CDW Corp (CDW) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless otherwise indicated or the context otherwise requires, as used in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the terms “we,” “us,” “the Company,” “our,” “CDW” and similar terms refer to CDW Corporation and its subsidiaries. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the Consolidated Financial Statements and the related notes included elsewhere in this report. 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” above.

Overview

CDW Corporation, a Fortune 500 company and member of the S&P 500 Index, is a leading multi-brand provider of information technology (“IT”) solutions to small, medium and large business, government, education and healthcare customers in the US, the UK and Canada. Our broad array of offerings ranges from discrete hardware and software products to integrated IT solutions and services that include on-premise, hybrid and cloud capabilities across hybrid infrastructure, digital experience and security.

We are vendor, technology, and consumption model “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 9,900 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.

On December 1, 2021, we completed the acquisition of Sirius Computer Solutions, Inc. (“Sirius”). The aggregate consideration paid, net of cash acquired, at the closing of the acquisition was approximately $2.4 billion, which is subject to the finalization of customary closing adjustments. Sirius is a leading provider of secure, mission-critical technology-based solutions and is one of the largest IT solutions integrators in the United States, leveraging its services-led approach, broad portfolio of hybrid infrastructure solutions, and deep technical expertise of its 2,600 coworkers to support corporate and public customers. This strategic acquisition will enhance our breadth and depth of services and solutions offerings.

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

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.

For a discussion of results for the year ended December 31, 2020, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission on February 26, 2021.

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Trends and Key Factors Affecting our Financial Performance

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

•General economic conditions are a key factor affecting our results as they impact our customers’ willingness to spend on information technology. This is particularly the case for our Corporate and Small Business customers, as their purchases tend to reflect confidence in their business prospects, which are driven by their discrete perceptions of business and general economic conditions. Additionally, changes in trade policy and product constraints from suppliers could have an adverse impact on our business.

•The global spread of the novel coronavirus (“COVID-19”) pandemic continues to create macroeconomic uncertainty, volatility and disruption, including supply constraints. The supply constraints are being caused by component availability and labor and logistical disruptions, resulting in extended lead times, unpredictability and higher costs. In 2021, customer top priorities have been digital transformation, security, hybrid and cloud solutions, client devices, and preparing for workers to return to the office and enhancing remote enablement capabilities as hybrid environments become the future work model. We have orchestrated solutions by leveraging client devices, accessories, collaboration tools, security, software and hybrid and cloud offerings to help customers build these capabilities and achieve their objectives.

•Changes in spending policies, budget priorities and funding levels, including current and future stimulus packages, are key factors influencing the purchasing levels of Government, Healthcare and Education customers. In 2021, Education customers continued to prioritize investments towards equity and access for all students and enhancing the in-classroom and hybrid experiences. In addition, Healthcare customers resumed projects that were paused during the pandemic as budget certainty improved as more patients returned to elective procedures. Government customers focused on multiyear budget planning and had contracting delays in several large contracts. As the duration and ongoing economic impacts of the COVID-19 pandemic remain uncertain, current and future budget priorities and funding levels for Government, Healthcare and Education customers may be adversely affected.

•Technology trends drive customer purchasing behaviors in the market. Current technology trends are focused on delivering greater flexibility and efficiency, as well as designing IT securely. These trends are driving customer adoption of solutions such as those delivered via cloud, software defined architectures and hybrid on-premise and off-premise combinations, as well as the evolution of the IT consumption model to more “as a service” offerings, including Device as a Service and managed services. Technology trends could also change as customers consider the impact of the COVID-19 pandemic on their operations.

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 and debt levels including available credit. These measures and ratios are closely monitored by management, so that actions can be taken, as necessary, in order to achieve set standards and objectives.

In this section, 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. Certain non-GAAP financial measures are also used to determine certain components of performance-based compensation. For the definitions 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 and reconciliations to the most directly comparable US GAAP measure, see “Results of Operations - Non-GAAP Financial Measure Reconciliations.”

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The results of certain key business metrics are as follows:

(1)    There were 254 selling days for each of the years ended December 31, 2021, 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

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

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:

(1)There were 254 selling days for both the years ended December 31, 2021 and 2020.

Total Net sales for the year ended December 31, 2021 increased $2,353 million, or 12.7%, to $20,821 million, compared to the prior year. This increase includes $197 million of Net sales from the acquisition of Sirius which closed on December 1, 2021. The Net sales impact from the acquisition of Sirius is included in our Corporate, Small Business and Public segments. Net sales growth was primarily driven by Corporate, Education and Small Business customers and the results from the UK and Canadian operations included in Other, partially offset by lower Net sales to Government customers.

