filings.toolsItem 8. Financial Statements and Supplementary Data
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Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of CDW Corporation and subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CDW Corporation and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a) (2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
| Revenue recognition | ||||||||
| Description of the Matter | As described in Note 1 to the consolidated financial statements, the Company recognizes revenue upon transfer of control of promised products or services to customers. The Company applies judgment in determining whether it is the principal and reports revenue on a gross basis, or an agent and reports revenue on a net basis. The Company also sells some of its products and services as part of bundled contract arrangements containing multiple performance obligations. 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 each distinct performance obligation, judgment is required to determine the relative standalone selling price to allocate the transaction price, such as using an expected cost plus margin approach. Auditing the Company’s contracts with customers was challenging given the significant audit effort required to analyze the Company’s various products, services and contract arrangements. For example, certain customer contracts contain multiple parties and there can be subjective judgment in assessing the Company’s role as principal or agent in the contract arrangement. For certain other customer contracts, there can be judgment in the identification of the distinct performance obligations along with the determination of the associated relative standalone selling prices. | |||||||
| How We Addressed the Matter in Our Audit | We obtained an understanding of the revenue process, evaluated the design and tested the operating effectiveness of the Company’s internal controls over the relevant terms of the customer contracts, including the determination of principal versus agent, the identification of distinct performance obligations and the determination of the relative standalone selling price for separate performance obligations. To test revenue recognition, our audit procedures included among others, examination of executed customer contracts for a sample of sales transactions, and evaluating the Company’s determination of principal versus agent, identifying products and services in the contract and assessing separate distinct performance obligations. To test management’s determination of relative standalone selling price for separate performance obligations, we performed audit procedures that included, among others, assessing the appropriateness of the methodology applied, testing the mathematical accuracy of the underlying data and calculations and inspecting the underlying data information on a sample basis. | |||||||
| Accounting for the Acquisition of Sirius - Valuation of Intangible Assets | ||||||||
| Description of the Matter | As described in Note 1 and Note 3 to the consolidated financial statements, the Company acquired Granite Parent, Inc. (also referred to as “Sirius”) for net consideration of $2.4 billion during the year ended December 31, 2021. The transaction was accounted for as a business combination and the Company preliminarily allocated $1.1 billion of the purchase price to the fair value of identified intangible assets. Auditing the Company’s accounting for its acquisition of Sirius was complex due to the significant estimation uncertainty in the Company’s preliminary determination of the fair value of identified intangible assets of $1.1 billion, which principally consisted of customer relationships of $1,090.0 million. The significant estimation uncertainty was primarily due to the sensitivity of the fair value of customer relationships to underlying assumptions about the future performance of the acquired business and the expectations of market participant synergies on which those assumptions were based. The Company used the income approach to measure customer relationships. The significant assumptions used to estimate the value of customer relationships included the long-term growth rate, customer attrition rate and discount rate. These significant assumptions are forward looking and could be affected by future economic and market conditions. |
| How We Addressed the Matter in Our Audit | We obtained an understanding of the Company’s process for accounting for the acquisition. We tested the design and operating effectiveness of the Company's controls over the estimation process supporting the recognition and measurement of customer relationships. We also tested controls regarding management’s review of assumptions used in the valuation model. To test the fair value of the Company’s customer relationships, we performed, with the assistance of our valuation specialists, audit procedures that included evaluating the Company’s selection of the valuation methodology, significant assumptions used and completeness and accuracy of the underlying data. For example, we compared the significant assumptions to historical and current industry, market and economic trends. We also tested the underlying source information used and verified the mathematical accuracy of the calculations within the valuation model. |
| /s/ Ernst & Young LLP | ||
| We have served as the Company’s auditor since 2011. | ||
| Chicago, Illinois | ||
| February 28, 2022 |
CDW CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except per share amounts)
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 258.1 | $ | 1,410.2 | |||||||
| Accounts receivable, net of allowance for credit losses of $20.4 and $29.6, respectively | 4,499.4 | 3,212.6 | |||||||||
| Merchandise inventory | 927.6 | 760.0 | |||||||||
| Miscellaneous receivables | 435.5 | 379.5 | |||||||||
| Prepaid expenses and other | 357.5 | 191.2 | |||||||||
| Total current assets | 6,478.1 | 5,953.5 | |||||||||
| Operating lease right-of-use assets | 155.6 | 130.8 | |||||||||
| Property and equipment, net | 195.8 | 175.5 | |||||||||
| Goodwill | 4,382.9 | 2,595.9 | |||||||||
| Other intangible assets, net | 1,628.1 | 445.1 | |||||||||
| Other assets | 358.9 | 43.9 | |||||||||
| Total Assets | $ | 13,199.4 | $ | 9,344.7 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable-trade | $ | 3,114.2 | $ | 2,088.4 | |||||||
| Accounts payable-inventory financing | 448.3 | 524.6 | |||||||||
| Current maturities of long-term debt | 102.7 | 70.9 | |||||||||
| Contract liabilities | 402.9 | 243.7 | |||||||||
| Accrued expenses and other current liabilities: | |||||||||||
| Compensation | 361.7 | 288.3 | |||||||||
| Advertising | 145.5 | 153.4 | |||||||||
| Sales and income taxes | 65.9 | 104.2 | |||||||||
| Other | 454.8 | 424.8 | |||||||||
| Total current liabilities | 5,096.0 | 3,898.3 | |||||||||
| Long-term liabilities: | |||||||||||
| Debt | 6,755.8 | 3,856.3 | |||||||||
| Deferred income taxes | 222.3 | 55.3 | |||||||||
| Operating lease liabilities | 184.2 | 169.0 | |||||||||
| Other liabilities | 235.4 | 68.7 | |||||||||
| Total long-term liabilities | 7,397.7 | 4,149.3 | |||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
| Preferred stock, $0.01 par value, 100.0 shares authorized; no shares issued or outstanding for both periods | — | — | |||||||||
| Common stock, $0.01 par value, 1,000.0 shares authorized; 134.8 and 141.9 shares outstanding, respectively | 1.3 | 1.4 | |||||||||
| Paid-in capital | 3,369.5 | 3,204.9 | |||||||||
| Accumulated deficit | (2,570.7) | (1,813.4) | |||||||||
| Accumulated other comprehensive loss | (94.4) | (95.8) | |||||||||
| Total stockholders’ equity | 705.7 | 1,297.1 | |||||||||
| Total Liabilities and Stockholders’ Equity | $ | 13,199.4 | $ | 9,344.7 |
The accompanying notes are an integral part of the Consolidated Financial Statements.
CDW CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in millions, except per share amounts)
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Net sales | $ | 20,820.8 | $ | 18,467.5 | $ | 18,032.4 | |||||||||||
| Cost of sales | 17,252.3 | 15,257.4 | 14,992.5 | ||||||||||||||
| Gross profit | 3,568.5 | 3,210.1 | 3,039.9 | ||||||||||||||
| Selling and administrative expenses | 2,149.5 | 2,030.9 | 1,906.3 | ||||||||||||||
| Operating income | 1,419.0 | 1,179.2 | 1,133.6 | ||||||||||||||
| Interest expense, net | (150.9) | (154.9) | (159.4) | ||||||||||||||
| Other income (expense), net | 29.7 | (22.0) | (24.5) | ||||||||||||||
| Income before income taxes | 1,297.8 | 1,002.3 | 949.7 | ||||||||||||||
| Income tax expense | (309.2) | (213.8) | (212.9) | ||||||||||||||
| Net income | $ | 988.6 | $ | 788.5 | $ | 736.8 | |||||||||||
| Net income per common share: | |||||||||||||||||
| Basic | $ | 7.14 | $ | 5.53 | $ | 5.08 | |||||||||||
| Diluted | $ | 7.04 | $ | 5.45 | $ | 4.99 | |||||||||||
| Weighted-average common shares outstanding: | |||||||||||||||||
| Basic | 138.5 | 142.6 | 145.1 | ||||||||||||||
| Diluted | 140.5 | 144.8 | 147.8 |
The accompanying notes are an integral part of the Consolidated Financial Statements.
