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.
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• 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 how quickly and to what extent normal economic and
operating conditions can resume. We have mobilized our resources to helpensure the well-being and safety of our coworkers, business continuity, a
strong capital position and adequate liquidity. Our efforts have included:
• We continue to be focused 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 implementedprecautions 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.
• Remote enablement, operations continuity, and security are customer
focus areas to manage remote environments at scale and to prepare to be
remote longer. Customers also focused on initiatives to reduce costs,
optimize resources, and leverage technology for better customer and
employee experiences through digital transformation. We areorchestrating solutions by leveraging client devices, accessories,
collaboration tools, security, software and cloud offerings to help
customers build these capabilities and achieve their objectives.
• We have adjusted our marketing and events from in-person to virtual to
allow our customers to continue to interact and learn from our
technical experts.
• We increased our provision for credit losses during the six months
ended
COVID-19. We continue to monitor cash collections and credit limits of
our customers to manage the risk of uncollectible receivables.
• We continue to closely monitor our cost structure relative to the
overall demand environment and have taken measures to enhance
liquidity, including completing a $600 million debt issuance in April
2020 , suspending share repurchases, and implementing cost savings
initiatives.
• 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, current and
future budget priorities and funding levels for these customers have been
and may continue to 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
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.
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
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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 GAAP measure, see "Results of Operations - Non-GAAP Financial Measure Reconciliations." Second Quarter Overview
The results of certain business metrics are as follows:
Three Months Ended June 30,
(dollars in millions) 2020 2019
Net sales $ 4,365.7 $ 4,629.9
Gross profit 747.2 773.8
Operating income 283.4 300.3
Net income 189.1 196.6
Non-GAAP operating income 338.2 358.4
Non-GAAP net income 225.3 237.7
Average daily sales(1) 68.2 72.3
Net debt(2) 2,941.1 3,084.4
Cash conversion cycle (in days)(3) 25 16
(1) There were 64 selling days for both the three months ended June 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.
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Results of Operations Three Months EndedJune 30, 2020 Compared to Three Months EndedJune 30, 2019 Results of operations, in dollars and as a percentage of Net sales are as follows: Three Months Ended June 30, 2020 2019 Dollars in Percentage of Dollars in Percentage of Millions Net Sales Millions Net Sales Net sales$ 4,365.7 100.0 %$ 4,629.9 100.0 % Cost of sales 3,618.5 82.9 3,856.1 83.3 Gross profit 747.2 17.1 773.8 16.7 Selling and administrative expenses 463.8 10.6 473.5 10.2 Operating income 283.4 6.5 300.3 6.5 Interest expense, net (39.7 ) (0.9 ) (40.5 ) (0.9 ) Other income, net 1.7 - 1.4 - Income before income taxes 245.4 5.6 261.2 5.6 Income tax expense (56.3 ) (1.3 ) (64.6 ) (1.4 ) Net income$ 189.1 4.3 %$ 196.6 4.2 % 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 June 30, 2020 2019 Percentage Percentage of Total of Total Dollar Percent (dollars in millions) Net Sales Net Sales Net Sales Net Sales Change Change Corporate$ 1,557.5 35.7 %$ 1,883.9 40.7 %$ (326.4 ) (17.3 )% Small Business 302.1 6.9 377.4 8.2 (75.3 ) (19.9 ) Public: Government 719.7 16.5 578.4 12.5 141.3 24.4 Education 876.8 20.1 773.6 16.7 103.2 13.3 Healthcare 425.6 9.7 488.1 10.5 (62.5 ) (12.8 ) Total Public 2,022.1 46.3 1,840.1 39.7 182.0 9.9 Other 484.0 11.1 528.5 11.4 (44.5 ) (8.4 ) Total Net sales$ 4,365.7 100.0 %$ 4,629.9 100.0 %$ (264.2 ) (5.7 )%
(1) There were 64 selling days for both the three months ended
and 2019.
