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 data center and networking, digital workspace, security and virtualization.

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 7,000 customer-facing coworkers, including sellers, highly-skilled technology specialists and advanced service delivery engineers. We are a leading sales channel partner for many original equipment manufacturers ("OEMs"), software publishers and cloud providers (collectively, our "vendor partners"), whose products we sell or include in the solutions we offer. We provide our vendor partners with a cost-effective way to reach customers and deliver a consistent brand experience through our established end-market coverage, technical expertise and extensive customer access.

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

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

For a discussion of results for the year ended December 31, 2019, 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, 2019, filed with the Securities and Exchange Commission on February 28, 2020.

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, the availability, efficacy and acceptance of a vaccine, and the actions taken to contain the virus, and the effectiveness of these actions and how quickly and to what extent normal economic and operating conditions can resume and be sustained. We have mobilized our resources to help ensure the well-being and safety of our coworkers, business continuity, a strong capital position and adequate liquidity. Our efforts have included:

• Continued focus on the well-being and safety of our coworkers, leveraging standing crisis management protocols and following guidelines from public health authorities and state and local governments. During 2020, we implemented precautions to help keep our coworkers healthy and safe, including activating a cross-functional response team led by senior leadership, moving to remote work for our office coworkers, and implementing safety protocols at our distribution centers, including social distancing measures, segmented shifts, additional personal protective equipment, enhanced facility cleanings, and temperature screening for anyone entering the facilities. All distribution and configuration centers are considered essential businesses and continue to be operational. Our office coworkers continue to work remotely.

• Remote enablement, operations continuity, and security are customer focus areas to manage remote environments at scale and to prepare to be remote longer. Customers are focused on initiatives to reduce costs, optimize resources, and leverage technology for better customer and employee experiences through digital transformation. We have orchestrated solutions by leveraging client devices, accessories, collaboration tools, security, software and hybrid and cloud offerings to help customers build these capabilities and achieve their objectives.

• Increasing our provision for credit losses during the year ended December 31, 2020 as a result of the expected economic impact of the COVID-19 pandemic. We continue to monitor cash collections and credit limits of our customers to manage the risk of uncollectible receivables.

• Closely monitoring our cost structure and liquidity position relative to the overall demand environment. We took measures to enhance liquidity, including completing a $600 million senior notes issuance in April 2020, leveraging the lower interest rate environment by refinancing one of our higher interest rate senior notes in August 2020, implementing cost savings initiatives and suspending temporarily share repurchases from March 2020 through October 2020.

• Changes in spending policies, budget priorities and funding levels are a key factor influencing the purchasing levels of Government, Healthcare and Education customers. Given the COVID-19 pandemic, Education customers have prioritized their budgets towards IT spending while Healthcare customer budgets have been pressured. As the duration and ongoing economic impacts of the COVID-19 pandemic remain uncertain, current and future budget priorities and funding levels for Government, Healthcare and Education customers may be adversely affected.

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

• The new UK/European Union ("EU") trade deal due to the UK’s exit from the EU (referred to as "Brexit") that came into effect on January 1, 2021 eased concerns over restrictions of imports and exports, but it increased regulatory complexities that may adversely impact our business.

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

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turnover. These measures and ratios are compared to standards or objectives set by management, so that actions can be taken, as necessary, in order to achieve the standards and objectives.

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

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

The results of certain key business metrics are as follows:

			Year Ended December 31,
(dollars in millions)			2020						2019						2018
Net sales			$	18,467.5					$	18,032.4					$	16,240.5
Gross profit			3,210.1						3,039.9						2,706.9
Operating income			1,179.2						1,133.6						987.3
Net income			788.5						736.8						643.0
Non-GAAP operating income			1,404.6						1,368.4						1,216.6
Non-GAAP net income			954.4						902.1						794.3
Average daily sales(1)			72.7						71.0						63.9
Net debt(2)			2,517.0						3,163.3						3,002.8
Cash conversion cycle (in days)(3)			17						18						19

(1) There were 254 selling days for each of the years ended December 31, 2020, 2019, and 2018.

