CDW CORPORATION 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 toCDW 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 endedDecember 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. OverviewCDW 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, theUK andCanada . 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: CDWUK andCDW 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. 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 has
created significant macroeconomic uncertainty, volatility and disruption.
The extent to which the COVID-19 pandemic ultimately impacts our business,
results of operations, cash flows, financial condition and liquidity will
depend on future developments, which are highly uncertain and cannot bepredicted, including, but not limited to, the duration and further spread
of the outbreak, its severity, actions taken to contain the virus or treat
its impact, and how quickly and to what extent normal economic and
operating conditions can resume. The Company is mobilizing its resources
to help ensure the well-being and safety of our coworkers, business
continuity, a strong capital position and adequate liquidity. The
Company's efforts are described below:
19--------------------------------------------------------------------------------
Table of Contents
• Currently, we are focused on the well-being and safety of our
coworkers, leveraging standing crisis management protocols and
following guidelines from public health authorities. 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 working 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. At the end of March, to limit the virus
spread after a few coworkers tested positive for COVID-19, we decided
to close our Vernon Hills, Illinois distribution center for several
days and to require a shift of configuration center coworkers to
self-isolate. We have continued to pay our affected coworkers their
wages. These actions have not had a material impact to date as we
leveraged flexibility in our distribution and configuration
capabilities where possible, and where not, shipping times modestly
increased.
• We had strong Net sales at the end for the first quarter 2020 due to
robust customer demand for remote work enablement. We expect as the
workforces of our customers are more fully enabled for remote work,
this demand will moderate. We believe that some portion of Net sales
achieved in March is likely attributable to a pull forward of future
demand.
• During the first quarter of 2020, we increased our provision for credit
losses as a result of the expected economic impact of COVID-19. We
continue to monitor cash collections and credit limits of our customers
to manage the risk of uncollectible receivables.
• We have taken certain strategic stocking positions to potentially
mitigate the impacts of product constraints related to potential delays
in our supply chain.
• We have taken measures to enhance liquidity, including completing a
and implementing cost savings initiatives.
• There continues to be substantial uncertainty regarding the impact of the
the
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 couldhave a negative impact on our business, financial condition and results of
operations. Prior to the impact of COVID-19, CDW
significant changes in the buying behavior of its customers. We have
established a presence in
growth opportunities in the EU and to help address future developments, as
needed, for Brexit.
• Changes in spending policies, budget priorities and funding levels are akey factor influencing the purchasing levels of government, healthcare and
education customers. With the current COVID-19 pandemic, future budget
priorities and funding levels for these 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.
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
20--------------------------------------------------------------------------------
Table of Contents
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 GAAP measure, see "Results of Operations - Non-GAAP Financial Measure Reconciliations."
The results of certain business metrics are as follows:
Three Months Ended March 31,
(dollars in millions) 2020 2019
Net sales $ 4,389.2 $ 3,957.9
Gross profit 756.5 672.1
Operating income 245.8 228.9
Net income 167.9 152.9
Non-GAAP operating income 303.9 287.3
Non-GAAP net income 200.0 185.4
Average daily sales(1) 68.6 62.8
Net debt(2) 3,257.8 2,998.4
Cash conversion cycle (in days)(3) 20 17
(1) There were 64 and 63 selling days for the three months ended March 31,
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 Three Months EndedMarch 31, 2020 Compared to Three Months EndedMarch 31, 2019 Results of operations, in dollars and as a percentage of Net sales are as follows: Three Months Ended March 31, 2020 2019 Dollars in Percentage of Dollars in Percentage of Millions Net Sales Millions Net Sales Net sales$ 4,389.2 100.0 %$ 3,957.9 100.0 % Cost of sales 3,632.7 82.8 3,285.8 83.0 Gross profit 756.5 17.2 672.1 17.0 Selling and administrative expenses 510.7 11.6 443.2 11.2 Operating income 245.8 5.6 228.9 5.8 Interest expense, net (37.9 ) (0.9 ) (38.3 ) (1.0 ) Other income, net 3.9 0.1 1.0 - Income before income taxes 211.8 4.8 191.6 4.8 Income tax expense (43.9 ) (1.0 ) (38.7 ) (1.0 ) Net income$ 167.9 3.8 %$ 152.9 3.9 % 21
--------------------------------------------------------------------------------
Table of Contents
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:
Three Months Ended March 31,
2020 2019
Average
Daily
Percentage Percentage Sales
(dollars in of Total of Total Dollar Percent Percent
millions) Net Sales Net Sales Net Sales Net Sales Change Change Change(1)
Corporate $ 1,911.0 43.5 % $ 1,736.2 43.9 % $ 174.8 10.1 % 8.4 %
Small
Business 391.5 8.9 355.6 9.0 35.9 10.1 8.4
Public:
Government 568.5 13.0 488.4 12.3 80.1 16.4 14.6
Education 476.2 10.8 400.4 10.1 75.8 19.0 17.1
Healthcare 480.6 11.0 441.9 11.2 38.7 8.8 7.1
Total Public 1,525.3 34.8 1,330.7 33.6 194.6 14.6 12.8
Other 561.4 12.8 535.4 13.5 26.0 4.8 3.2
Total Net
sales $ 4,389.2 100.0 % $ 3,957.9 100.0 % $ 431.3 10.9 % 9.2 %
(1) There were 64 and 63 selling days for the three months ended March 31,
2020 and 2019, respectively.