Total Net sales for the three months endedJune 30, 2020 decreased$264 million , or 5.7%, to$4,366 million , compared to the three months endedJune 30, 2019 . Excluding the impact of foreign currency fluctuations, constant currency Net sales decreased 5.3%. For additional information, see "Non-GAAP Financial Measure Reconciliations" below regarding constant currency Net sales growth. For the three months endedJune 30, 2020 , Net sales decreased across all major hardware categories, except for notebooks/mobile devices, compared to the three months endedJune 30, 2019 , 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. 24
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Corporate segment Net sales for the three months endedJune 30, 2020 decreased$326 million , or 17.3%, compared to the three months endedJune 30, 2019 driven by decreases across all major hardware categories and software due to the impact of the COVID-19 pandemic on customer demand. Small Business segment Net sales for the three months endedJune 30, 2020 decreased$75 million , or 19.9%, compared to the three months endedJune 30, 2019 driven by decreases across all major hardware categories and software due to the impact of the COVID-19 pandemic on customer demand. Public segment Net sales for the three months endedJune 30, 2020 increased$182 million , or 9.9%, compared to the three months endedJune 30, 2019 . Net sales to Government customers increased 24.4% primarily driven by notebooks/mobile devices. Other hardware, including accessories and smartphones, and services also contributed to the increase as we continued to deliver on the Census project. Net sales to Education customers increased 13.3% primarily driven by notebooks/mobile devices, partially offset by video, as schools become more enabled for remote learning. Net sales to Healthcare customers decreased 12.8% primarily driven by desktops as hospitals delayed refresh projects. Net sales in Other, which is comprised of results from ourUK and Canadian operations, for the three months endedJune 30, 2020 decreased$45 million , or 8.4% compared to the three months endedJune 30, 2019 . Net sales for Canadian operations decreased across most major hardware categories. Net sales forUK operations increased primarily driven by notebooks/mobile devices. The impact of foreign currency exchange further decreased Other Net sales by approximately 320 basis points due to the unfavorable impact resulting from the British pound and Canadian dollar to US dollar translations. Gross profit Gross profit decreased$27 million , or 3.4%, to$747 million for the three months endedJune 30, 2020 , compared to$774 million for the three months endedJune 30, 2019 . As a percentage of Net sales, Gross profit margin increased 40 basis points to 17.1% for the three months endedJune 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 decreased$10 million , or 2.1%, to$464 million for the three months endedJune 30, 2020 , compared to$474 million for the three months endedJune 30, 2019 . The decrease was primarily driven by lower sales payroll consistent with lower Gross profit, reduced performance-based compensation, and cost saving measures, including decreased travel and entertainment, and ongoing productivity and efficiency efforts. These reductions were partially offset by COVID-19 related costs. Total coworker count was 10,048, up 265 from 9,783 atJune 30, 2019 . As a percentage of total Net sales, Selling and administrative expenses increased 40 basis points to 10.6% during the three months endedJune 30, 2020 , compared to 10.2% in the three months endedJune 30, 2019 due to COVID-19 costs and higher payroll expense, primarily driven by higher coworker count, partially offset by lower performance-based compensation. 25
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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 June 30,
2020 2019
Dollars in Operating Dollars in Operating Percent Change
Millions Margin Millions Margin in Operating Income
Segments:(1)
Corporate $ 123.0 7.9 % $ 157.2 8.3 % (21.8 )%
Small Business 21.0 7.0 26.6 7.0 (21.1 )
Public 159.9 7.9 129.4 7.0 23.6
Other(2) 16.5 3.4 19.1 3.6 (13.6 )
Headquarters(3) (37.0 ) nm* (32.0 ) nm* (15.6 )
Total Operating income $ 283.4 6.5 % $ 300.3 6.5 % (5.6 )%
* 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
thresholds.
(3) Includes certain Headquarters' function costs that are not allocated to
the segments.
Operating income was $283 million for the three months ended June 30, 2020 , a
decrease of $17 million , or 5.6%, compared to $300 million for the three months
ended June 30, 2019 . Operating income decreased primarily due to lower Gross
profit dollars and COVID-19 related costs, partially offset by lower
performance-based compensation. Total operating margin percentage remained flat
at 6.5% for the three months ended June 30, 2020 and 2019 primarily due to
higher product margin and lower performance-based compensation as a percentage
of Net sales, offset by higher payroll expenses as a percentage of Net sales and
COVID-19 related costs.