(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:

						Year Ended December 31,
						2020												2019
						Dollars in Millions						Percentage of Net Sales						Dollars in Millions						Percentage of Net Sales
Net sales						$	18,467.5					100.0		%				$	18,032.4					100.0		%
Cost of sales						15,257.4						82.6						14,992.5						83.1
Gross profit						3,210.1						17.4						3,039.9						16.9
Selling and administrative expenses						2,030.9						11.0						1,906.3						10.6
Operating income						1,179.2						6.4						1,133.6						6.3
Interest expense, net						(154.9)						(0.8)						(159.4)						(0.9)
Other expense, net						(22.0)						(0.1)						(24.5)						(0.1)
Income before income taxes						1,002.3						5.4						949.7						5.3
Income tax expense						(213.8)						(1.2)						(212.9)						(1.2)
Net income						$	788.5					4.3		%				$	736.8					4.1		%

Net sales

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

						Year Ended December 31,
						2020												2019
(dollars in millions)						Net Sales						Percentage of Total Net Sales						Net Sales						Percentage of Total Net Sales						Dollar Change						Percent Change(1)
Corporate						$	6,846.0					37.1		%				$	7,499.0					41.6		%				$	(653.0)					(8.7)		%
Small Business						1,397.1						7.6						1,510.3						8.4						(113.2)						(7.5)
Public:
Government						2,978.5						16.1						2,519.3						14.0						459.2						18.2
Education						3,458.1						18.7						2,411.6						13.4						1,046.5						43.4
Healthcare						1,701.1						9.2						1,933.9						10.7						(232.8)						(12.0)
Total Public						8,137.7						44.0						6,864.8						38.1						1,272.9						18.5
Other						2,086.7						11.3						2,158.3						12.0						(71.6)						(3.3)
Total Net sales						$	18,467.5					100.0		%				$	18,032.4					100.0		%				$	435.1					2.4		%

(1)There were 254 selling days for both the years ended December 31, 2020 and 2019.

Total Net sales for the year ended December 31, 2020 increased $435 million, or 2.4%, to $18,468 million, compared to the prior year. The impact of foreign currency fluctuations did not have an impact to Net sales growth. For additional information, see "Non-GAAP Financial Measure Reconciliations" below regarding constant currency Net sales growth.

For the year ended December 31, 2020, Net sales growth was driven by Education and Government customers prioritizing integrated solutions including notebooks, accessories and services to support remote enablement and the Census project. These Public customer increases were partially offset by decreases in most hardware categories in our other business segments due to the impact of the COVID-19 pandemic on customer demand. For additional information, see Note 18 (Segment Information) to the accompanying Consolidated Financial Statements.

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Corporate segment Net sales for the year ended December 31, 2020 decreased $653 million, or 8.7%, compared to the year ended December 31, 2019. The decrease was primarily driven by decreases across all major hardware categories due to the impact of the COVID-19 pandemic on customer demand, partially offset by an increase in software.

Small Business segment Net sales for the year ended December 31, 2020 decreased by $113 million, or 7.5%, compared to the year ended December 31, 2019. The decrease was primarily driven by decreases across all major hardware categories due to the impact of the COVID-19 pandemic on customer demand.

Public segment Net sales for the year ended December 31, 2020 increased $1,273 million, or 18.5%, compared to the year ended December 31, 2019. The increase was primarily driven by growth in Education and Government customers. Net sales to Education customers increased 43.4% primarily driven by notebooks/mobile devices as schools invested in remote enablement. Net sales to Government customers increased 18.2% primarily driven by the continued delivery on the Census project comprised of other hardware, including accessories and smartphones, and services. Increases in notebooks/mobile devices also contributed to growth in Government customers due to agencies investing in remote enablement and device refreshes. Net sales to Healthcare customers decreased 12.0% primarily driven by decreases across most hardware categories, as well as decreases in software and services as hospitals experienced budget pressures and delayed projects.

Net sales in Other, which is comprised of results from our UK and Canadian operations, for the year ended December 31, 2020 decreased $72 million, or 3.3%, compared to the year ended December 31, 2019. Net sales for Canadian operations decreased across all hardware categories, with the exception of notebooks/mobile devices. Net sales for UK operations increased primarily driven by increases in notebooks/mobile devices and software, partially offset by decreases across most other major hardware categories. The impact of foreign currency exchange decreased Other Net sales by approximately 10 basis points, primarily due to the unfavorable translation of the Canadian dollar and British pound to the US dollar.