CDW CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in millions)
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Net income | $ | 988.6 | $ | 788.5 | $ | 736.8 | ||||||||||||||
| Other comprehensive income: | ||||||||||||||||||||
| Unrealized loss from cash flow hedge, net of tax | — | (0.6) | (11.3) | |||||||||||||||||
| Reclassification of cash flow hedge loss to net income, net of tax | 2.5 | 6.0 | 1.7 | |||||||||||||||||
| Foreign currency translation, net of tax | (1.1) | 16.6 | 22.4 | |||||||||||||||||
| Other comprehensive income | 1.4 | 22.0 | 12.8 | |||||||||||||||||
| Comprehensive income | $ | 990.0 | $ | 810.5 | $ | 749.6 |
The accompanying notes are an integral part of the Consolidated Financial Statements.
CDW CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(dollars in millions)
| Common Stock | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||
| Balance as of December 31, 2018 | 147.7 | $ | 1.5 | $ | 2,996.9 | $ | (1,892.6) | $ | (130.6) | $ | 975.2 | |||||||||||||||||||||||||||
| Net income | — | — | — | 736.8 | — | 736.8 | ||||||||||||||||||||||||||||||||
| Equity-based compensation expense | — | — | 47.7 | — | — | 47.7 | ||||||||||||||||||||||||||||||||
| Stock option exercises | 1.3 | — | 34.9 | — | — | 34.9 | ||||||||||||||||||||||||||||||||
| Coworker Stock Purchase Plan | 0.1 | — | 14.9 | — | — | 14.9 | ||||||||||||||||||||||||||||||||
| Repurchases of common stock | (6.1) | (0.1) | — | (657.1) | — | (657.2) | ||||||||||||||||||||||||||||||||
| Dividend payments ($1.265 per share) | — | — | 0.9 | (184.3) | — | (183.4) | ||||||||||||||||||||||||||||||||
| Incentive compensation plan stock withheld for taxes | — | — | — | (21.4) | — | (21.4) | ||||||||||||||||||||||||||||||||
| Unrealized loss from hedge accounting | — | — | — | — | (11.3) | (11.3) | ||||||||||||||||||||||||||||||||
| Reclassification of cash flow hedge loss to net income | — | — | — | — | 1.7 | 1.7 | ||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | 22.4 | 22.4 | ||||||||||||||||||||||||||||||||
| Balance as of December 31, 2019 | 143.0 | $ | 1.4 | $ | 3,095.3 | $ | (2,018.6) | $ | (117.8) | $ | 960.3 | |||||||||||||||||||||||||||
| Net income | — | — | — | 788.5 | — | 788.5 | ||||||||||||||||||||||||||||||||
| Equity-based compensation expense | — | — | 42.5 | — | — | 42.5 | ||||||||||||||||||||||||||||||||
| Stock option exercises | 1.4 | — | 49.2 | — | — | 49.2 | ||||||||||||||||||||||||||||||||
| Coworker Stock Purchase Plan | 0.1 | — | 16.8 | — | — | 16.8 | ||||||||||||||||||||||||||||||||
| Repurchases of common stock | (2.6) | — | — | (340.6) | — | (340.6) | ||||||||||||||||||||||||||||||||
| Dividend payments ($1.540 per share) | — | — | 1.1 | (220.7) | — | (219.6) | ||||||||||||||||||||||||||||||||
| Incentive compensation plan stock withheld for taxes | — | — | — | (22.5) | — | (22.5) | ||||||||||||||||||||||||||||||||
| Unrealized loss from hedge accounting | — | — | — | — | (0.6) | (0.6) | ||||||||||||||||||||||||||||||||
| Reclassification of cash flow hedge loss to net income | — | — | — | — | 6.0 | 6.0 | ||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | 16.6 | 16.6 | ||||||||||||||||||||||||||||||||
| Adoption of Credit Losses ASU 2016-13 | — | — | — | 0.5 | — | 0.5 | ||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | 141.9 | $ | 1.4 | $ | 3,204.9 | $ | (1,813.4) | $ | (95.8) | $ | 1,297.1 | |||||||||||||||||||||||||||
| Net income | — | — | — | 988.6 | — | 988.6 | ||||||||||||||||||||||||||||||||
| Equity-based compensation expense | — | — | 72.6 | — | — | 72.6 | ||||||||||||||||||||||||||||||||
| Stock option exercises | 1.5 | — | 69.9 | — | — | 69.9 | ||||||||||||||||||||||||||||||||
| Coworker Stock Purchase Plan | 0.1 | — | 20.6 | — | — | 20.6 | ||||||||||||||||||||||||||||||||
| Repurchases of common stock | (8.7) | (0.1) | — | (1,500.3) | — | (1,500.4) | ||||||||||||||||||||||||||||||||
| Dividend payments ($1.700 per share) | — | — | 1.5 | (236.3) | — | (234.8) | ||||||||||||||||||||||||||||||||
| Incentive compensation plan stock withheld for taxes | — | — | — | (28.5) | — | (28.5) | ||||||||||||||||||||||||||||||||
| Reclassification of cash flow hedge loss to net income | — | — | — | — | 2.5 | 2.5 | ||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | (1.1) | (1.1) | ||||||||||||||||||||||||||||||||
| Adoption of Income Tax ASU 2019-12 | — | — | — | 19.2 | — | 19.2 | ||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | 134.8 | $ | 1.3 | $ | 3,369.5 | $ | (2,570.7) | $ | (94.4) | $ | 705.7 |
The accompanying notes are an integral part of the Consolidated Financial Statements.
CDW CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net income | $ | 988.6 | $ | 788.5 | $ | 736.8 | |||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | 191.2 | 425.6 | 267.1 | ||||||||||||||
| Equity-based compensation expense | 72.6 | 42.5 | 48.5 | ||||||||||||||
| Deferred income taxes | (6.7) | (20.2) | (87.9) | ||||||||||||||
| Provision for credit losses | (5.4) | 30.9 | 0.8 | ||||||||||||||
| Other | (24.1) | 42.1 | 28.2 | ||||||||||||||
| Changes in assets and liabilities: | |||||||||||||||||
| Accounts receivable | (616.8) | (226.4) | (244.8) | ||||||||||||||
| Merchandise inventory | (151.0) | (71.4) | (153.0) | ||||||||||||||
| Other assets | (134.8) | 18.6 | (10.9) | ||||||||||||||
| Accounts payable-trade | 374.5 | 253.7 | 194.1 | ||||||||||||||
| Other liabilities | 96.5 | 30.4 | 248.3 | ||||||||||||||
| Net cash provided by operating activities | 784.6 | 1,314.3 | 1,027.2 | ||||||||||||||
| Cash flows used in investing activities: | |||||||||||||||||
| Capital expenditures | (100.0) | (158.0) | (236.3) | ||||||||||||||
| Acquisitions of businesses, net of cash acquired | (2,705.6) | (43.0) | (95.1) | ||||||||||||||
| Proceeds from the sale of equity method investment | 36.0 | — | — | ||||||||||||||
| Net cash used in investing activities | (2,769.6) | (201.0) | (331.4) | ||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Proceeds from borrowings under revolving credit facilities | 1,619.7 | 1,024.0 | 2,445.5 | ||||||||||||||
| Repayments of borrowings under revolving credit facilities | (1,300.5) | (1,075.0) | (2,394.5) | ||||||||||||||
| Proceeds from issuance of long-term debt | 3,917.5 | 1,300.0 | 600.0 | ||||||||||||||
| Payments to extinguish long-term debt | (1,469.2) | (622.5) | (539.0) | ||||||||||||||
| Payments of debt financing fees | (38.1) | (16.2) | (9.5) | ||||||||||||||
| Net change in accounts payable-inventory financing | (161.8) | 93.0 | (1.3) | ||||||||||||||
| Financing payments for revenue generating assets | (46.1) | (18.1) | — | ||||||||||||||
| Repurchases of common stock | (1,500.4) | (340.6) | (657.2) | ||||||||||||||
| Proceeds from stock option exercises | 69.9 | 49.2 | 34.9 | ||||||||||||||
| Payment of incentive compensation plan withholding taxes | (28.5) | (22.5) | (21.4) | ||||||||||||||
| Dividend payments | (234.8) | (219.6) | (183.4) | ||||||||||||||
| Other | 5.1 | (12.9) | (23.9) | ||||||||||||||
| Net cash provided by (used in) financing activities | 832.8 | 138.8 | (749.8) | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 0.1 | 4.1 | 2.2 | ||||||||||||||
| Net (decrease) increase in cash and cash equivalents | (1,152.1) | 1,256.2 | (51.8) | ||||||||||||||
| Cash and cash equivalents – beginning of period | 1,410.2 | 154.0 | 205.8 | ||||||||||||||
| Cash and cash equivalents – end of period | $ | 258.1 | $ | 1,410.2 | $ | 154.0 | |||||||||||
| Supplementary disclosure of cash flow information: | |||||||||||||||||
| Interest paid | $ | (134.3) | $ | (139.4) | $ | (154.2) | |||||||||||
| Income taxes paid, net | $ | (351.0) | $ | (245.6) | $ | (272.2) |
The accompanying notes are an integral part of the Consolidated Financial Statements.