Total Net sales for the three months ended March 31, 2020 increased $431
million , or 10.9%, to $4,389 million , compared to the three months ended March
31, 2019 . There was one more selling day in the three months ended March 31,
2020 compared to the same period of 2019, and Net sales on an average daily
sales basis increased 9.2%. Excluding the impact of foreign currency
fluctuations, constant currency Net sales growth on an average daily sales basis
was 9.4%. For additional information on constant currency Net sales growth, see
"Non-GAAP Financial Measure Reconciliations."
For the three months ended March 31, 2020 , Net sales grew in client devices
(defined as notebooks/mobile devices and desktops), collaboration tools, and
software from robust customer demand for remote worker enablement in response to
the COVID-19 pandemic. The Census project further contributed to growth in
Notebooks/mobile devices, as well as 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 March 31, 2020 increased
$175 million , or 10.1%, compared to the three months ended March 31, 2019 . On an
average daily sales basis, Corporate segment Net sales increased 8.4%. Growth
was primarily driven by client devices, video and software.
Small Business segment Net sales for the three months ended March 31, 2020
increased $36 million , or 10.1%, compared to the three months ended March 31,
2019 . On an average daily sales basis, Small Business segment Net sales
increased 8.4%. Growth was primarily driven by client devices, video and
software.
Public segment Net sales for the three months ended March 31, 2020 increased
$195 million , or 14.6%, compared to the three months ended March 31, 2019 . On an
average daily sales basis, Public segment Net sales increased 12.8%. Net sales
to Government customers increased 14.6% on an average daily sales basis
primarily driven by Notebooks/Mobile devices, as well as other hardware,
including accessories and smartphones, and services as we continued to deliver
on the Census project. Net sales to Education and Healthcare customers increased
17.1% and 7.1%, respectively, on an average daily sales basis, primarily driven
by client devices.
Net sales in Other, which is comprised of results from our UK and Canadian
operations, for the three months ended March 31, 2020 increased $26 million , or
3.2% on an average daily sales basis, compared to the three months ended March
31, 2019 . Both operations grew in local currency led by Canada which included
two months of 2019 Net sales from the acquisition of Scalar. The impact of
foreign currency exchange decreased Other Net sales growth by approximately 200
basis points, primarily due to the unfavorable translation of the British pound
and Canadian dollar to the US dollar.
22--------------------------------------------------------------------------------
Table of Contents
Gross profit Gross profit increased$85 million , or 12.6%, to$757 million for the three months endedMarch 31, 2020 , compared to$672 million for the three months endedMarch 31, 2019 . As a percentage of Net sales, Gross profit margin increased 20 basis points to 17.2% for the three months endedMarch 31, 2020 . Gross profit margin was positively impacted by product margin, partially offset by the mix of netted down revenues that are booked net of cost of goods sold, which did not grow as fast as overall Net sales. Selling and administrative expenses Selling and administrative expenses increased$68 million , or 15.2%, to$511 million for the three months endedMarch 31, 2020 , compared to$443 million for the three months endedMarch 31, 2019 . The increase was primarily due to a higher provision for credit losses driven by a$29 million increase in reserves, which predominately reflects the expected economic impact of the COVID-19 pandemic, higher payroll expenses consistent with higher coworker count and higher gross profit. As a percentage of Net sales, Selling and administrative expenses increased 40 basis points to 11.6% during the three months endedMarch 31, 2020 , compared to 11.2% for the three months endedMarch 31, 2019 due to a higher provision for credit losses. Operating income Operating income by segment, in dollars and as a percentage of Net sales, and the year-over-year percentage change are as follows: Three Months Ended March 31, 2020 2019 Percent Change Dollars in Operating Dollars in Operating in Operating Millions Margin Millions Margin Income Segments:(1) Corporate$ 127.4 6.7 %$ 134.7 7.8 % (5.4 )% Small Business 27.3 7.0 24.4 6.9 11.9 Public 112.4 7.4 76.1 5.7 47.8 Other(2) 14.7 2.6 25.6 4.8 (42.5 ) Headquarters(3) (36.0 ) nm* (31.9 ) nm* (12.9 ) Total Operating income$ 245.8 5.6 %$ 228.9 5.8 % 7.4 %
* 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
thresholds.