Corporate segment Net sales for the year ended December 31, 2021 increased $1,334 million, or 19.5%, compared to the year ended December 31, 2020. The increase was primarily driven by hybrid work resulting in higher demand for notebooks/mobile devices, video and accessories. Additionally, Corporate customers continued to prioritize digital transformation, hybrid and cloud and security, driving growth in solutions categories, including servers and software.

Small Business segment Net sales for the year ended December 31, 2021 increased by $473 million, or 33.9%, compared to the year ended December 31, 2020. Customers continued to focus on remote enablement as Net sales growth was driven by notebooks/mobile devices, video and accessories.

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Public segment Net sales for the year ended December 31, 2021 increased $46 million, or 0.6%, compared to the year ended December 31, 2020. The increase was primarily driven by growth in Education and Healthcare customers, offset by lower Net sales with Government customers. Net sales to Education customers increased 18.8% primarily driven by integrated solutions, including notebooks/mobile devices, video, accessories and services. Schools continued to prioritize equity and access to learning and investing in the interactive learning experience for both the classroom and dorm room. Net sales to Healthcare customers increased 12.8% primarily driven by desktops, software, notebooks/mobile devices, servers, video and services. Healthcare customers saw patients returning for elective procedures which increased confidence in budgets, enabling delayed projects to restart. Net sales to Government customers decreased 27.6%. Government decreased in most transactional and solutions categories primarily driven by several one-time activities in 2020 that did not reoccur in 2021, including the Census project, timebound stimulus funding and device refreshes related to large customer contracts. In addition, Government had contracting delays across certain large contracts in 2021.

Net sales in Other, which is comprised of results from our UK and Canadian operations, for the year ended December 31, 2021 increased $501 million, or 24.0%, compared to the year ended December 31, 2020. UK and Canadian Net sales increased as a result of the economic recovery from 2020 and increased customer confidence. Customers in the UK and Canada remained focused on hybrid work and learning as Net sales growth was driven by notebooks/mobile devices, video and software. The impact of foreign currency exchange increased Other Net sales by approximately 810 basis points, primarily due to the favorable translation of the Canadian dollar and British pound to the US dollar.

Gross profit

Gross profit increased $359 million, or 11.2%, to $3,569 million for the year ended December 31, 2021, compared to $3,210 million for the year ended December 31, 2020. As a percentage of Net sales, Gross profit margin decreased 30 basis points to 17.1% for the year ended December 31, 2021. This decrease in Gross profit margin was primarily due to lower product margin and higher margin configuration services in the prior year, partially offset by an increase in the mix of net service contract revenue, primarily Software as a Service, increase in Net sales and related margins on professional services.

Selling and administrative expenses

Selling and administrative expenses increased $119 million, or 5.8%, to $2,150 million for the year ended December 31, 2021, compared to $2,031 million for the year ended December 31, 2020. The increase was primarily due to higher payroll expenses consistent with higher Gross profit, higher coworker count and higher performance-based compensation consistent with higher attainment against financial goals, and higher acquisition and integration costs, partially offset by lower intangible asset amortization and lower bad debt expense. Total coworker count was 13,924, up 3,942 from 9,982 at December 31, 2020 primarily due to an increase in customer-facing coworkers as a result of our recent acquisitions and an increase in new hires during 2021.

As a percentage of total Net sales, Selling and administrative expenses decreased 70 basis points to 10.3% for the year ended December 31, 2021, compared to 11.0% for the year ended December 31, 2020 primarily due to lower intangible asset amortization, lower bad debt expense and lower payroll expenses as a percentage of Net sales.

Operating income

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

* Not meaningful

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

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

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

Operating income was $1,419 million for the year ended December 31, 2021, an increase of $240 million, or 20.3%, compared to $1,179 million for the year ended December 31, 2020. Operating income increased primarily due to higher Gross profit dollars, lower intangible asset amortization and lower bad debt expense, partially offset by higher payroll expenses consistent with higher Gross profit, higher coworker count, higher performance-based compensation consistent with higher attainment against financial goals, and higher acquisition and integration expenses. Total operating margin percentage increased 40 basis points to 6.8% for the year ended December 31, 2021, from 6.4% for the year ended December 31, 2020 primarily due to lower intangible asset amortization, lower bad debt expense and lower payroll as a percentage of Net sales, partially offset by lower Gross profit margin and higher acquisition and integration expenses as a percentage of Net sales.