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
CDW Corporation (“Parent”), 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 United States (“US”), the United Kingdom (“UK”) and Canada. The Company’s 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.
Throughout this report, the terms “the Company” and “CDW” refer to Parent and its 100% owned subsidiaries.
Parent has two 100% owned subsidiaries, CDW LLC and CDW Finance Corporation. CDW LLC is an Illinois limited liability company that, together with its 100% owned subsidiaries, holds all material assets and conducts all business activities and operations of the Company. CDW Finance Corporation is a Delaware corporation formed for the sole purpose of acting as co-issuer of certain debt obligations and does not hold any material assets or engage in any business activities or operations.
Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules and regulations of the US Securities and Exchange Commission (“SEC”). The Company’s Consolidated Financial Statements are based on a fiscal year ended December 31.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Parent and its 100% owned subsidiaries. All intercompany transactions and accounts are eliminated in consolidation.
On October 15, 2021, the Company entered into a Purchase and Sale Agreement (the “Purchase Agreement”) to acquire all issued and outstanding equity interests in Granite Parent, Inc., the parent company of Sirius Computer Solutions, Inc. (“Sirius”), for a base purchase price of $2.5 billion in cash, subject to customary closing adjustments. On December 1, 2021, the Company completed its acquisition of Sirius. The Company included the financial results of Sirius in its Consolidated Financial Statements from the date of the acquisition. For additional information on the acquisition of Sirius, refer to Note 3 (Acquisitions).
Reclassifications
Certain prior period amounts included in the Financing activities of the Consolidated Statements of Cash Flows have been reclassified to conform with the current period presentation.
Use of Estimates
The preparation of the Consolidated Financial Statements in accordance with US GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the reported periods. The Company bases its estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results and outcomes could differ from those estimates.
Except as noted within Note 2 (Recent Accounting Pronouncements) for the adoption of Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, there have been no changes to the Company’s significant accounting policies and estimates during the year ended December 31, 2021.
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting, which allocates the fair value of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions. The Company may utilize third-party valuation specialists to assist the Company in the allocation. Initial purchase price allocations are subject to revision within the measurement period, not to exceed one year from the date of acquisition. Acquisition-related expenses and transaction costs associated with business combinations are expensed as incurred.
Cash and Cash Equivalents
Cash and cash equivalents include deposits in banks and short-term (original maturities of three months or less at the time of purchase), highly liquid investments that are readily convertible to known amounts of cash and are so near maturity that there is insignificant risk of changes in value due to interest rate changes.
Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and typically do not bear interest. The Company estimates an allowance for credit losses related to accounts receivable for future expected credit losses by using relevant information such as historical information, current conditions, and reasonable and supportable forecasts. The allowance is measured on a pool basis when similar risk characteristics exist, and a loss-rate for each pool is determined using historical credit loss experience as the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current conditions as well as changes in forecasted macroeconomic conditions, such as changes in the unemployment rate or gross domestic product growth rate. The Company has typically observed a higher loss-rate experience with customers in pools associated with the Company’s Corporate and Small Business segments, as compared to the pools associated with the Public segment.
The Company occasionally may transfer certain accounts receivable, without recourse, to third-party financial companies as a method to accelerate cash collections and reduce the Company’s credit exposure. Under these agreements, the Company may transfer certain accounts receivable in exchange for cash less a discount, as defined by the agreements. The Company’s ability to sell receivables is dependent on the financial institutions’ willingness to purchase such receivables. In addition, certain of these agreements also require that the Company continue to service, administer and collect the sold accounts receivable. Such transfers are recognized as a sale and the related accounts receivable is derecognized from the Consolidated Balance Sheet upon receipt of the third-party financing company’s payment. During the years ended December 31, 2021 and 2020, the Company sold approximately $139 million and $83 million, respectively, of accounts receivable.
Merchandise Inventory
Inventory is valued at the lower of cost and net realizable value. Cost is determined using a weighted-average cost method. Price protection is recorded when earned as a reduction to the cost of inventory. The Company decreases the value of inventory for estimated obsolescence equal to the difference between the cost of inventory and the net realizable value, based upon an aging analysis of the inventory on hand, specifically known inventory-related risks and assumptions about future demand and market conditions.
Miscellaneous Receivables
Miscellaneous receivables primarily consist of amounts due from vendors. The Company receives incentives from vendors related to cooperative advertising, volume rebates, bid programs, price protection and other programs. These incentives generally relate to written vendor agreements with specified performance requirements and are generally recorded as adjustments to Cost of sales or Merchandise inventory, depending on the nature of the incentive.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. The Company calculates depreciation expense using the straight-line method over the estimated useful lives of the assets. For revenue generating assets, the Company calculates depreciation expense using the straight-line method to the estimated residual value over the
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
estimated useful life of the assets. Property and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset’s carrying amount over its fair value. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining lease term. Expenditures for major renewals and improvements that extend the useful life of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.
Leases
The Company enters into operating lease contracts, as assessed at contract inception, primarily for real estate, data centers and equipment. On the lease commencement date, the Company records operating lease liabilities based on the present value of the future lease payments. In determining the present value of future lease payments, the Company uses its incremental borrowing rate based on the information available at the commencement date. For real estate and data center contracts, the Company accounts for the lease and non-lease components as a single lease component. For certain equipment leases, the Company applies a portfolio approach to account for the right-of-use asset and operating lease liability. In assessing the lease term, the Company includes options to renew only when it is reasonably certain that it will be exercised; a determination which is at the sole discretion of the Company. For leases with an initial term of 12 months or less, the Company has elected to not record a right-of-use asset and lease liability. For equipment leases used in revenue generating activities, the Company records a right-of-use asset and lease liability for leases with a term of 12 months or less. The Company records lease expense on a straight-line basis over the lease term beginning on the commencement date.
Goodwill
The Company performs an evaluation of goodwill at the reporting unit level, utilizing either a qualitative or quantitative impairment test. A qualitative assessment is performed at least on an annual basis to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. The Company performs a quantitative impairment test for each reporting unit every three years, or more frequently if circumstances indicate a potential impairment. The annual test for impairment is conducted as of December 1. The Company’s reporting units included in the assessment of potential goodwill impairment are the same as its operating segments.
Under a qualitative assessment, the most recent quantitative assessment is used to determine if it is more likely than not that the reporting unit’s goodwill is impaired. As part of this qualitative assessment, the Company assesses relevant events and circumstances including macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, changes in share price and entity-specific events to determine if there is an indication of impairment.