(3) Includes certain Headquarters' function costs that are not allocated to
the segments.
Operating income was $246 million for the three months ended March 31, 2020 , an
increase of $17 million , or 7.4%, compared to $229 million for the three months
ended March 31, 2019 . Operating income increased primarily due to higher Gross
profit dollars, partially offset by a higher provision for credit losses and
higher payroll expenses. Total operating margin percentage decreased 20 basis
points to 5.6% for the three months ended March 31, 2020 , from 5.8% for the
three months ended March 31, 2019 primarily due to a higher provision for credit
losses, partially offset by an increase in Gross profit margin.
Corporate segment Operating income was $127 million for the three months ended
March 31, 2020 , a decrease of $8 million , or 5.4%, compared to $135 million for
the three months ended March 31, 2019 . Corporate segment Operating income
decreased primarily due to a higher provision for credit losses and higher
payroll expenses, partially offset by higher Gross profit dollars. Corporate
segment operating margin percentage decreased 110 basis points to 6.7% for the
three months ended March 31, 2020 , from 7.8% for the three months ended March
31, 2019 primarily due to a higher provision for credit losses and lower product
margin.
Small Business segment Operating income was $27 million for the three months
ended March 31, 2020 , an increase of $3 million , or 11.9%, compared to $24
million for the three months ended March 31, 2019 . Small Business segment
Operating income increased
23--------------------------------------------------------------------------------
Table of Contents
primarily due to higher Gross profit dollars partially offset by a higher provision for credit losses and higher payroll expenses. Small Business segment operating margin percentage increased 10 basis points to 7.0% for the three months endedMarch 31, 2020 , from 6.9% for the three months endedMarch 31, 2019 primarily due to higher product margin and lower sales payroll expenses as a percentage of Net sales, partially offset by a higher provision for credit losses. Public segment Operating income was$112 million for the three months endedMarch 31, 2020 , an increase of$36 million , or 47.8%, compared to$76 million for the three months endedMarch 31, 2019 . Public segment Operating income increased primarily due to higher Gross profit dollars partially offset by a higher provision for credit losses and higher sales payroll expenses. Public segment operating margin percentage increased 170 basis points to 7.4% for the three months endedMarch 31, 2020 , from 5.7% for the three months endedMarch 31, 2019 primarily due to a mix into more profitable product and service offerings and lower sales payroll expenses as a percentage of Net sales, partially offset by a higher provision for credit losses. Other Operating income was$15 million for the three months endedMarch 31, 2020 , a decrease of$11 million , or 42.5%, compared to$26 million for the three months endedMarch 31, 2019 . Other Operating income decreased primarily due to a higher provision for credit losses, a mix out of more profitable service offerings, and higher payroll expenses due to higher coworker count. Other operating margin percentage decreased 220 basis points to 2.6% for the three months endedMarch 31, 2020 , from 4.8% for the three months endedMarch 31, 2019 primarily due to lower product margin and a higher provision for credit losses. Income tax expense Income tax expense was$44 million for the three months endedMarch 31, 2020 , compared to$39 million for the three months endedMarch 31, 2019 . The effective tax rate, expressed by calculating the income tax expense as a percentage of Income before income taxes, was 20.7% for the three months endedMarch 31, 2020 and differed from the US federal statutory rate of 21.0% primarily due to the impact of excess tax benefits on equity-based compensation, partially offset by state and local income taxes. The effective income tax rate for the three months endedMarch 31, 2019 was 20.2% and differed from the US federal statutory rate of 21.0% primarily due to the impact of excess tax benefits on equity-based compensation and a discrete tax benefit related toCDW Canada's acquisition of Scalar in 2019, partially offset by state and local income taxes. The increase in the effective tax rate for the three months endedMarch 31, 2020 as compared to the same period of the prior year was primarily driven by a discrete tax benefit related toCDW Canada's acquisition of Scalar in 2019, partially offset by the impact of higher excess tax benefits on equity-based compensation in 2020. 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 endedMarch 31, 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, 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, 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 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. 24
--------------------------------------------------------------------------------
Table of Contents
Non-GAAP operating income Non-GAAP operating income was$304 million for the three months endedMarch 31, 2020 , an increase of$17 million , or 5.8%, compared to$287 million for the three months endedMarch 31, 2019 . As a percentage of Net sales, Non-GAAP operating income was 6.9% and 7.3% for the three months endedMarch 31, 2020 and 2019. Three Months Ended March 31, (dollars in millions) 2020 2019 Operating income$ 245.8 $ 228.9 Amortization of intangibles(1) 44.6 44.4 Equity-based compensation 8.8 12.7 Other adjustments(2) 4.7 1.3
Non-GAAP operating income
6.9 % 7.3 %
(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
office, and acquisition and integration expenses.