Corporate segment Operating income was $697 million for the year ended December 31, 2021, an increase of $207 million, or 42.4%, compared to $490 million for the year ended December 31, 2020. Corporate segment Operating income increased primarily due to higher Gross profit and lower intangible asset amortization, partially offset by higher payroll expenses. Corporate segment operating margin percentage increased 130 basis points to 8.5% for the year ended December 31, 2021, from 7.2% for the year ended December 31, 2020 primarily due to lower intangible asset amortization and lower payroll expense as a percentage of Net sales.

Small Business segment Operating income was $168 million for the year ended December 31, 2021, an increase of $69 million, or 69.4%, compared to $99 million for the year ended December 31, 2020. Small Business segment Operating income increased primarily due to higher Gross profit and lower intangible asset amortization, partially offset by higher payroll expenses. Small Business segment operating margin percentage increased 190 basis points to 9.0% for the year ended December 31, 2021, from 7.1% for the year ended December 31, 2020 primarily due to lower intangible asset amortization and lower payroll expenses as a percentage of Net sales.

Public segment Operating income was $607 million for the year ended December 31, 2021, a decrease of $71 million, or 10.5%, compared to $678 million for the year ended December 31, 2020. Public segment Operating income decreased primarily due to higher payroll expenses and lower Gross profit dollars. Public segment operating margin percentage decreased 90 basis points to 7.4% for the year ended December 31, 2021, from 8.3% for the year ended December 31, 2020, primarily due to higher payroll expenses and higher margin configuration services in the prior year.

Other Operating income, which is comprised of results from our UK and Canadian operations, was $116 million for the year ended December 31, 2021, an increase of $50 million, or 75.5%, compared to $66 million for the year ended December 31, 2020. Other Operating income increased primarily due to higher Gross profit and lower bad debt expense, partially offset by higher payroll expenses. Other operating margin percentage increased 130 basis points to 4.5% for the year ended December 31, 2021, from 3.2% for the year ended December 31, 2020, primarily due to lower expenses, including payroll expenses, bad debt expense, intangible asset amortization, integration costs and other selling and administrative expenses, partially offset by lower product margin.

Interest expense, net

Interest expense, net in 2021 was $151 million, a decrease of $4 million, compared to $155 million in 2020. This decrease was primarily driven by lower effective interest rates in 2021 compared to 2020, partially offset by additional interest expense from the $2.5 billion aggregate principal amount of senior notes issued on December 1, 2021, the net proceeds of which were used to fund the acquisition of Sirius.

Other income (expense), net

During the year ended December 31, 2021, we sold all ownership interests in an equity method investment and recognized a $36 million gain. During the year ended December 31, 2020, we completed the August 2020 senior notes refinancing and recorded a $27 million Net loss on extinguishment of long-term debt.

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Income tax expense

Income tax expense was $309 million in 2021, compared to $214 million in 2020. The effective income tax rate, expressed by calculating income tax expense as a percentage of Income before income taxes, was 23.8% and 21.3% for 2021 and 2020, respectively.

For 2021, the effective tax rate differed from the US federal statutory rate primarily due to state and local income taxes and a discrete deferred tax expense as a result of an increase in the UK corporate tax rate effective in 2023, partially offset by excess tax benefits on equity-based compensation. For 2020, the effective tax rate differed from the US federal statutory rate primarily due to state and local income taxes and a discrete deferred tax expense as a result of an increase in the UK corporate tax rate, largely offset by excess tax benefits on equity-based compensation and tax benefits associated with global intangible low taxed income and nondeductible expenses.

The 2021 effective tax rate was higher than 2020 primarily due to certain tax benefits incurred in the prior year with no similar activity in the current year and a less favorable tax rate impact of excess tax benefits on equity-based compensation.

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 years ended December 31, 2021 and 2020 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 condition that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with US GAAP. Non-GAAP measures used by management may differ from similar measures used by other companies, even when similar terms are used to identify such measures.

We believe these measures provide analysts, investors and management with helpful information regarding the underlying operating performance of our business, as they remove the impact of items that management believes are not reflective of underlying operating performance. Management uses these measures to evaluate period-over-period performance as management believes they provide a more comparable measure of the underlying business. Certain non-GAAP financial measures are also used to determine certain components of performance-based compensation.