Under a quantitative assessment, goodwill impairment is identified by comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, goodwill is considered impaired and an impairment charge is recognized in an amount equal to that excess, not to exceed the carrying amount of goodwill. Fair value of a reporting unit is determined by using a weighted combination of an income approach (75%) and a market approach (25%), as this combination is considered the most indicative of the Company’s fair value in an orderly transaction between market participants.
Under the income approach, the Company determines fair value based on estimated future cash flows of a reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn. The estimated future cash flows of each reporting unit are based on internally generated forecasts for the remainder of the respective reporting period and the next five years.
Under the market approach, the Company utilizes valuation multiples derived from publicly available information for guideline companies to provide an indication of how much a knowledgeable investor in the marketplace would be willing to pay for a company. The valuation multiples are applied to the reporting units.
Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including Net sales growth rates, gross profit margins, operating margins, discount rates and future
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
market conditions, among others. Any changes in the judgments, estimates or assumptions used could produce significantly different results.
Intangible Assets
Intangible assets with determinable lives are amortized on a straight-line basis over their respective estimated useful lives. The cost of computer software developed or obtained for internal use is capitalized and amortized on a straight-line basis over the estimated useful life of the software. Intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset’s carrying amount over its fair value. In addition, each quarter, the Company evaluates whether events and circumstances warrant a revision to the remaining estimated useful life of each of these intangible assets. If the Company were to determine that a change to the remaining estimated useful life of an intangible asset was necessary, then the remaining carrying amount of the intangible asset would be amortized prospectively over that revised remaining useful life.
Deferred Financing Costs
Deferred financing costs, such as underwriting, financial advisory, professional fees and other similar fees are capitalized and recognized in Interest expense, net over the estimated life of the related debt instrument using the effective interest method or straight-line method, as applicable. The Company classifies deferred financing costs as a direct deduction from the carrying value of the Long-term debt liability on the Consolidated Balance Sheets, except for deferred financing costs associated with revolving credit facilities which are presented as an asset, within Other assets on the Consolidated Balance Sheets.
Derivative Instruments
The Company has interest rate cap agreements for the purpose of hedging its exposure to fluctuations in interest rates. The interest rate cap agreements are designated as cash flow hedges of interest rate risk and recorded at fair value in Other assets on the Consolidated Balance Sheets. Changes in fair value of the derivative instruments, along with the change in the fair value of the hedged item, are reported as a component of Accumulated other comprehensive loss until reclassified to Interest expense, net in the same period the hedge transaction affects earnings.
Fair Value Measurements
Fair value is defined under US GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy has been established for valuation inputs to prioritize the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
Level 1 – observable inputs such as quoted prices for identical instruments traded in active markets.
Level 2 – inputs are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models and similar techniques.
Revenue Recognition
The Company is a primary distribution channel for a large group of vendors and suppliers, including original equipment manufacturers (“OEMs”), software publishers and wholesale distributors.
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are established, the contract has commercial substance and collectability of consideration is probable. The Company evaluates the following indicators amongst others when determining whether it is acting as a principal in the transaction and recording revenue on a gross basis: (i) the Company is primarily responsible for fulfilling the promise to provide the specified goods or service, (ii) the Company has inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer and (iii) the Company has discretion in establishing the price for the specified good or service. If the terms of a transaction do not indicate the Company is acting as a principal in the transaction, then the Company is acting as an agent in the transaction and the associated revenues are recognized on a net basis.
The Company recognizes revenue once control has passed to the customer. The following indicators are evaluated in determining when control has passed to the customer: (i) the Company has a right to payment for the product or service, (ii) the customer has legal title to the product, (iii) the Company has transferred physical possession of the product to the customer, (iv) the customer has the significant risk and rewards of ownership of the product and (v) the customer has accepted the product. The Company’s products can be delivered to customers in a variety of ways, including (i) as physical product shipped from the Company’s warehouse, (ii) via drop-shipment by the vendor or supplier or (iii) via electronic delivery of keys for software licenses. The Company’s shipping terms typically allow for the Company to recognize revenue when the product reaches the customer’s location.
The Company leverages drop-shipment arrangements with many of its vendors and suppliers to deliver products to its customers without having to physically hold the inventory at its warehouses. The Company is the principal in the transaction and recognizes revenue for drop-shipment arrangements on a gross basis.
Revenue Recognition for Hardware
Revenues from sales of hardware products are recognized on a gross basis as the Company is acting as a principal in these transactions, with the selling price to the customer recorded as Net sales and the acquisition cost of the product recorded as Cost of sales. The Company recognizes revenue from these transactions when control has passed to the customer, which is usually upon delivery of the product to the customer.
In some instances, the customer agrees to buy the product from the Company but requests delivery at a later date, commonly known as bill-and-hold arrangements. For these transactions, the Company deems that control passes to the customer when the product is ready for delivery. The Company views products ready for delivery when the customer has a signed agreement, significant risk and rewards for the products and the ability to direct the assets, and the products have been set aside specifically for the customer, cannot be redirected to another customer and for customer orders that include configuration services, when such services have been completed.
The Company’s vendor partners warrant most of the products the Company sells. These manufacturer warranties are assurance-type warranties and are not considered separate performance obligations. The warranties are not sold separately and only provide assurance that products will conform with the manufacturer’s specifications. In some transactions, a third party will provide the customer with an extended warranty. These extended warranties are sold separately and provide the customer with a service in addition to assurance that the product will function as expected. The Company considers these warranties to be separate performance obligations from the underlying product. For extended warranties, the Company is arranging for those services to be provided by the third party and therefore is acting as an agent in the transaction and records revenue on a net basis at the point of sale.
The Company sells cloud computing solutions which include Infrastructure as a Service (“IaaS”). IaaS solutions utilize third-party partners to enable customers to access data center functionality in a cloud-based solution, including storage, computing and networking. The Company recognizes revenue for cloud computing solutions for arrangements with one-time invoicing to the customer at the time of invoice on a net basis as the Company is acting as an agent in the transaction. For monthly subscription-based arrangements, the Company is acting as an agent in the transaction and recognizes revenue as it invoices the customer for its monthly usage on a net basis.
Revenue Recognition for Software
Revenues from most software license sales are recognized as a single performance obligation on a gross basis as the Company is acting as a principal in these transactions at the point the software license is delivered to the customer. Generally, software licenses are sold with accompanying third-party delivered software assurance, which is a product that allows customers to upgrade, at no additional cost, to the latest technology if new capabilities are introduced
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
during the period that the software assurance is in effect. The Company evaluates whether the software assurance is a separate performance obligation by assessing if the third-party delivered software assurance is critical or essential to the core functionality of the software itself. This involves considering if the software provides its original intended functionality to the customer without the updates, if the customer would ascribe a higher value to the upgrades versus the up-front deliverable, if the customer would expect frequent intelligence updates to the software (such as updates that maintain the original functionality), and if the customer chooses to not delay or always install upgrades. If the Company determines that the accompanying third-party delivered software assurance is critical or essential to the core functionality of the software license, the software license and the accompanying third-party delivered software assurance are recognized as a single performance obligation. The value of the product is primarily the accompanying support delivered by a third party and therefore the Company is acting as an agent in these transactions and recognizes them on a net basis at the point the associated software license is delivered to the customer. For software licenses where the accompanying third-party delivered software assurance is not critical or essential to the core functionality, the software assurance is recognized as a separate performance obligation, with the associated revenue recognized on a net basis at the point the related software license is delivered to the customer. For additional information regarding the accounting for bundled arrangements, see “Revenue Recognition for Bundled Arrangements” below.
The Company sells cloud computing solutions which include Software as a Service (“SaaS”). SaaS solutions utilize third-party partners to offer the Company’s customers access to software in the cloud that enhances office productivity, provides security or assists in collaboration. The Company recognizes revenue for cloud computing solutions for arrangements with one-time invoicing to the customer at the time of invoice on a net basis as the Company is acting as an agent in the transaction. For monthly subscription-based arrangements, the Company is acting as an agent in the transaction and recognizes revenue as it invoices the customer for its monthly usage on a net basis.