Corporate segment Operating income was $123 million for the three months ended
June 30, 2020 , a decrease of $34 million , or 21.8%, compared to $157 million for
the three months ended June 30, 2019 . Corporate segment Operating income
decreased primarily due to lower Gross profit dollars, partially offset by lower
sales payroll expenses. Corporate segment operating margin percentage decreased
40 basis points to 7.9% for the three months ended June 30, 2020 , compared to
8.3% for the three months ended June 30, 2019 primarily due to higher payroll
expenses as a percentage of Net sales and COVID-19 related costs, partially
offset by higher product margin and lower provision for credit losses.
Small Business segment Operating income was $21 million for the three months
ended June 30, 2020 , a decrease of $6 million , or 21.1%, compared to $27 million
for the three months ended June 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 remained flat at 7.0% for the three months ended June 30, 2020 and
2019 primarily due to higher product margin offset by higher payroll expenses as
a percentage of Net sales and COVID-19 related costs.
Public segment Operating income was $160 million for the three months ended
June 30, 2020 , an increase of $31 million , or 23.6%, compared to $129 million
for the three months ended June 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 90
basis points to 7.9% for the three months ended June 30, 2020 , compared to 7.0%
for the three months ended June 30, 2019 primarily due to a mix into more
profitable product and service offerings and benefits from cost saving measures,
such as decreased travel and entertainment, and ongoing productivity and
efficiency efforts.
Other Operating income was $17 million for the three months ended June 30, 2020 ,
a decrease of $2 million , or 13.6%, compared to $19 million for the three months
ended June 30, 2019 . Other Operating income decreased primarily due to lower
Gross profit dollars. Other operating margin percentage decreased 20 basis
points to 3.4% for the three months ended June 30, 2020 , compared to 3.6% for
the three months ended June 30, 2019 primarily due to higher sales payroll
expenses as a percentage of Net sales due higher coworker count and higher
occupancy as a percentage of Net sales, partially offset by higher product
margin.
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Income tax expense Income tax expense was$56 million and$65 million for the three months endedJune 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 22.9% and 24.7% for the three months endedJune 30, 2020 and 2019, respectively. The effective tax rates differed from the US statutory rate of 21.0% for both periods primarily due to state and local income taxes, partially offset by excess tax benefits on equity-based compensation. The lower effective tax rate for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , was primarily attributable to 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 endedJune 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, 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. Non-GAAP operating income Non-GAAP operating income was$338 million for the three months endedJune 30, 2020 , a decrease of$20 million , or 5.6%, compared to$358 million for the three months endedJune 30, 2019 . As a percentage of Net sales, Non-GAAP operating income was 7.7% for both the three months endedJune 30, 2020 and 2019. Three Months Ended June 30, (dollars in millions) 2020 2019 Operating income$ 283.4 $ 300.3 Amortization of intangibles(1) 44.4 44.7 Equity-based compensation 5.6 12.2 Other adjustments(2) 4.8 1.2
Non-GAAP operating income
7.7 % 7.7 %
(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.
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Non-GAAP net income Non-GAAP net income was$225 million for the three months endedJune 30, 2020 , a decrease of$13.0 million , or 5.2%, compared to$238 million for the three months endedJune 30, 2019 . Three Months Ended June 30, 2020 2019 Income before Income tax Net income Income before Income tax Net income (in millions) income taxes expense(1) income taxes expense(1) GAAP (as reported)$ 245.4 $ (56.3 ) $
189.1
44.4 (11.1 ) 33.3 44.7 (11.2 ) 33.5
Equity-based compensation 5.6 (6.3 ) (0.7 ) 12.2 (5.5 ) 6.7
Other adjustments(3) 4.8 (1.2 ) 3.6 1.2 (0.3 ) 0.9
Non-GAAP $ 300.2 $ (74.9 ) $ 225.3 $ 319.3 $ (81.6 ) $ 237.7 (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.
Net sales growth on a constant currency basis Net sales decreased$264 million , or 5.7%, to$4,366 million for the three months endedJune 30, 2020 , compared to$4,630 million for the three months endedJune 30, 2019 . Net sales on a constant currency basis, which excludes the impact of foreign currency translation, decreased$246 million , or 5.3%. Three Months Ended June 30, (dollars in millions) 2020 2019 % Change Net sales, as reported$ 4,365.7 $ 4,629.9 (5.7 )% Foreign currency translation(2) - (17.8 )
Net sales, on a constant currency basis
(1) There were 64 selling days for both the three months ended
and 2019.