Gross profit

Gross profit increased $170 million, or 5.6%, to $3,210 million for the year ended December 31, 2020, compared to $3,040 million for the year ended December 31, 2019. As a percentage of Net sales, Gross profit margin increased 50 basis points to 17.4% for the year ended December 31, 2020. Gross profit margin was positively impacted by product margin and the mix of netted down revenues that are booked net of cost of goods sold, primarily software as a service.

Selling and administrative expenses

Selling and administrative expenses increased $125 million, or 6.5%, to $2,031 million for the year ended December 31, 2020, compared to $1,906 million for the year ended December 31, 2019. The increase was primarily due to higher payroll expenses consistent with higher Gross profit, higher average coworker count and coworker compensation investments, and a higher provision for credit losses driven by increased reserves reflecting the expected economic impact of the COVID-19 pandemic. The increase was partially offset by cost saving measures, including decreased travel and entertainment. Total coworker count was 9,982, up 86 from 9,896 at December 31, 2019 due to our recent acquisition.

As a percentage of total Net sales, Selling and administrative expenses increased 40 basis points to 11.0% for the year ended December 31, 2020, compared to 10.6% for the year ended December 31, 2019 primarily due to higher payroll expenses and a higher provision for credit losses, partially offset by lower travel and entertainment.

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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 was as follows:

						Year Ended December 31,
						2020												2019
						Dollars in Millions						Operating Margin						Dollars in Millions						Operating Margin						Percent Change in Operating Income
Segments:(1)
Corporate						$	489.5					7.2		%				$	585.1					7.8		%				(16.3)		%
Small Business						99.0						7.1						107.5						7.1						(7.8)
Public						678.2						8.3						475.0						6.9						42.8
Other(2)						65.9						3.2						101.6						4.7						(35.0)
Headquarters(3)						(153.4)						nm*						(135.6)						nm*						13.6
Total Operating income						$	1,179.2					6.4		%				$	1,133.6					6.3		%				4.0		%

• Not meaningful

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

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

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

Operating income was $1,179 million for the year ended December 31, 2020, an increase of $46 million, or 4.0%, compared to $1,134 million for the year ended December 31, 2019. Operating income increased primarily due to higher Gross profit dollars and cost saving measures implemented during the year, partially offset by higher payroll expenses and a higher provision for credit losses. Total operating margin percentage increased 10 basis points to 6.4% for the year ended December 31, 2020, from 6.3% for the year ended December 31, 2019 primarily due to higher Gross profit margin and cost saving measures implemented during the year, partially offset by higher payroll expenses and a higher provision for credit losses as percentage of Net sales.

Corporate segment Operating income was $490 million for the year ended December 31, 2020, a decrease of $96 million, or 16.3%, compared to $585 million for the year ended December 31, 2019. Corporate segment Operating income decreased primarily due to lower Gross profit dollars and higher payroll expenses due to coworker compensation investments. Corporate segment operating margin percentage decreased 60 basis points to 7.2% for the for the year ended December 31, 2020, from 7.8% for the year ended December 31, 2019 primarily due higher payroll expenses and a higher provision for credit losses as a percentage of Net sales, partially offset by the mix of netted down revenue and cost saving measures.

Small Business segment Operating income was $99 million for the year ended December 31, 2020, a decrease of $9 million, or 7.8%, compared to $108 million for the year ended December 31, 2019. Small Business segment Operating income decreased primarily due to lower Gross profit dollars, a higher provision for credit losses and higher payroll expenses due to coworker compensation investments. Small Business segment operating margin percentage remained flat at 7.1% for both the year ended December 31, 2020 and 2019 primarily due to the mix of netted down revenue, partially offset by increased payroll expenses and a higher provision for credit losses as a percentage of Net sales.

Public segment Operating income was $678 million for the year ended December 31, 2020, an increase of $203 million, or 42.8%, compared to $475 million for the year ended December 31, 2019. Public segment Operating income increased primarily due to higher Gross profit dollars, partially offset by higher sales payroll expenses. Public segment operating margin percentage increased 140 basis points to 8.3% for the year ended December 31, 2020, from 6.9% for the year ended December 31, 2019, primarily due to a mix into more profitable product offerings and services and by cost saving measures as a percentage of Net sales.