Non-GAAP operating income

Non-GAAP operating income was $1,645 million for the year ended December 31, 2021, an increase of $240 million, or 17.1%, compared to $1,405 million for the year ended December 31, 2020. As a percentage of Net sales, Non-GAAP operating income was 7.9% and 7.6% for the years ended December 31, 2021 and 2020, respectively.

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

Non-GAAP net income

Non-GAAP net income was $1,119 million for the year ended December 31, 2021, an increase of $165 million, or 17.2%, compared to $954 million for the year ended December 31, 2020.

(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.

Net sales growth on a constant currency basis

Net sales increased $2,353 million, or 12.7%, to $20,821 million for the year ended December 31, 2021, compared to $18,468 million for the year ended December 31, 2020. Net sales on a constant currency basis, which excludes the impact of foreign currency translation, increased $2,207 million, or 11.9%.

(1)There were 254 selling days for both the years ended December 31, 2021 and 2020.

(2)Represents the effect of translating Net sales for the year ended December 31, 2020 of CDW UK and CDW Canada at the average exchange rates applicable in 2021.

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. Since the onset of the pandemic, we have experienced variability compared to historic seasonality trends. As uncertainty due to COVID-19 remains, seasonality may continue to be different than historical experience.

Liquidity and Capital Resources

Overview

We finance our operations and capital expenditures with internally generated cash from operations and borrowings under our revolving loan facility. As of December 31, 2021, we had $1.0 billion of availability for borrowings under our revolving loan facility. Our liquidity and borrowing plans are established to align with our financial and strategic planning processes and

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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 dividend payments, assessment of debt levels, acquisitions and share repurchases. 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.

Our material contractual obligations consist of debt and related interest payments and operating leases. See Note 9 (Debt) and Note 11 (Leases) to the accompanying Consolidated Financial Statements for additional information regarding future maturities of debt and operating leases.

Long-Term Debt and Financing Arrangements

During the fourth quarter of 2021, we entered into a commitment letter for a $2.5 billion senior unsecured 364-day bridge loan facility (the “Bridge Facility”), which would have been used in the event permanent financing was not obtained on or before completing the acquisition of Sirius. In lieu of borrowing under the Bridge Facility, on December 1, 2021, we obtained permanent financing through the issuance of $1.0 billion aggregate principal amount of 2.670% Senior Notes due 2026, $500 million aggregate principal amount of 3.276% Senior Notes due 2028 and $1.0 billion aggregate principal amount of 3.569% Senior Notes due 2031. The Bridge Facility was automatically terminated upon completing the acquisition of Sirius without using the Bridge Facility.

Also during the fourth quarter of 2021, we entered into the Revolving Loan Facility, a new five-year $1.6 billion senior unsecured revolving loan facility, which replaced the senior secured asset-based revolving credit facility (the “ABL Facility”). On the same date, we also entered into the Term Loan Facility, a new five-year $1.4 billion senior unsecured term loan facility, which replaced the senior secured term loan facility.

During the first quarter of 2021, we amended, extended and increased the size of the ABL Facility, prior to its extinguishment during the fourth quarter. Simultaneously, we paid off the remaining principal amount on the variable rate CDW UK term loan by drawing on the ABL Facility.

As of December 31, 2021, we had total unsecured indebtedness of $6.9 billion. At December 31, 2021, 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 9 (Debt) to the accompanying Consolidated Financial Statements. For additional information regarding the acquisition of Sirius, see Note 3 (Acquisitions) to the accompanying Consolidated Financial Statements.

Inventory Financing Agreements

We have entered into agreements with certain financial intermediaries to obtain more favorable terms on purchases 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 7 (Inventory Financing Agreements) to the accompanying Consolidated Financial Statements.

Share Repurchase Program

During 2021, we repurchased 8.7 million shares of our common stock for $1,500 million under the previously announced share repurchase program. For additional information, refer to Note 12 (Stockholders’ Equity) to the accompanying Consolidated Financial Statements.

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Dividends

A summary of 2021 dividend activity for our common stock is as follows:

On February 9, 2022, we announced that our Board of Directors declared a quarterly cash dividend on our common stock of $0.500 per share. The dividend will be paid on March 10, 2022 to all stockholders of record as of the close of business on February 25, 2022.

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.