(2) Represents the effect of translating the prior year results of CDW
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The results of certain business metrics are as follows:
Six Months Ended June 30,
(dollars in millions) 2020 2019
Net sales $ 8,754.9 $ 8,587.8
Gross profit 1,503.7 1,445.9
Operating income 529.2 529.2
Net income 357.0 349.5
Non-GAAP operating income 642.1 645.7
Non-GAAP net income 425.3 423.1
Average daily sales(1) 68.4 67.6
Net debt(2) 2,941.1 3,084.4
Cash conversion cycle (in days)(3) 25 16
(1) There were 128 and 127 selling days for the six months ended
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 Six Months EndedJune 30, 2020 Compared to Six Months EndedJune 30, 2019 Results of operations, in dollars and as a percentage of Net sales are as follows: Six Months Ended June 30, 2020 2019 Dollars in Percentage of Dollars in Percentage of Millions Net Sales Millions Net Sales Net sales$ 8,754.9 100.0 %$ 8,587.8 100.0 % Cost of sales 7,251.2 82.8 7,141.9 83.2 Gross profit 1,503.7 17.2 1,445.9 16.8 Selling and administrative expenses 974.5 11.2 916.7 10.6 Operating income 529.2 6.0 529.2 6.2 Interest expense, net (77.6 ) (0.9 ) (78.8 ) (0.9 ) Other income, net 5.6 0.1 2.4 - Income before income taxes 457.2 5.2 452.8 5.3 Income tax expense (100.2 ) (1.1 ) (103.3 ) (1.2 ) Net income$ 357.0 4.1 %$ 349.5 4.1 % 29
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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:
Six Months Ended June 30,
2020 2019
Average
Percentage Percentage Daily Sales
(dollars in of Total of Total Dollar Percent Percent
millions) Net Sales Net Sales Net Sales Net Sales Change Change Change(1)
Corporate $ 3,468.5 39.6 % $ 3,620.1 42.2 % $ (151.6 ) (4.2 )% (4.9 )%
Small
Business 693.6 7.9 733.0 8.5 (39.4 ) (5.4 ) (6.1 )
Public:
Government 1,288.2 14.7 1,066.8 12.4 221.4 20.8 19.8
Education 1,353.0 15.5 1,174.0 13.7 179.0 15.2 14.3
Healthcare 906.2 10.4 930.0 10.8 (23.8 ) (2.6 ) (3.3 )
Total Public 3,547.4 40.6 3,170.8 36.9 376.6 11.9 11.0
Other 1,045.4 11.9 1,063.9 12.4 (18.5 ) (1.7 ) (2.5 )
Total Net
sales $ 8,754.9 100.0 % $ 8,587.8 100.0 % $ 167.1 1.9 % 1.1 %
(1) There were 128 and 127 selling days for the six months ended
and 2019, respectively.