The Company’s customers are offered the opportunity by certain of its vendors to purchase software licenses and software assurance under enterprise agreements (“EAs”). For most EA transactions, the Company’s obligation to the customer is that of a distributor or sales agent of the services, where all obligations for providing the services to customers are passed to the Company’s vendors. The Company’s performance obligations are satisfied at the time of the sale. In other EA transactions, the Company is responsible for fulfilling the promised services to the customer and providing remedy or refund for work if the customer is not satisfied with the delivered services, has inventory risk in the arrangement and has full control to set the price for the customer. With most EAs, the Company’s vendors will transfer the license and invoice the customer directly, paying resellers an agency fee or commission on these sales. The Company records these fees as a component of Net sales as earned and there is no corresponding Cost of sales amount.
Revenue Recognition for Services
The Company provides professional services, which include project managers and consultants recommending, designing and implementing IT solutions. Revenue from professional services is recognized either on a time and materials basis or proportionally as costs are incurred for fixed fee project work. Revenue is recognized on a gross basis each month as work is performed and the Company transfers those services.
Revenues from the sale of data center services, such as managed and remote managed services, server co-location, internet connectivity and data backup and storage provided by the Company, are recognized over the period the service is provided. Most hosting and managed service obligations are based on the quantity and pricing parameters established in the agreement. As the customer receives the benefit of the service each month, the Company recognizes the respective revenue on a gross basis as the Company is acting as a principal in the transaction. Additionally, the Company’s managed services team provides project support to customers that are billed on a fixed fee basis. The Company is acting as the principal in the transaction and recognizes revenue on a gross basis based on the total number of hours incurred for the period over the total expected hours for the project. Total expected hours to complete the project is updated for each period and best represents the transfer of control of the service to the customer.
Revenue Recognition for Bundled Arrangements
The Company also sells some of its products and services as part of bundled contract arrangements containing multiple deliverables, which may include a combination of products and services. For each deliverable that represents a distinct performance obligation, total arrangement consideration is allocated based upon the standalone selling prices of each performance obligation.
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
Sales In-Transit
The Company performs 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. This analysis is the basis upon which the Company estimates the amount of Net sales in-transit at the end of the period and adjusts revenue and the related costs to reflect only what has been delivered to the customer. Changes in delivery patterns may result in a different number of business days estimated to make this adjustment.
Freight Costs
The Company records freight billed to its customers as Net sales and the related freight costs as Cost of sales when the underlying product revenue is recognized. For freight not billed to its customers, the Company records the freight costs as Cost of sales. The Company’s typical shipping terms result in shipping being performed before the customer obtains control of the product. The Company considers shipping to be a fulfillment activity and not a separate performance obligation.
Other
The nature of the Company’s contracts give rise to variable consideration in the form of volume rebates and sales returns and allowances, which are estimated at contract inception. The Company estimates variable consideration at the most likely amount to which it is expected to be entitled. This estimated amount is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based on an assessment of the Company’s anticipated performance and all information that is reasonably available. At the time of sale, the Company records a liability for estimated sales returns and allowances and an associated right of return asset. The Company also records a provision for volume rebates based on the evaluation of contract terms and historical experience.
The Company excludes amounts collected on behalf of third-parties, such as sales taxes, when determining the transaction price.
When a contract results in revenue being recognized in excess of the amount the Company has the right to invoice to the customer, a contract asset is recorded on the Consolidated Balance Sheets. Contract assets are comprised primarily of professional services with fixed fee arrangements.
Contract liabilities consist of payments received from customers, or such consideration that is contractually due, in advance of providing the product or performing services. Contract liabilities are comprised primarily of professional services with fixed fee arrangements, bill-and-hold transactions where control has not passed to the customer and certain governmental contracts.
Trade accounts receivable are recorded at the point of sale (or in accordance with the Statement of Work for services) for the total amount payable by the customer to the Company for sale of goods and services. Taxes to be collected from the customer as part of the sale are included in Accounts receivable.
Any incremental direct costs of obtaining a contract, primarily sales commissions, are deferred on the Consolidated Balance Sheets and amortized over the period of contract performance.
The Company generally does not enter into long-term contracts. The Company has elected to use the practical expedient for its performance obligations table to include only those contracts that are longer than 12 months at the time of contract inception and those contracts that are non-cancelable. Additionally, for certain governmental contracts where there are annual renewals, the Company has excluded these contracts since there is only a one-year legal obligation. Typically, the only contracts that are longer than 12 months in duration are related to the Company’s managed services business.
The Company requests payments for its products and services at the point of sale. The Company generally does not enter into any long-term financing arrangements or payment plans with customers or contracts with customers that have non-cash consideration.
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
Sales Taxes
Sales tax amounts collected from customers for remittance to governmental authorities are presented on a net basis in the Consolidated Statements of Operations.
Advertising
Advertising costs are generally charged to expense in the period incurred and are recorded in Selling and administrative expenses in the Consolidated Statements of Operations. Cooperative reimbursements from vendors are recorded in the period the related advertising expenditure is incurred. The Company classifies vendor consideration as a reduction to Cost of sales. During the years ended December 31, 2021, 2020 and 2019, the Company had advertising costs of $199 million, $191 million and $193 million, respectively.
Equity-Based Compensation
The Company measures all equity-based payments using a fair-value-based method and records compensation expense over the requisite service period using the straight-line method in its Consolidated Financial Statements. The expense calculation includes estimated forfeiture rates, which have been developed based upon historical experience.
Interest Expense
Interest expense is recognized in the period incurred at the applicable interest rate in effect.
Foreign Currency Translation
The Company’s reporting currency is the US dollar. The functional currency of the Company’s international operating subsidiaries is generally the same as the corresponding local currency. Assets and liabilities of the international operating subsidiaries are translated at the spot rate in effect at the applicable reporting date. Revenues and expenses of the international operating subsidiaries are translated at the average exchange rates in effect during the applicable period. The resulting foreign currency translation adjustment is recorded as Accumulated other comprehensive loss, which is reflected as a separate component of Stockholders’ equity.
Income Taxes
Deferred income taxes are provided to reflect the differences between the tax bases of assets and liabilities and their reported amounts in the Consolidated Financial Statements using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company performs an evaluation of the realizability of deferred tax assets on a quarterly basis. This evaluation requires management to make use of estimates and assumptions and considers all positive and negative evidence and factors, such as the scheduled reversal of temporary differences, the mix of earnings in the jurisdictions in which the Company operates, and prudent and feasible tax planning strategies.
The Company accounts for unrecognized tax benefits based upon its assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. The Company reports a liability for unrecognized tax benefits resulting from unrecognized tax benefits taken or expected to be taken in a tax return and recognizes interest and penalties, if any, related to its unrecognized tax benefits in income tax expense.
2. Recent Accounting Pronouncements
Accounting for Contract Assets and Contract Liabilities
In October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU requires entities to recognize contract liabilities and contract assets acquired in a business combination to be recognized in accordance with ASC 606, Revenue from Contracts with Customers (“Topic 606”) as if the acquirer had originated the contracts, subject to certain considerations. As a result, the recognition and measurement of those contract liabilities and contract assets will likely be comparable to the acquiree’s book value under Topic 606. This ASU is effective for the Company beginning in the first quarter of 2023 and allows for early adoption upon issuance. The Company early adopted this standard, and the impact of adoption was not significant to the Company’s Consolidated Financial Statements.
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
Accounting for Income Taxes
On January 1, 2021, the Company adopted and applied ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“Topic 740”) in accordance with the applicable transition methods. Among the various updates, the Company adopted the accounting for ownership changes when transitioning from equity method to consolidation on a modified retrospective basis, which resulted in a $19 million adjustment to retained earnings as of January 1, 2021 for the cumulative effect of derecognizing the deferred tax liability related to the UK acquisition. The adoption of the remaining components of Topic 740 did not have an impact to the Company’s Consolidated Financial Statements.