Non-GAAP net income Non-GAAP net income was$200 million for the three months endedMarch 31, 2020 , an increase of$15 million , or 7.8%, compared to$185 million for the three months endedMarch 31, 2019 . Three Months Ended March 31, 2020 2019 Income before Income tax Net income Income before Income tax Net income (dollars in millions) income taxes expense(1) income taxes expense(1) GAAP (as reported)$ 211.8 $ (43.9 ) $
167.9
44.6 (11.1 ) 33.5 44.4 (11.3 ) 33.1
Equity-based compensation 8.8 (13.7 ) (4.9 ) 12.7 (11.3 ) 1.4
Other adjustments(3) 4.7 (1.2 ) 3.5 1.3 (3.3 ) (2.0 )
Non-GAAP $ 269.9 $ (69.9 ) $ 200.0 $ 250.0 $ (64.6 ) $ 185.4 (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
office, and acquisition and integration expenses.
25--------------------------------------------------------------------------------
Table of Contents
Net sales growth on a constant currency basis Net sales increased$431 million , or 10.9%, to$4,389 million for the three months endedMarch 31, 2020 , compared to$3,958 million for the three months endedMarch 31, 2019 . Net sales on a constant currency basis, which excludes the impact of foreign currency translation, increased$441 million , or 11.2%. Three Months Ended March 31, Average Daily % (dollars in millions) 2020 2019 % Change Change(1) Net sales, as reported$ 4,389.2 $ 3,957.9 10.9 % 9.2 % Foreign currency translation(2) - (9.8 )
Net sales, on a constant currency basis
11.2 % 9.4 %
(1) There were 64 and 63 selling days for the three months endedMarch 31, 2020 and 2019, respectively.
(2) Represents the effect of translating the prior year results of CDW
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 ofMarch 31, 2020 , we also had$0.9 billion of availability for borrowings under our senior secured asset-based revolving credit facility and an additional £50 million ($62 million ) under the CDWUK 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. InApril 2020 , we bolstered our liquidity position by completing a$600 million debt offering to be used for general corporate purposes. We also took additional measures to enhance our liquidity by suspending share repurchases and implementing various other 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 As ofMarch 31, 2020 , we had total indebtedness of$3.5 billion , of which$1.7 billion was secured indebtedness. OnApril 21, 2020 , we completed the issuance of$600 million aggregate principal amount of 4.125% senior notes due 2025 at par. AtMarch 31, 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. 26
--------------------------------------------------------------------------------
Table of Contents Share Repurchase Program During the three months endedMarch 31, 2020 , we repurchased 1.1 million shares of our common stock for$141 million under the previously announced share repurchase program. For additional information on our share repurchase program, see "Part II, Item 2, Unregistered Sales ofEquity 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
OnMay 6, 2020 , we announced that our Board of Directors declared a quarterly cash dividend of$0.380 per common share. The dividend will be paid onJune 10, 2020 to all stockholders of record as of the close of business onMay 25, 2020 . The payment of any future dividends will be at the discretion of our Board of Directors and will depend upon our results of operations, financial condition, business prospects, capital requirements, contractual restrictions, any potential indebtedness we may incur, restrictions imposed by applicable law, tax considerations and other factors that our Board of Directors deems relevant. In addition, our ability to pay dividends on our common stock will be limited by restrictions on our ability to pay dividends or make distributions to our stockholders and on the ability of our subsidiaries to pay dividends or make distributions to us, in each case, under the terms of our current and any future agreements governing our indebtedness. Coronavirus Aid, Relief, and Economic Security Act OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted into law. The primary impact to our financial statements as a result of the CARES Act will be the deferral of US corporate income tax payments from the second quarter of 2020 toJuly 2020 as well as the deferral of employer related payroll tax payments from the second, third and fourth quarters of 2020 with 50% to be paid in the fourth quarter of 2021 and the remaining 50% to be paid in the fourth quarter of 2022. Cash Flows Cash flows from operating, investing and financing activities are as follows: Three Months Ended March 31, (dollars in millions) 2020 2019 Net cash provided by (used in): Operating activities$ 223.0 $ 252.4 Investing activities (25.4 ) (88.1 ) Net change in accounts payable-inventory financing (81.4 ) 70.2 Other financing activities (48.6 ) (150.4 ) Financing activities (130.0 ) (80.2 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash (7.2 )