Total Net sales for the six months endedJune 30, 2020 increased$167 million , or 1.9%, to$8,755 million , compared to the six months endedJune 30, 2019 . There was one more selling day in the six months endedJune 30, 2020 compared to the same period of 2019, and Net sales on an average daily sales basis increased 1.1%. Excluding the impact of foreign currency fluctuations, constant currency Net sales growth on an average daily sales basis was 1.5%. For additional information, see "Non-GAAP Financial Measure Reconciliations" below regarding constant currency Net sales growth. For the six months endedJune 30, 2020 , Net sales growth was primarily due to 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 partially offset by decreases in netcomm products, enterprise storage and desktops 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 six months endedJune 30, 2020 decreased$152 million , or 4.2%, compared to the six months endedJune 30, 2019 . On an average daily sales basis, Corporate segment Net sales decreased 4.9%. The decrease was primarily driven by netcomm products and enterprise storage. Small Business segment Net sales for the six months endedJune 30, 2020 decreased$39 million , or 5.4%, compared to the six months endedJune 30, 2019 . On an average daily sales basis, Small Business segment Net sales decreased 6.1%. The decrease was driven by declines across all major hardware categories. Public segment Net sales for the six months endedJune 30, 2020 increased$377 million , or 11.9%, compared to the six months endedJune 30, 2019 . On an average daily sales basis, Public segment Net sales increased 11.0%. Net sales to Government customers increased 19.8% 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 Education customers increased 14.3% on an average daily sales basis, primarily driven by notebooks/mobile devices, partially offset by video, as schools become more enabled for remote learning. Net sales to Healthcare customers decreased 3.3% on an average daily sales basis, primarily driven by desktops and enterprise storage as hospitals delayed refresh projects, partially offset by notebooks/mobile devices. Net sales in Other, which is comprised of results from ourUK and Canadian operations, for the six months endedJune 30, 2020 decreased$19 million , or 1.7%, compared to the six months endedJune 30, 2019 . On an average daily sales basis, Other decreased 2.5%. TheUK operations grew in local currency while the Canadian operations declined in local currency. Net sales for Canadian operations decreased across most major hardware categories. Net sales forUK operations increased primarily driven by notebooks/mobile devices and software, partially offset by enterprise storage. The impact of foreign currency exchange further decreased 30
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Other Net sales by approximately 250 basis points, primarily due to the unfavorable translation of the British pound and Canadian dollar to the US dollar. Gross profit Gross profit increased$58 million , or 4.0%, to$1,504 million for the six months endedJune 30, 2020 , compared to$1,446 million for the six months endedJune 30, 2019 . As a percentage of Net sales, Gross profit margin increased 40 basis points to 17.2% for the six months endedJune 30, 2020 . Gross profit margin was positively impacted by product margin. Selling and administrative expenses Selling and administrative expenses increased$58 million , or 6.3%, to$975 million for the six months endedJune 30, 2020 , compared to$917 million for the six months endedJune 30, 2019 . The increase was primarily due to a higher provision for credit losses driven by a$27 million increase in reserves, which predominately reflects the expected economic impact of the COVID-19 pandemic, higher payroll expenses consistent with higher coworker count and higher Gross profit, and COVID-19 related costs. As a percentage of Net sales, Selling and administrative expenses increased 60 basis points to 11.2% during the six months endedJune 30, 2020 , compared to 10.6% for the six months endedJune 30, 2019 , due to a higher provision for credit losses and higher payroll expenses. Operating income Operating income by segment, in dollars and as a percentage of Net sales, and the year-over-year percentage change are as follows: Six Months Ended June 30, 2020 2019 Percent Change Dollars in Operating Dollars in Operating in Operating Millions Margin Millions Margin Income Segments:(1) Corporate$ 250.4 7.2 %$ 291.9 8.1 % (14.2 )% Small Business 48.3 7.0 51.0 7.0 (5.3 ) Public 272.3 7.7 205.5 6.5 32.5 Other(2) 31.2 3.0 44.7 4.2 (30.2 ) Headquarters(3) (73.0 ) nm* (63.9 ) nm* (14.2 )
Total Operating income$ 529.2 6.0 %$ 529.2 6.2 % - %
* 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 remained flat at $529 million for the six months ended June 30,
2020 and 2019 primarily due to higher Gross profit dollars, offset by higher
payroll expenses and a higher provision for credit losses. Total operating
margin percentage decreased 20 basis points to 6.0% for the six months ended
June 30, 2020 , from 6.2% for the six months ended June 30, 2019 primarily due to
a higher provision for credit losses, higher payroll expenses as percentage of
Net sales and COVID-19 related costs, partially offset by higher product margin.
Corporate segment Operating income was $250 million for the six months ended
June 30, 2020 , a decrease of $42 million , or 14.2%, compared to $292 million for
the six months ended June 30, 2019 . Corporate segment Operating income decreased
primarily due to lower Gross profit dollars and a higher provision for credit
losses. Corporate segment operating margin percentage decreased 90 basis points
to 7.2% for the six months ended June 30, 2020 , from 8.1% for the six months
ended June 30, 2019 primarily due to a higher provision for credit losses,
higher payroll expenses as a percentage of Net sales and COVID-19 related costs.