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, followed by an amendment issued in January 2021. This ASU temporarily provides optional expedients and exceptions for applying existing guidance to contract modifications, hedging relationships and other transactions that are expected to be affected by reference rate reform. This ASU, as amended, was effective upon issuance and will remain in effect for all contract modifications and hedging relationships entered into through December 31, 2022. The adoption of this ASU along with the related expedients did not have an impact to the Company’s Consolidated Financial Statements.
3. Acquisitions
Sirius
On December 1, 2021, the Company completed its previously announced acquisition of all issued and outstanding equity interests of Sirius, as described within Note 1 (Description of Business and Summary of Significant Accounting Policies). 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. Transaction costs related to the acquisition were $35 million, which are included in Selling and administrative expenses for the year ended December 31, 2021. The Company used the net proceeds from the issuance of the $2.5 billion aggregate principal amount of senior unsecured notes to finance the acquisition and related transaction costs. For additional information on the issuance of the senior notes, see Note 9 (Debt).
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 the Company’s breadth and depth of services and solutions offerings.
Following the close of the acquisition, the Company issued a mix of cash and equity-based retention awards to certain Sirius coworkers, which vest over a required service period and will be recorded as expense over the required service period. The results of operations of Sirius are included in the consolidated financial statements of the Company beginning on the acquisition date. These amounts are presented within the Corporate, Small Business and Public reportable segments. For the year ended December 31, 2021, the Company’s consolidated financial statements included $197 million of net sales and $9 million of net income from the results of operations of Sirius.
The acquisition of Sirius has been accounted for as a business combination. The Company is currently assessing the identification and measurement of the assets acquired and liabilities assumed as of the date of the acquisition. As the values of certain of these assets and liabilities are preliminary, they are subject to adjustment as additional information is obtained about the facts and circumstances that existed as of the acquisition date. The valuations will be finalized within twelve months following the close of the acquisition. When valuations are finalized, any changes to the preliminary valuation of assets acquired and liabilities assumed may result in adjustments to the preliminary fair value of the net identifiable assets acquired and goodwill.
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
The preliminary purchase price allocation is as follows:
| Acquisition-Date Fair Value | ||||||||
| Cash and cash equivalents | $ | 52.8 | ||||||
| Accounts receivable | 646.1 | |||||||
| Intangible assets, net | 1,140.5 | |||||||
| Goodwill | 1,572.4 | |||||||
| Other assets | 444.6 | |||||||
| Total assets acquired | 3,856.4 | |||||||
| Accounts payable-trade | 643.8 | |||||||
| Debt | 170.1 | |||||||
| Deferred tax liabilities | 208.6 | |||||||
| Other liabilities | 415.6 | |||||||
| Total liabilities assumed | 1,438.1 | |||||||
| Total preliminary purchase price | $ | 2,418.3 |
The Company used the income approach to value the intangible assets, consisting of acquired customer relationships and trade name. 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. Significant inputs used to value these intangible assets include projection of all future cash flows, long-term growth rates, customer attrition rates, discount rates, royalty rates and applicable income tax rates. The excess purchase price recorded to goodwill primarily represents the future economic benefits the Company expects to achieve as a result of combining operations and Sirius’ workforce.
The amount of goodwill expected to be deductible for income tax purposes is estimated to be $160 million. The Company has preliminarily allocated the goodwill to the reportable segments. For additional information on goodwill allocation, see Note 6 (Goodwill and Other Intangible Assets).
The table below summarizes the preliminary estimated fair value of identifiable intangible assets acquired.
| Useful Lives (Years) | Acquisition-Date Fair Value | |||||||||||||
| Customer relationships | 12 | $ | 1,090.0 | |||||||||||
| Trade name | 3 | 50.5 | ||||||||||||
| $ | 1,140.5 |
The following unaudited pro forma financial information presents the combined results of operations as if the acquisition of Sirius had been consummated on January 1, 2020. The pro forma adjustments are based on historical results of operations and financial condition of the Company and Sirius and do not include any anticipated synergies or other expected benefits of the acquisition. The unaudited pro forma financial information is not necessarily indicative of the actual consolidated results of operations had the acquisition actually consummated on January 1, 2020, nor are they indicative of future consolidated results of operations of the combined company.
| Year Ended December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Pro forma net sales | $ | 22,793.0 | $ | 20,659.0 | ||||||||||
| Pro forma net income | $ | 977.4 | $ | 771.1 |
The pro forma adjustments include, among other things:
-
Estimated impact to conform Sirius’ classification to the Company’s financial statement presentation.
-
Estimated amortization expense of intangible assets acquired.
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
-
Estimated compensation expense for the cash and equity retention awards.
-
Interest expense for the additional indebtedness incurred to fund the acquisition.
-
Transaction costs that have been incurred in connection with the acquisition.
Focal Point Data Risk LLC and certain affiliates (“Focal Point”)
On July 30, 2021, the Company completed the acquisition of Focal Point through a purchase of all issued and outstanding equity interests. Focal Point is a leading US-based cybersecurity services firm that brings a team skilled in identity and access management as well as the ability to serve customers across the full cybersecurity landscape. This strategic acquisition expands the Company’s services and capabilities to help customers address risks posed by malicious cyber threats and cyber workforce shortages, while helping customers navigate shifting data protection laws. The acquisition of Focal Point was not material to the Company’s results of operations and financial condition. The financial results of Focal Point have been included in the Company’s Consolidated Financial Statements since the date of the acquisition. These amounts are presented within the Public reportable segment and are insignificant during the year ended December 31, 2021. The purchase price allocation is preliminary and subject to customary closing adjustments and revision as additional information about fair value of assets and liabilities become available. Preliminarily, the Company recorded $36 million of intangible assets related to customer relationships.
Amplified IT LLC (“Amplified IT”)
On March 15, 2021, the Company completed the acquisition of Amplified IT through a purchase of all issued and outstanding membership interests. Amplified IT is a Google Premium education partner and leading provider of Google Cloud services, solutions and software for education partners. This strategic acquisition expands the Company’s services and solutions capabilities to help schools leverage technology to achieve greater educational outcomes. The acquisition of Amplified IT was not material to the Company’s results of operations and financial condition. The financial results of Amplified IT have been included in the Company’s Consolidated Financial Statements since the date of the acquisition. These amounts are presented within the Public reportable segment and are insignificant during the year ended December 31, 2021. The purchase price allocation is preliminary and subject to customary closing adjustments and revision as additional information about fair value of assets and liabilities become available. Preliminarily, the Company recorded approximately $88 million of intangible assets, which primarily consisted of customer relationships.
4. Accounts Receivable and Contract Balances
Accounts Receivable
The timing of revenue recognition may differ from the time of billing to customers. Accounts receivable presented on the Consolidated Balance Sheets represent an unconditional right to consideration, which includes unbilled receivables. Unbilled receivables represent revenues that are not currently billable where payment is unconditional and solely subject to the passage of time. These items are expected to be billed and collected in the normal course of business. The balance of the Company’s accounts receivable is classified as current for amounts expected to be collected within twelve months and noncurrent for amounts to be collected beyond twelve months. The following table details the total accounts receivable recognized and the related classification on the Consolidated Balance Sheets:
| December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Accounts receivable, current | $ | 4,499.4 | $ | 3,212.6 | ||||||||||
| Accounts receivable, noncurrent | 197.4 | — | ||||||||||||
| Total accounts receivable | $ | 4,696.8 | $ | 3,212.6 |
(1)Accounts receivable, current are presented within Accounts receivable, net of allowance for credit losses on the Consolidated Balance Sheets.
(2)Accounts receivable, noncurrent are presented within Other assets on the Consolidated Balance Sheets.
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
Accounts receivable increased during the year ended December 31, 2021 primarily due to the acquisition of Sirius. For additional information on the acquisition of Sirius, refer to Note 3 (Acquisitions).