Cash Flows

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

(1) Includes expenditures for revenue generating assets

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Operating Activities

Cash flows from operating activities are as follows:

(1)Includes items such as depreciation and amortization, equity-based compensation expense, amortization of deferred financing costs, deferred income taxes and net loss on extinguishment of long-term debt.

(2)The change is primarily due to higher Accounts receivable balance in Public segment.

(3)The change is primarily due to higher customer-driven stocking positions in 2021.

(4)The change is primarily due to mixing out of vendors with extended payment terms in 2021 and higher inventory purchases at the end of 2020, partially offset by timing of payments at the end of 2021.

(5)The change is primarily due to higher contract liabilities in 2021, partially offset by a decrease in accrued compensation, a decrease in lease incentives and an increase in receivables from vendors in 2021.

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:

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

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

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

The cash conversion cycle increased to 24 days at December 31, 2021, compared to 17 days at December 31, 2020. DSO, DIO and DPO increased 8 days, 3 days and 4 days, respectively. The increase in DSO was primarily driven by higher Accounts receivable balance in Public segment and increased net service contract revenue, such as software as a service and warranties. The increase in net service contract revenue also results in a favorable impact on DPO. DPO further benefited from favorability in timing of payments at the end of 2021. Additionally, DIO increased due to higher customer and strategic stocking positions in 2021 relative to 2020.

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Investing Activities

Net cash used in investing activities increased $2,569 million in 2021 compared to 2020. The increase was primarily due to the acquisitions of Sirius, Amplified IT LLC and Focal Point Data Risk LLC, partially offset by lower capital expenditures and proceeds from the sale of an equity method investment. For additional information regarding the acquisitions, see Note 3 (Acquisitions) to the accompanying Consolidated Financial Statements.

Financing Activities

Net cash provided by financing activities increased $694 million in 2021 compared to 2020. The increase was primarily due to the issuance of $2.5 billion aggregate principal amount of senior notes issued on December 1, 2021 which was used to fund the acquisition of Sirius and increased borrowings under our revolving credit facilities, partially offset by higher share repurchases and the mixing out of vendors with extended payment terms under our inventory financing arrangements. For additional information regarding the inventory financing and debt activities, see Note 7 (Inventory Financing Agreements) and Note 9 (Debt) to the accompanying Consolidated Financial Statements.

Off-Balance Sheet Arrangements

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

Issuers and Guarantors of Debt Securities

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

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

•structurally subordinated to all existing and future indebtedness and other liabilities of our non-guarantor subsidiaries and

•rank equal in right of payment with all of the Issuers’ and the Guarantors’ existing and future unsecured senior debt.

The following tables set forth Balance Sheet information as of December 31, 2021 and December 31, 2020, and Statement of Operations information for the years ended December 31, 2021 and 2020 for the accounts of the Issuers and the accounts of the Guarantors (the “Obligor Group”). The financial information of the Obligor Group is presented on a combined basis and the intercompany balances and transactions between the Obligor Group have been eliminated.

Balance Sheet Information

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Statements of Operations Information

Commitments and Contingencies

The information set forth in Note 16 (Commitments and Contingencies) to the accompanying Consolidated Financial Statements included in Part II, Item 8 of this report is incorporated herein by reference.

Critical Accounting Policies and Estimates

The preparation of the Consolidated Financial Statements in accordance with US GAAP requires management to make use of certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities in the Consolidated Financial Statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Historically, we have not made significant changes to the methods for determining these estimates as our actual results have not differed materially from our estimates. We do not believe it is reasonably likely that the estimates and related assumptions will change materially in the foreseeable future; however, actual results could differ from those estimates under different assumptions, judgments or conditions.

Critical accounting policies and estimates are those that are most important to the portrayal of our financial condition and results of operations, and which require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and estimates addressed below. For additional information related to significant accounting policies used in the preparation of our Consolidated Financial Statements, see Note 1 (Description of Business and Summary of Significant Accounting Policies) to the accompanying Consolidated Financial Statements.

Revenue Recognition

We sell some of our products and services as part of bundled contract arrangements containing multiple deliverables, which may include a combination of different products and services. Significant judgment may be required when determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together.

For contracts consisting of multiple performance obligations, the total transaction price is allocated to each performance obligation based upon its standalone selling price. Judgment is required to determine the standalone selling price for each distinct performance obligation. For certain performance obligations, we will use a combination of methods to estimate the standalone selling price based on recent transactions. When evidence from recent transactions is not available to confirm that the prices are representative of the standalone selling price, an expected cost plus margin approach is used.