Other Operating income was $66 million for the year ended December 31, 2020, a decrease of $36 million, or 35.0%, compared to $102 million for the year ended December 31, 2019. Other Operating income decreased primarily due to lower Gross profit dollars, higher payroll expenses due to higher average coworker count and coworker compensation investments in addition to a

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higher provision for credit losses. Other operating margin percentage decreased 150 basis points to 3.2% for the year ended December 31, 2020, from 4.7% for the year ended December 31, 2019, primarily due to higher payroll expenses and a higher provision for credit losses as a percentage of Net sales.

Interest expense, net

Interest expense, net in 2020 was $155 million, a decrease of $4 million, compared to $159 million in 2019. This decrease was primarily due to paying a lower effective interest rate on the term loan in 2020 compared to the capped rate in 2019, partially offset by additional interest expense on the senior notes issued in April 2020.

Income tax expense

Income tax expense was $214 million in 2020, compared to $213 million in 2019. The effective income tax rate, expressed by calculating income tax expense as a percentage of Income before income taxes, was 21.3% and 22.4% for 2020 and 2019, respectively.

For 2020, the effective tax rate differed from the US federal statutory rate primarily due to state income taxes, a discrete deferred tax expense as a result of an increase in the UK corporate tax rate, partially offset by excess tax benefits on equity-based compensation and tax benefits associated with new IRS regulations for global intangible low taxed income ("GILTI") and non-deductible expenses for the current and prior years. For 2019, the effective tax rate differed from the US federal statutory rate primarily due to state income taxes, partially offset by tax credits, excess tax benefits on equity-based compensation and a tax benefit related to CDW Canada’s acquisition of Scalar. The 2020 effective tax rate was lower than 2019 primarily due to the tax benefits associated with the new IRS regulations for GILTI and lower non-deductible expenses.

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, 2020 and 2019 below.

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

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

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

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Non-GAAP operating income

Non-GAAP operating income was $1,405 million for the year ended December 31, 2020, an increase of $37 million, or 2.6%, compared to $1,368 million for the year ended December 31, 2019. As a percentage of Net sales, Non-GAAP operating income was 7.6% for each of the years ended December 31, 2020 and 2019.

			Year Ended December 31,
(dollars in millions)			2020						2019
Operating income			$	1,179.2					$	1,133.6
Amortization of intangibles(1)			158.1						178.5
Equity-based compensation			42.5						48.5
Workforce reduction charges			8.5						—
Other adjustments(2)			16.3						7.8
Non-GAAP operating income			$	1,404.6					$	1,368.4
Non-GAAP operating income margin			7.6		%				7.6		%

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

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

Non-GAAP net income

Non-GAAP net income was $954 million for the year ended December 31, 2020, an increase of $52 million, or 5.8%, compared to $902 million for the year ended December 31, 2019.

						Year Ended December 31, 2020																								Year Ended December 31, 2019
(dollars in millions)						Income before income taxes						Income tax expense(1)						Net income												Income before income taxes						Income tax expense(1)						Net income
US GAAP, as reported						$	1,002.3					$	(213.8)					$	788.5											$	949.7					$	(212.9)					$	736.8
Amortization of intangibles(2)						158.1						(36.8)						121.3												178.5						(44.6)						133.9
Equity-based compensation						42.5						(37.0)						5.5												48.5						(36.6)						11.9
Net loss on extinguishments of long-term debt						27.3						(6.8)						20.5												22.1						(5.5)						16.6
Workforce reduction charges						8.5						(2.1)						6.4												—						—						—
Other adjustments(3)						16.3						(4.1)						12.2												7.8						(4.9)						2.9
Non-GAAP						$	1,255.0					$	(300.6)					$	954.4											$	1,206.6					$	(304.5)					$	902.1

(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 Chicago office, and acquisition and integration expenses.

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Net sales growth on a constant currency basis

Net sales increased $435 million, or 2.4%, to $18,468 million for the year ended December 31, 2020, compared to $18,032 million for the year ended December 31, 2019. Net sales on a constant currency basis, which excludes the impact of foreign currency translation, increased $438 million, or 2.4%.

						Year Ended December 31,
(dollars in millions)						2020						2019						% Change(1)
Net sales, as reported						$	18,467.5					$	18,032.4					2.4		%
Foreign currency translation(2)						—						(2.5)
Net sales, on a constant currency basis						$	18,467.5					$	18,029.9					2.4		%

(1)There were 254 selling days for both the years ended December 31, 2020 and 2019.