The Company recognizes an allowance for credit losses at inception and reassesses quarterly on a pool basis based on expected collectability. The following table details the changes in the allowance for credit losses related to accounts receivable:
| Balance as of December 31, 2019 | $ | 7.9 | ||||||
| Increase to provision for credit losses | 30.9 | |||||||
| Write-offs charged against the allowance for credit losses | (10.8) | |||||||
| Other | 1.6 | |||||||
| Balance as of December 31, 2020 | 29.6 | |||||||
| Decrease to provision for credit losses | (5.4) | |||||||
| Write-offs charged against the allowance for credit losses | (5.0) | |||||||
| Other | 1.2 | |||||||
| Balance as of December 31, 2021 | $ | 20.4 |
During the year ended December 31, 2021, the Company recognized a $5 million decrease to the provision within the Corporate and Public segments. While the overall impact and duration of the COVID-19 pandemic remains uncertain, the Company has observed improved collections for certain pools throughout the year 2021 and loss rates across certain pools are approaching pre-pandemic levels. The Company’s estimates and assumptions may continue to evolve as conditions change.
Contract Balances
Contract assets and liabilities represent the difference in the timing of revenue recognition from receipt of cash from customers. Contract assets represent revenue recognized on performance obligations satisfied or partially satisfied for which the Company has no unconditional right to consideration. Contract liabilities consist of payments received from customers, or such consideration that is contractually due, in advance of providing the product or performing services. The following table details information about the Company’s contract balances recognized on the Consolidated Balance Sheets:
| December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Contract assets(1) | $ | 134.7 | $ | 39.1 | ||||||||||
| Contract liabilities(2)(3) | $ | 423.3 | $ | 255.3 |
(1)Contract assets are presented within Prepaid expenses and other on the Consolidated Balance Sheets.
(2)Includes $20 million and $12 million of long-term contract liabilities that are presented within Other liabilities on the Consolidated Balance Sheets as of December 31, 2021 and 2020, respectively.
(3)For the years ended December 31, 2021 and 2020, the Company recognized revenue of $171 million and $203 million, respectively, related to its contract liabilities that were included in the beginning balance of the respective periods.
Contract assets and contract liabilities increased $96 million and $168 million, respectively, primarily due to the acquisition of Sirius.
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For additional information regarding the Company’s performance obligations, see Note 1 (Description of Business and Summary of Significant Accounting Policies). The following table represents the total transaction price for the remaining performance obligations as of December 31, 2021 related to non-cancelable contracts longer than 12 months in duration that is expected to be recognized over future periods.
| Within 1 Year | Years 1-2 | Years 2-3 | Thereafter | |||||||||||||||||||||||
| Remaining performance obligations | $ | 57.2 | $ | 26.3 | $ | 7.5 | $ | 2.8 |
5. Property and Equipment
Property and equipment consist of the following:
| December 31, | |||||||||||||||||
| Useful Lives (Years) | 2021 | 2020 | |||||||||||||||
| Computer and data processing equipment | 3 - 5 | $ | 162.1 | $ | 126.5 | ||||||||||||
| Building and leasehold improvements | 5 - 25 | 151.3 | 126.8 | ||||||||||||||
| Machinery and equipment | 5 - 10 | 44.4 | 43.3 | ||||||||||||||
| Computer software | 3 - 5 | 32.9 | 22.9 | ||||||||||||||
| Furniture and fixtures | 5 - 10 | 31.0 | 21.2 | ||||||||||||||
| Land | -* | 27.7 | 27.7 | ||||||||||||||
| Construction in progress | -* | 12.0 | 50.8 | ||||||||||||||
| Property and equipment, gross | 461.4 | 419.2 | |||||||||||||||
| Less: accumulated depreciation | (265.6) | (243.7) | |||||||||||||||
| Property and equipment, net | $ | 195.8 | $ | 175.5 |
*Asset is not depreciated.
During 2021, 2020 and 2019, the Company recorded disposals of $20 million, $54 million and $3 million, respectively, to derecognize Property and equipment that were no longer in use.
Depreciation expense for the years ended December 31, 2021, 2020, and 2019 was $42 million, $213 million and $41 million, respectively.
6. Goodwill and Other Intangible Assets
Goodwill
The changes in goodwill by reportable segment are as follows:
| Corporate | Small Business | Public | Other(1) | Consolidated | ||||||||||||||||||||||||||||
| Balances as of December 31, 2019(2) | $ | 1,090.6 | $ | 185.9 | $ | 929.6 | $ | 346.9 | $ | 2,553.0 | ||||||||||||||||||||||
| IGNW, Inc. acquisition | 33.0 | — | — | — | 33.0 | |||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | 9.9 | 9.9 | |||||||||||||||||||||||||||
| Balances as of December 31, 2020(2) | 1,123.6 | 185.9 | 929.6 | 356.8 | 2,595.9 | |||||||||||||||||||||||||||
| Amplified IT acquisition(3) | — | — | 133.8 | — | 133.8 | |||||||||||||||||||||||||||
| Focal Point acquisition(3) | — | — | 82.7 | — | 82.7 | |||||||||||||||||||||||||||
| Sirius acquisition(3) | 900.6 | 80.2 | 591.6 | — | 1,572.4 | |||||||||||||||||||||||||||
| Other acquisition adjustments | 0.2 | — | — | — | 0.2 | |||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | (2.1) | (2.1) | |||||||||||||||||||||||||||
| Balances as of December 31, 2021(2) | $ | 2,024.4 | $ | 266.1 | $ | 1,737.7 | $ | 354.7 | $ | 4,382.9 |
(1)Other is comprised of CDW UK and CDW Canada operating segments.
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
(2)Goodwill is net of accumulated impairment losses of $1,571 million, $354 million and $28 million related to the Corporate, Public and Other segments, respectively, recorded in 2008 and 2009.
(3)For additional information regarding the Company’s acquisitions, see Note 3 (Acquisitions).
Other Intangible Assets
A summary of intangible assets is as follows:
| December 31, 2021 | Useful Lives (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||
| Customer relationships | 3 - 14 | $ | 3,330.9 | $ | (1,987.8) | $ | 1,343.1 | |||||||||||||||||||
| Trade name | 1 - 20 | 472.7 | (302.0) | 170.7 | ||||||||||||||||||||||
| Internally developed software | 3 - 5 | 352.0 | (239.8) | 112.2 | ||||||||||||||||||||||
| Other | 1 - 10 | 2.5 | (0.4) | 2.1 | ||||||||||||||||||||||
| Total | $ | 4,158.1 | $ | (2,530.0) | $ | 1,628.1 | ||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||
| Customer relationships | 3 - 14 | $ | 2,131.5 | $ | (1,927.9) | $ | 203.6 | |||||||||||||||||||
| Trade name | 1 - 20 | 422.8 | (280.1) | 142.7 | ||||||||||||||||||||||
| Internally developed software | 3 - 5 | 280.6 | (186.0) | 94.6 | ||||||||||||||||||||||
| Other | 1 - 10 | 9.6 | (5.4) | 4.2 | ||||||||||||||||||||||
| Total | $ | 2,844.5 | $ | (2,399.4) | $ | 445.1 |
During the years ended December 31, 2021, 2020 and 2019, the Company recorded disposals of $2 million, $25 million and $11 million, respectively, to remove fully amortized intangible assets that were no longer in use.
During the years ended December 31, 2021, 2020 and 2019, the Company recorded amortization expense related to intangible assets of $149 million, $212 million and $219 million, respectively.
Estimated future amortization expense related to intangible assets is as follows:
| Years ending December 31, | Estimated Future Amortization Expense | |||||||
| 2022 | $ | 218.7 | ||||||
| 2023 | 197.9 | |||||||
| 2024 | 178.1 | |||||||
| 2025 | 149.9 | |||||||
| 2026 | 147.9 | |||||||
| Thereafter | 735.6 | |||||||
| Total future amortization expense | $ | 1,628.1 |
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
7. Inventory Financing Agreements
The Company has entered into agreements with certain financial intermediaries to facilitate the purchase of inventory from various suppliers under certain terms and conditions, as described below. These amounts are classified separately as Accounts payable-inventory financing on the Consolidated Balance Sheets. The Company does not incur any interest expense associated with these agreements as balances are paid when they are due.