Additional judgment is required in determining whether we are the principal, and report revenues on a gross basis, or agent, and report revenues on a net basis. For each identified performance obligation in a transaction, we evaluate the facts and circumstances present to determine whether or not we control the specified good or service prior to transfer to the customer. This evaluation includes, but is not limited to, assessing indicators such as whether: (i) we are primarily responsible for fulfilling the promise to provide the specified goods or service, (ii) we have inventory risk before the specified good or service has been transferred to a customer and (iii) we have discretion in establishing the price for the specified good or service. When the evaluation indicates we control the specified good or service prior to transfer to the customer, we are acting as a principal. When the evaluation indicates we do not control the specified good or service prior transfer to the customer, we are acting as an agent.

The nature of our contracts give rise to variable consideration in the form of volume rebates and sales returns and allowances. We estimate variable consideration at the most likely amount to which we expect to be entitled. The estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based on an assessment of our anticipated performance and all information that is reasonably available.

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We recognize revenue on performance obligations when the customer obtains control over the specified good or service. That is, when the customer has the ability to direct the use of and obtain substantially all of the benefits from the good or service. For the sale of hardware and software, this is generally upon delivery to the customer. As a result, we perform an analysis to estimate the amount of Net sales in-transit at the end of the period and adjust revenue and the related costs to reflect only what has been delivered to the customer. This analysis requires judgment whereby we perform an analysis of the estimated number of days of sales in-transit to customers at the end of each reporting period based on a weighted-average analysis of commercial delivery terms that include drop-shipment arrangements. Changes in delivery patterns may result in a different number of business days estimated to make this adjustment.

Goodwill

Goodwill is allocated to reporting units expected to benefit from the business combination. Goodwill is subject to periodic testing for impairment at the reporting unit level on an annual basis during the fourth quarter, or more frequently if events or changes in circumstances indicate that the asset may be impaired. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition or sale or disposition of a significant portion of a reporting unit.

We may elect to utilize a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. As part of our qualitative assessment, judgment is required in weighing the effect of various positive and negative factors that may affect the fair value. We consider various factors, including the excess of fair value over carrying value from the last quantitative test, macroeconomic conditions, industry and market considerations, the projected financial performance and actual financial performance compared to prior year projected financial performance.

If we elect to bypass the qualitative assessment, or if indicators of impairment exist, a quantitative impairment test is performed. As part of the quantitative assessment, application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. Fair value of a reporting unit is determined by using a weighted combination of an income approach and a market approach, as this combination is considered the most indicative of our fair value in an orderly transaction between market participants. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, determination of our weighted average cost of capital, future market conditions and profitability of future business strategies. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit. However, our past estimates of fair value would not have indicated an impairment when revised to include subsequent years’ actual results.

We completed our annual impairment analysis during the fourth quarter of 2021. We performed a qualitative analysis for all reporting units and concluded that it was more likely than not that the fair values of all reporting units exceeded their respective carrying values and, therefore, did not result in an impairment. In 2020, we performed a quantitative analysis of goodwill impairment and determined that no impairment existed.

Business combinations

We allocate purchase price consideration to the assets acquired and liabilities assumed based on their fair values as of the acquisition date. Determining the fair value of these assets and liabilities requires the use of significant estimates, particularly in valuing acquired intangible assets and Goodwill.

Purchased intangible assets other than goodwill are initially recognized at fair value and amortized over their useful lives. We determine the fair value of purchased intangible using an income approach on an individual asset basis. The fair value measurements were primarily based on significant inputs that are not observable, which are categorized as a Level 3 measurement in the fair value hierarchy. The values assigned to consideration transferred, assets acquired and liabilities assumed may be adjusted during the measurement period as new information arises.

We use the multi-period excess earnings method to determine the fair value of customer relationships. This method identifies the portion of revenue expected to be generated through repeat customers existing as of the valuation date and includes an attrition rate to account for the loss of customers over time. Critical estimates utilized in valuing customer relationships include estimated forecasted future revenue and EBITDA margin growth rates, customer attrition rates and market-participant discount rates. The assumptions we apply in forecasting future revenue and customer attrition rates is based on analysis of historical data, assessment of current and anticipated market conditions, estimated growth rates, and management plans.

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Recent Accounting Pronouncements

The information set forth in Note 2 (Recent Accounting Pronouncements) to the accompanying Consolidated Financial Statements included in Part II, Item 8 of this report is incorporated herein by reference.