Small Business segment Operating income was $48 million for the six months ended
June 30, 2020 , a decrease of $3 million , or 5.3%, compared to $51 million for
the six months ended June 30, 2019 . Small Business segment Operating income
decreased
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primarily due to a higher provision for credit losses. Small Business segment operating margin percentage remained flat at 7.0% for the six months endedJune 30, 2020 and 2019 primarily due to higher product margin, offset by a higher provision for credit losses, higher payroll expenses as a percentage of Net sales and COVID-19 related costs. Public segment Operating income was$272 million for the six months endedJune 30, 2020 , an increase of$66 million , or 32.5%, compared to$206 million for the six months endedJune 30, 2019 . Public segment Operating income increased primarily due to higher Gross profit dollars, partially offset by higher sales payroll expenses and a higher provision for credit losses. Public segment operating margin percentage increased 120 basis points to 7.7% for the six months endedJune 30, 2020 , from 6.5% for the six months endedJune 30, 2019 primarily due to a mix into more profitable product and service offerings, and lower payroll expenses as a percentage of Net sales. Other Operating income was$31 million for the six months endedJune 30, 2020 , a decrease of$14 million , or 30.2%, compared to$45 million for the six months endedJune 30, 2019 . Other Operating income decreased primarily due to a mix out of more profitable service offerings, higher payroll expenses and a higher provision for credit losses. Other operating margin percentage decreased 120 basis points to 3.0% for the six months endedJune 30, 2020 , from 4.2% for the six months endedJune 30, 2019 primarily due to higher payroll expenses as a percentage of Net sales and a higher provision for credit losses. Income tax expense Income tax expense was$100 million and$103 million for the six months endedJune 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 21.9% for the six months endedJune 30, 2020 and differed from the US federal statutory rate of 21.0% with state and local income taxes being largely offset by excess tax benefits on equity-based compensation. The effective income tax rate for the six months endedJune 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 toCDW Canada's acquisition of Scalar in 2019. The decrease in the effective tax rate for the six months endedJune 30, 2020 as compared to the same period of the prior year was primarily driven by the impact of higher excess tax benefits on equity-based compensation in 2020, partially offset by a discrete tax benefit related toCDW 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 six months endedJune 30, 2020 and 2019 below. Non-GAAP operating income Non-GAAP operating income was$642 million for the six months endedJune 30, 2020 , a decrease of$4 million , or 0.5%, compared to$646 million for the six months endedJune 30, 2019 . As a percentage of Net sales, Non-GAAP operating income was 7.3% and 7.5% for the six months endedJune 30, 2020 and 2019, respectively. Six Months Ended June 30, (dollars in millions) 2020 2019 Operating income$ 529.2 $ 529.2 Amortization of intangibles(1) 89.0 89.1 Equity-based compensation 14.4 24.9 Other adjustments(2) 9.5 2.5
Non-GAAP operating income
7.3 % 7.5 %
(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.
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Non-GAAP net income Non-GAAP net income was$425 million for the six months endedJune 30, 2020 , an increase of$2 million , or 0.5%, compared to$423 million for the six months endedJune 30, 2019 . Six Months Ended June 30, 2020 2019 Income before Income tax Net income Income before Income tax Net income (dollars in millions) income taxes expense(1) income taxes expense(1) GAAP (as reported)$ 457.2 $ (100.2 ) $
357.0
89.0 (22.2 ) 66.8 89.1 (22.5 ) 66.6
Equity-based compensation 14.4 (20.0 ) (5.6 ) 24.9 (16.8 ) 8.1
Other adjustments(3) 9.5 (2.4 ) 7.1 2.5 (3.6 ) (1.1 )
Non-GAAP $ 570.1 $ (144.8 ) $ 425.3 $ 569.3 $ (146.2 ) $ 423.1 (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.