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

Seasonality

While we have not historically experienced significant seasonality throughout the year, sales in our Corporate segment, which primarily serves US private sector business customers with more than 250 employees, are typically higher in the fourth quarter than in other quarters due to customers spending their remaining technology budget dollars at the end of the year. Additionally, sales in our Public segment have historically been higher in the third quarter than in other quarters primarily due to the buying patterns of the federal government and education customers. During 2020, we experienced variability compared to historic seasonality trends. As uncertainty due to COVID-19 remains, seasonality is expected to 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 credit facility. As of December 31, 2020, we also had $1.0 billion of availability for borrowings under our senior secured asset-based revolving credit facility and an additional £50 million ($68 million) under the CDW UK revolving credit facility. Our liquidity and borrowing plans are established to align with our financial and strategic planning processes and ensure we have the necessary funding to meet our operating commitments, which primarily include the purchase of inventory, payroll and general expenses. We also take into consideration our overall capital allocation strategy, which includes investment for future growth, dividend payments, acquisitions and share repurchases. During 2020, we bolstered our liquidity position by completing a $600 million senior notes issuance in April 2020, and leveraging the lower interest rate environment by refinancing one of our higher interest rate senior notes in August 2020. We also temporarily suspended share repurchases from March 2020 through October 2020. We took additional measures to enhance our liquidity by implementing various cost savings initiatives. We believe we have adequate sources of liquidity and funding available for at least the next year; however, there are a number of factors that may negatively impact our available sources of funds. The amount of cash generated from operations will be dependent upon factors such as the successful execution of our business plan, general economic conditions and working capital management, including accounts receivable.

Long-Term Debt and Financing Arrangements

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

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

As of December 31, 2020, we had total indebtedness of $3.9 billion, of which $1.5 billion was secured indebtedness. At December 31, 2020, we were in compliance with the covenants under our various credit agreements and indentures.

For additional information regarding our debt and refinancing activities, see Note 10 (Long-Term Debt) to the accompanying Consolidated Financial Statements.

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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 7 (Inventory Financing Agreements) to the accompanying Consolidated Financial Statements.

Share Repurchase Program

During 2020, we repurchased 2.6 million shares of our common stock for $341 million under the previously announced share repurchase program. During 2020, we temporarily suspended share repurchases from March 2020 through October 2020 as a precautionary measure in light of the COVID-19 pandemic. For additional information, see "Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities."

Dividends

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

Dividend Amount						Declaration Date						Record Date						Payment Date
$0.380						February 6, 2020						February 25, 2020						March 10, 2020
$0.380						May 6, 2020						May 25, 2020						June 10, 2020
$0.380						August 4, 2020						August 25, 2020						September 10, 2020
$0.400						November 2, 2020						November 25, 2020						December 10, 2020
$1.540

On February 10, 2021, we announced that our Board of Directors declared a quarterly cash dividend on our common stock of $0.400 per share. The dividend will be paid on March 10, 2021 to all stockholders of record as of the close of business on February 25, 2021.

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

Coronavirus Aid, Relief, and Economic Security Act

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

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Cash Flows

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

			Year Ended December 31,
(dollars in millions)			2020						2019
Net cash provided by (used in):
Operating activities			$	1,314.3					$	1,027.2
Investing activities			(201.0)						(331.4)
Net change in accounts payable - inventory financing			93.0						(1.3)
Other financing activities			45.8						(748.5)
Financing activities			138.8						(749.8)
Effect of exchange rate changes on cash and cash equivalents			4.1						2.2
Net increase (decrease) in cash and cash equivalents			$	1,256.2					$	(51.8)

Operating Activities

Cash flows from operating activities are as follows:

			Year Ended December 31,
(dollars in millions)			2020						2019						Change
Net income			$	788.5					$	736.8					$	51.7
Adjustments for the impact of non-cash items(1)			520.9						256.7						264.2
Net income adjusted for the impact of non-cash items(2)			1,309.4						993.5						315.9
Changes in assets and liabilities:
Accounts receivable(3)			(226.4)						(244.8)						18.4
Merchandise inventory(4)			(71.4)						(153.0)						81.6
Accounts payable-trade(5)			253.7						194.1						59.6
Other(6)			49.0						237.4						(188.4)
Net cash provided by operating activities			$	1,314.3					$	1,027.2					$	287.1

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

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

(3)The change is primarily due to improved collection performance partially offset by increased sales.

