potential breaches of data security and failure to protect our information technology systems from cybersecurity threats; potential failures to comply with Public segment contracts or applicable laws and regulations; potential failures to provide high-quality services to CDW's customers; potential losses of any key personnel; potential adverse occurrences at one of CDW's primary facilities or customer data centers; increases in the cost of commercial delivery services or disruptions of those services; CDW's exposure to accounts receivable and inventory risks; future acquisitions or alliances; fluctuations in CDW's operating results; fluctuations in foreign currency; current and future legal proceedings and audits; changes in laws, including regulations or interpretations thereof; and other risk factors or uncertainties identified from time to time in CDW's filings with the SEC. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements contained in the section entitled "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2019 and elsewhere in this report as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.

We caution you that the important factors referenced above may not reflect all of the factors that could cause actual results or events to differ from our expectations. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this report are made only as of the date hereof or, with respect to any documents incorporated by reference, available at the time such document was prepared or filed with the SEC. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

## Market risk

As filed, 319 characters.

See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosures of Market Risks" in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. As of September 30, 2020, there have been no material changes in this information.

## Controls and procedures

As filed, 1,834 characters.

### Evaluation of Disclosure Controls and Procedures

The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, has concluded that, as of the end of such period, the Company's disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, and that information is accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussions regarding required disclosure.

### Changes in Internal Control over Financial Reporting

There have been no changes in the Company's internal control over financial reporting during the three months ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our coworkers are working remotely for their health and safety during the COVID-19 pandemic. We are continually monitoring and assessing the potential impact of the COVID-19 pandemic on our internal controls to minimize the impact on their design and operating effectiveness.

## Risk factors

As filed, 5,063 characters.

The disclosure below modifies the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. These risks and uncertainties, along with those previously disclosed, may cause our business prospects, results of operations and cash flows in future periods to differ materially from those currently expected or desired. Factors not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, results of operations and cash flows.

### Risks Related to Our Business

*The outbreak of the novel coronavirus ("COVID-19") pandemic has adversely impacted and could continue to adversely impact our business and results of operations and could also adversely impact our cash flows, financial condition and liquidity.*

The global spread of COVID-19 continues to create significant macroeconomic uncertainty, volatility and disruption. Many governments and health authorities have implemented recommendations or mandates intended to slow the further spread of the disease, such as shelter-in-place orders, resulting in the temporary closure of schools and non-essential businesses, or social distancing measures, resulting in modified operations of various businesses including ours, and these measures may remain in place for a significant period of time. While some of these restrictions have been lifted or eased in certain jurisdictions, the resurgence of COVID-19 in other jurisdictions has slowed, and in some cases reversed, the reopening process. We could experience disruptions, including as a result of resurgences of COVID-19, that prevent us from meeting the demands of our customers, such as product constraints from our vendor partners and wholesale distributors and other disruptions to our supply chain, disruptions in or restrictions on the ability of our coworkers to work effectively, temporary closures of our distribution facilities, modifications in the operation of facilities that remain open and disruptions of commercial delivery services. The impact of COVID-19 and measures implemented to slow the spread have and could continue to cause delay in, or limit the ability of, our customers to make timely payments to us and could materially increase our costs. In addition, the pandemic has resulted in a widespread health crisis that has adversely affected the economies and financial markets of many countries, including the US, the UK and Canada. During the COVID-19 pandemic and even after it has subsided, we may experience adverse impacts to our business as a result of the pandemic’s global economic impact, including any recession, economic downturn or volatility, government spending cuts, tightening of credit markets or increased unemployment that has occurred or may occur in the future, which could cause our customers and potential customers to postpone or reduce spending on technology products or services or put downward pressure on prices.

Individually and collectively, the consequences of the COVID-19 pandemic have adversely impacted and could continue to adversely impact our business and results of operations and could also adversely impact our cash flows, financial condition and liquidity. Net sales during the third quarter of 2020 decreased as compared to the third quarter of 2019 across all major hardware categories with the exception of notebooks/mobile devices, due to the impact of the COVID-19 pandemic on customer demand, in particular with respect to our Corporate and Small Business customers as their purchases tend to reflect confidence in their business prospects, which are driven by their discrete perceptions of business and economic conditions. The extent to which the COVID-19 pandemic continues to impact our business, results of operations, cash flows, financial condition and liquidity will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration, the severity and further spread of the outbreak, future resurgences and reimplementation of closures, actions taken to contain the virus or treat its impact and the effectiveness of these actions and how quickly and to what extent normal economic and operating conditions can resume and be sustained. To the extent the COVID-19 pandemic adversely affects our business, results of operations, cash flows, financial condition and liquidity, it may also have the effect of heightening many of the other risks described in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, such as those relating to spending on technology products and services by our public sector customers, our level of indebtedness, our need to generate sufficient cash to service our indebtedness, restrictive covenants contained in the agreements that govern our indebtedness limiting our ability to incur additional debt, pay dividends or repurchase capital stock, fluctuations in our operating results and volatility of our common stock price.

Filed Nov 2, 2020.
Source: SEC EDGAR, the filing index for accession 0001402057-20-000157. Last ingested by Listed: Nov 4, 2026, 16:25 ET. No prices; not investment advice.