Net sales growth on a constant currency basis Net sales increased$167 million , or 1.9%, to$8,755 million for the six months endedJune 30, 2020 , compared to$8,588 million for the six months endedJune 30, 2019 . Net sales on a constant currency basis, which excludes the impact of foreign currency translation, increased$194 million , or 2.3%. Six Months Ended June 30, Average Daily % (dollars in millions) 2020 2019 % Change Change(1) Net sales, as reported$ 8,754.9 $ 8,587.8 1.9 % 1.1 % Foreign currency translation(2) - (26.8 )
Net sales, on a constant currency basis
2.3 % 1.5 %
(1) There were 128 and 127 selling days for the six months ended
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 ofJune 30, 2020 , we had$1.0 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, 33
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dividend payments, acquisitions and share repurchases. During 2020, we bolstered our liquidity position by completing a$600 million debt offering with the proceeds 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 OnApril 21, 2020 , we completed the issuance of$600 million aggregate principal amount of 4.125% Senior Notes due 2025 at par. As ofJune 30, 2020 , we had total indebtedness of$3.9 billion , of which$1.5 billion was secured indebtedness. AtJune 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 2020, we repurchased 1.1 million shares of our common stock for$141 million under the previously announced share repurchase program. InMarch 2020 , we elected to suspend share repurchases as a precautionary measure in light of the COVID-19 pandemic. We have not made any further share repurchases since this announcement. 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
$0.380 February 6, 2020 February 25, 2020 March 10, 2020
$0.380 May 6, 2020 May 25, 2020 June 10, 2020
On August 5, 2020 , we announced that our Board of Directors declared a quarterly
cash dividend of $0.380 per common share. The dividend will be paid on
September 10, 2020 to all stockholders of record as of the close of business on
August 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 will be 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.
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Cash Flows
Cash flows from operating, investing and financing activities are as follows:
Six Months Ended June 30,
(dollars in millions) 2020 2019
Net cash provided by (used in):
Operating activities $ 515.8 $ 414.5
Investing activities (100.0 ) (118.9 )
Net change in accounts payable-inventory financing 52.3 36.3
Other financing activities 342.0 (341.5 )
Financing activities 394.3 (305.2 )Effect of exchange rate changes on cash and cash equivalents (5.7 )
(1.7 )
Net increase (decrease) in cash and cash equivalents
Operating Activities
Cash flows from operating activities are as follows:
Six Months Ended June 30,
(dollars in millions) 2020 2019 Change
Net income $ 357.0 $ 349.5 $ 7.5
Adjustments for the impact of non-cash
items(1) 272.2 138.1 134.1
Net income adjusted for the impact of non-cash items(2) 629.2 487.6
141.6
Changes in assets and liabilities:
Accounts receivable(3) (80.4 ) (230.1 ) 149.7 Merchandise inventory(4) (89.3 ) (197.3 ) 108.0 Accounts payable-trade(5) (2.1 ) 414.9 (417.0 ) Other(6) 58.4 (60.6 ) 119.0
Net cash provided by operating activities
$ 101.3
(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.
(3) The change is primarily due to lower sales volume in the second quarter
compared to 2019.
(4) The change is primarily due to lower growth in inventory balances during
the first half of 2020 compared to 2019.
(5) The change is primarily due to lower sales volume in the second quarter
compared to 2019.
(6) The change is driven by improved collection performance and lower balance
of our receivables from vendors.
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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:
June 30,
(in days) 2020 2019
Days of sales outstanding (DSO)(1) 59 52 Days of supply in inventory (DIO)(2) 18 14 Days of purchases outstanding (DPO)(3) (52 ) (50 ) Cash conversion cycle
25 16
(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 25 days atJune 30, 2020 , compared to 16 days atJune 30, 2019 . DSO, DIO and DPO increased 7 days, 4 days and 2 days, respectively, compared toJune 30, 2019 . The increase in DSO was primarily driven by higher receivable balances due to the current economic environment and greater impact of third-party services, such as software as a service and warranties. These third-party services also drove DPO higher. The increase in DIO was driven by higher inventory levels during the second quarter compared to 2019. Investing Activities Net cash used in investing activities decreased$19 million in the six months endedJune 30, 2020 compared toJune 30, 2019 . This decrease was primarily due to the acquisition of Scalar in 2019, partially offset by increased Capital expenditures of$56 million primarily due to purchases of devices for the Census project. Financing Activities Net cash provided by financing activities increased$700 million in the six months endedJune 30, 2020 compared toJune 30, 2019 . The increase was primarily driven by the$600 million debt offering completed in April and lower share repurchases, partially offset by decreased borrowings under our revolving credit facilities. 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, 2021 , 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 36
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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 June 30, 2020 and
December 31, 2019 , and Statement of Operations information for the six months
ended June 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.
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