0.8
Net increase in cash, cash equivalents and restricted cash$ 60.4 $ 84.9 27
--------------------------------------------------------------------------------
Table of Contents
Operating Activities
Cash flows from operating activities are as follows:
Three Months Ended March 31,
(dollars in millions) 2020 2019 Change
Net income $ 167.9 $ 152.9 $ 15.0
Adjustments for the impact of non-cash
items(1) 133.4 66.1 67.3
Net income adjusted for the impact of
non-cash items(2) 301.3 219.0 82.3
Changes in assets and liabilities:
Accounts receivable(3) (209.0 ) 11.9 (220.9 ) Merchandise inventory(4) (66.4 ) (134.2 ) 67.8 Accounts payable-trade(5) 157.4 116.0 41.4 Other 39.7 39.7 -
Net cash provided by operating activities
$ (29.4 ) (1) Includes items such as deferred income taxes, depreciation and
amortization, provision for credit losses and equity-based compensation
expense.
(2) The change is due to stronger operating results driven by Net sales and
Gross profit growth.
(3) The change is primarily due to increased sales volume and timing of
payments during the first quarter of 2020 compared to 2019.
(4) The change is primarily due to lower growth in inventory balances during
the first quarter of 2020 compared to 2019.
(5) The change is due to increased sales volume during the first quarter of2020 compared to 2019 and timing of inventory purchases, partially offset
by mixing out of vendors with longer payment terms.
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:
March 31,
(in days) 2020 2019
Days of sales outstanding (DSO)(1) 58 57 Days of supply in inventory (DIO)(2) 14 14 Days of purchases outstanding (DPO)(3) (52 ) (54 ) Cash conversion cycle
20 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 Accountspayable-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 increased to 20 days atMarch 31, 2020 , compared to 17 days atMarch 31, 2019 . DSO increased 1 day, DPO decreased 2 days, and DIO remained flat compared toMarch 31, 2019 . The increase in DSO was primarily due to timing of payments during the first quarter of 2020 compared to 2019. The decrease in DPO is primarily due to mixing out of vendors with longer payment terms and lower growth in third-party services sales such as Software as a Service and warranties. 28
--------------------------------------------------------------------------------
Table of Contents
Investing Activities Net cash used in investing activities decreased$63 million in the three months endedMarch 31, 2020 compared toMarch 31, 2019 . This decrease was primarily due to the acquisition of Scalar in 2019. Additionally, Capital expenditures increased$6 million primarily due to investments for improvements to our information technology systems. Financing Activities Net cash used in financing activities increased$50 million in the three months endedMarch 31, 2020 compared toMarch 31, 2019 . The increase was primarily driven by changing to a mix of more vendors outside our inventory financing arrangements, which was partially offset by increased borrowings on our revolving credit facilities and lower share repurchases. 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 endedDecember 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, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Issuers and Guarantors ofDebt Securities OnMarch 2, 2020 , theSEC 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 untilJanuary 4, 2020 , voluntary early compliance is permitted. We have elected to voluntarily comply beginning with the quarterly period endedMarch 31, 2020 . Each series of our outstanding unsecured senior notes (the "Notes") are issued byCDW LLC andCDW Finance Corporation (the "Issuers") and are guaranteed byCDW Corporation ("Parent") and each ofCDW 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 ofMarch 31, 2020 andDecember 31, 2019 , and Statement of Operations information for the three months endedMarch 31, 2020 and for the year endedDecember 31, 2019 . The financial information includes the accounts of the Issuers and the accounts of the Guarantor s (the "Obligor Group "). The financial information of theObligor Group is presented on a combined basis and the intercompany balances and transactions between theObligor Group have been eliminated. 29
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