(4)The change is due to lower customer-driven and strategic stocking positions partially offset by timing of receipts and shipments.

(5)The change is primarily due to mixing into vendors with extended payment terms in 2021, increased sales and year-end inventory purchases.

(6)The change is primarily due to lower contract liabilities partially offset by higher accrued compensation expense in 2020 compared to 2019.

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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:

			December 31,
(in days)			2020						2019
Days of sales outstanding (DSO)(1)			57						57
Days of supply in inventory (DIO)(2)			14						14
Days of purchases outstanding (DPO)(3)			(54)						(53)
Cash conversion cycle			17						18

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

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

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

The cash conversion cycle decreased to 17 days at December 31, 2020, compared to 18 days at December 31, 2019. DSO and DIO both remained unchanged at 57 days and 14 days, respectively. DPO increased by 1 day to 54 days driven by mixing into vendors with extended payment terms during the quarter compared to 2019.

Investing Activities

Net cash used in investing activities decreased $130 million in 2020 compared to 2019. The decrease was primarily due to decreased Capital expenditures of $78 million from fewer purchases of devices for the Census program and lower investments in acquisitions.

Financing Activities

Net cash provided by financing activities increased $889 million in the year ended December 31, 2020 compared to year ended December 31, 2019. The increase was primarily driven by the $600 million debt offering completed in April 2020, lower share repurchases and increased volume through our inventory financing arrangements, partially offset by decreased borrowings under our revolving credit facilities and higher dividend payments. For additional information regarding our debt activities, see Note 10 (Long-Term Debt) to the accompanying Consolidated Financial Statements.

Contractual Obligations

We have future obligations under various contracts relating to debt and interest payments and operating leases. Our estimated future payments, based on undiscounted amounts, under contractual obligations that existed as of December 31, 2020, are as follows:

			Payments Due by Period
(dollars in millions)			Total						2021						2022-2023						2024-2025						2026 & Thereafter
Term Loan(1)			$	1,577.4					$	42.2					$	83.6					$	82.5					$	1,369.1
CDW UK Term Loan(1)			56.5						56.5						—						—						—
Senior Notes due 2024(2)			701.5						31.6						63.3						606.6						—
Senior Notes due 2025(2)			711.4						24.8						49.5						637.1						—
Senior Notes due 2028(2)			791.3						25.5						51.0						51.0						663.8
Senior Notes due 2029(2)			893.5						22.9						45.5						45.5						779.6
Operating leases(3)			243.2						32.8						49.2						37.8						123.4
Total			$	4,974.8					$	236.3					$	342.1					$	1,460.5					$	2,935.9

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(1)Includes future principal and cash interest payments on long-term borrowings through scheduled maturity dates. Interest payments for variable rate debt were calculated using interest rates as of December 31, 2020. Excluded from these amounts are the amortization of debt issuance and other costs related to indebtedness.

(2)Includes future principal and cash interest payments on long-term borrowings through scheduled maturity dates. Interest on the Senior Notes is calculated using the stated interest rates. Excluded from these amounts are the amortization of debt issuance and other costs related to indebtedness.

(3)For additional information, see Note 12 (Leases) 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 each of CDW LLC's direct and indirect, 100% owned, domestic subsidiaries (the "Guarantor Subsidiaries" and, together with Parent, the "Guarantors"). All guarantees by Parent and the Guarantors are joint and several, and full and unconditional; provided that guarantees by the Guarantor Subsidiaries are subject to certain customary release provisions contained in the indentures governing the Notes.

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

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

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

The following tables set forth Balance Sheet information as of December 31, 2020 and December 31, 2019, and Statement of Operations information for the years ended December 31, 2020 and 2019 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

			December 31,
(dollars in millions)			2020						2019
Current assets			$	5,161.3					$	3,601.6
Goodwill			2,239.1						2,206.1
Other assets			572.1						903.1
Total Non-current assets			2,811.2						3,109.2
Current liabilities			3,265.0						2,975.3
Long-term debt			3,856.5						3,229.5
Other liabilities			209.8						188.3
Total Long-term liabilities			4,066.3						3,417.8

Statements of Operations Information

			Year Ended December 31,
(dollars in millions)			2020						2019
Net sales			$	16,380.8					$	15,874.1
Gross profit			2,851.8						2,666.8
Operating income			1,113.2						1,032.1
Net income			738.8						656.7

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Inflation

Inflation has not had a material impact on our operating results. We generally have been able to pass along price increases to our customers, though certain economic factors and technological advances in recent years have tended to place downward pressure on pricing. We also have been able to generally offset the effects of inflation on operating costs by continuing to emphasize productivity improvements. There can be no assurances, however, that inflation would not have a material impact on our sales or operating costs in the future.

Commitments and Contingencies

The information set forth in Note 17 (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. We have reviewed our critical accounting policies with the Audit Committee of our Board of Directors.

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.

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

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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.

Vendor Programs

We receive incentives from certain vendors related to cooperative advertising, volume rebates, bid programs, price protection and other programs. These incentives generally relate to written agreements with specified performance requirements with the vendors and are recorded as adjustments to Cost of sales or Merchandise inventory, depending on the nature of the incentive. We record vendor partner receivables related to these programs when the amounts are probable and reasonably estimable. Some programs are based on the achievement of specific targets, and we base our estimates on information provided by our vendors and internal information to assess our progress toward achieving those targets.

We also record reserves for vendor partner receivables for estimated losses due to vendors' inability to pay or rejections by vendors of claims. In estimating the required allowance, we take into consideration collections performance and the aging of the incentive receivables, as well as specific vendor circumstances.

Goodwill

Goodwill is allocated to reporting units expected to benefit from the business combination. Goodwill is not amortized but is subject to periodic testing for impairment at the reporting unit level on an annual basis each December 1, 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.

Intangible Assets

Intangible assets include customer relationships, trade names, internally developed software and other intangibles. Intangible assets are amortized on a straight-line basis over the estimated useful life of the asset and reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The valuation and classification of these assets and the assignment of useful lives involve significant judgment and the use of estimates. The valuation, classification and assignment of useful lives are derived using market inputs, historic experience and third-party guidance.

Income Taxes

The determination of our provision for income taxes and evaluating our tax positions requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. Our provision for income taxes primarily reflects a combination of income earned and taxed in the various US federal and state, as well as foreign, jurisdictions. Our annual

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effective tax rate is based on our income, the jurisdiction(s) in which the income is earned and subjected to taxation, the tax laws in those various jurisdictions which can be affected by tax law changes, increases or decreases in permanent differences between book and tax items, and accruals or adjustments of accruals for unrecognized tax benefits or valuation allowances.

We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that the position becomes uncertain based upon one of the following: (1) the tax position is not more likely than not to be sustained, (2) the tax position is more likely than not to be sustained, but for a lesser amount, or (3) the tax position is more likely than not to be sustained, but not in the financial period in which the tax position was originally taken. Reserves related to tax accruals and valuation allowances related to deferred tax assets can be impacted by changes in tax law in the relevant jurisdiction(s) and our future taxable income levels in the relevant jurisdiction(s) with respect to valuation allowances.

Allowance for Credit Losses

We estimate an allowance for credit losses related to accounts receivable for future expected credit losses by using relevant information such as historical information, current conditions, and reasonable and supportable forecasts. The allowance is measured on a pool basis when similar risk characteristics exist, and a loss-rate for each pool is determined using historical credit loss experience as the basis for the estimation of expected credit losses. Adjustments to historical loss information involves making informed judgments to reflect our expectations for differences in current conditions, as well as changes in forecasted macroeconomic conditions, such as changes in the unemployment rate or gross domestic product growth, when applicable. We also consider internal information on pool specific factors to inform our decision making. We typically observe a higher loss-rate experience with customers in the pools associated with our Corporate and Small Business segments, as compared to the pools associated with the Public segment. During the year ended December 31, 2020, we recognized an increase in the allowance to reflect the forecasted credit deterioration due to the COVID-19 pandemic, which considered geographic-specific factors, customer makeup and the overall size of our pools, as well as the impacts experienced to date and the impacts from the last significant economic downturn in 2008-2009. As the overall impact and duration of the COVID-19 pandemic remains uncertain, our estimates and assumptions may evolve as conditions change.

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.