Amounts included in accounts payable-inventory financing are as follows:
| December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Revolving Loan inventory financing agreement(1) | $ | 310.1 | $ | 470.1 | ||||||||||
| Other inventory financing agreements | 138.2 | 54.5 | ||||||||||||
| Accounts payable-inventory financing | $ | 448.3 | $ | 524.6 |
(1)The revolving credit facilities include an inventory floorplan sub-facility that enables the Company to maintain an inventory financing agreement with a financial intermediary.
8. Financial Instruments
The Company does not hold or issue derivative financial instruments for trading or speculative purposes. The Company’s indebtedness creates interest rate risk on its variable-rate debt. The Company uses derivative financial instruments to manage its exposure to interest rate risk.
The Company has interest rate cap agreements that entitle it to payments from the counterparty of the amount, if any, by which three-month London Interbank Offered Rate (“LIBOR”) exceeds the strike rates of the caps during the agreement period in exchange for an upfront premium. During 2021, the Company did not enter into new interest rate cap agreements.
As of December 31, 2021 and December 31, 2020, the Company had interest rate cap agreements with a fair value of less than $1 million which were classified within Other assets on the Consolidated Balance Sheets. The total notional value of the interest rate cap agreements was $1.3 billion and $1.4 billion as of December 31, 2021 and December 31, 2020, respectively, of which $100 million matured on December 31, 2021 and $1.3 billion will mature on December 31, 2022.
The fair value of the Company’s interest rate cap agreements is classified as Level 2 in the fair value hierarchy. The valuation of the interest rate cap agreements is derived by using a discounted cash flow analysis on the expected cash receipts that would occur if variable interest rates rise above the strike rates of the caps. This analysis reflects the contractual terms of the interest rate cap agreements, including the period to maturity, and uses observable market-based inputs, including LIBOR curves and implied volatilities. The Company also incorporates insignificant credit valuation adjustments to appropriately reflect the respective counterparty’s nonperformance risk in the fair value measurements. The counterparty credit spreads are based on publicly available credit information obtained from a third-party credit data provider. For additional information, see Note 9 (Debt).
The interest rate cap agreements are designated as cash flow hedges. The changes in the fair value of derivatives that qualify as cash flow hedges are recorded in Accumulated other comprehensive loss (“AOCL”) and are subsequently reclassified into Interest expense in the period when the hedged forecasted transaction affects earnings. The following tables provide the activity in AOCL, net of tax, for the years ended December 31, 2021, 2020 and 2019.
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Change in fair value recorded to AOCL | $ | — | $ | (0.6) | $ | (11.3) | ||||||||||||||
| Reclassification from AOCL to Interest expense, net | $ | 2.5 | $ | 6.0 | $ | 1.7 |
The Company expects to reclassify $5 million from Accumulated other comprehensive loss into Interest expense, net during the next 12 months.
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
9. Debt
| As of December 31, 2021 | As of December 31, 2020 | |||||||||||||||||||||||||||||||
| Maturity Date | Interest Rate | Amount | Interest Rate | Amount | ||||||||||||||||||||||||||||
| Credit Facility | ||||||||||||||||||||||||||||||||
| Senior unsecured revolving loan facility | December 2026 | Variable | $ | 316.4 | Variable | $ | — | |||||||||||||||||||||||||
| Term Loans | ||||||||||||||||||||||||||||||||
| CDW UK term loan | March 2021 | — | % | — | 1.445 | % | 56.0 | |||||||||||||||||||||||||
| Senior unsecured term loan facility | December 2026 | Variable | 1,420.0 | — | % | — | ||||||||||||||||||||||||||
| Senior secured term loan facility | December 2021 | — | % | — | 1.900 | % | 1,423.4 | |||||||||||||||||||||||||
| Total term loans | 1,420.0 | 1,479.4 | ||||||||||||||||||||||||||||||
| Unsecured Senior Notes | ||||||||||||||||||||||||||||||||
| Senior notes due 2024 | December 2024 | 5.500 | % | 575.0 | 5.500 | % | 575.0 | |||||||||||||||||||||||||
| Senior notes due 2025 | May 2025 | 4.125 | % | 600.0 | 4.125 | % | 600.0 | |||||||||||||||||||||||||
| Senior notes due 2028 | April 2028 | 4.250 | % | 600.0 | 4.250 | % | 600.0 | |||||||||||||||||||||||||
| Senior notes due 2029 | February 2029 | 3.250 | % | 700.0 | 3.250 | % | 700.0 | |||||||||||||||||||||||||
| Senior notes due 2026 | December 2026 | 2.670 | % | 1,000.0 | — | % | — | |||||||||||||||||||||||||
| Senior notes due 2028 | December 2028 | 3.276 | % | 500.0 | — | % | — | |||||||||||||||||||||||||
| Senior notes due 2031 | December 2031 | 3.569 | % | 1,000.0 | — | % | — | |||||||||||||||||||||||||
| Total unsecured senior notes | 4,975.0 | 2,475.0 | ||||||||||||||||||||||||||||||
| Receivable financing liability | 179.5 | — | ||||||||||||||||||||||||||||||
| Other long-term obligations | 13.6 | — | ||||||||||||||||||||||||||||||
| Unamortized deferred financing fees | (46.0) | (27.2) | ||||||||||||||||||||||||||||||
| Current maturities of long-term debt | (102.7) | (70.9) | ||||||||||||||||||||||||||||||
| Total long-term debt | $ | 6,755.8 | $ | 3,856.3 |
As of December 31, 2021, the Company is in compliance with the covenants under its credit agreements and indentures.
Credit Facility
The Company has a variable rate senior unsecured revolving loan facility (the “Revolving Loan Facility”) from which it may draw tranches denominated in US dollars, British pounds or Euros. The interest rate is based on LIBOR plus a margin or an alternate base rate plus a margin, where the margin is based on the Company’s senior unsecured rating. The Revolving Loan Facility is used by the Company for borrowings, issuances of letters of credit and floorplan financing. As of December 31, 2021, the Company could have borrowed up to an additional $1.0 billion under the Revolving Loan Facility. As of December 31, 2021, the Revolving Loan Facility had less than $1 million of undrawn letters of credit and $296 million reserved for the floorplan sub-facility.
Term Loan
The senior unsecured term loan facility (the “Term Loan Facility”) has a variable interest rate, which has effectively been capped through the use of interest rate caps. The interest rate is based on LIBOR plus a margin, where the margin is determined by the Company’s senior unsecured credit rating. The Company is required to pay quarterly principal installments of $9 million in 2022 and of $18 million in 2023 and thereafter, with the remaining principal amount due at the maturity date.
Unsecured Senior Notes
The senior notes have a fixed interest rate, which is paid semi-annually.
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
Receivable Financing
The majority of the receivable financing liabilities were assumed in connection with the acquisition of Sirius, which had a balance of $160 million as of December 31, 2021. Such amounts relate to pre-acquisition transfers of certain accounts receivable to third-party financing companies that did not qualify as a sale under the terms of the agreement. While the terms of such agreements are on a nonrecourse basis, the transfers of accounts receivable could not achieve certain criteria that would allow derecognition of the accounts receivable. The proceeds from these arrangements are recognized as a liability and the associated accounts receivable remains on the Consolidated Balance Sheet until the liability is settled.
Debt Issuances and Extinguishments
In connection with the execution of the Purchase Agreement to acquire Sirius, on October 15, 2021, the Company entered into a commitment letter for a $2.5 billion senior unsecured 364-day bridge loan facility (“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, the Company 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. Interest on each note is payable semi-annually on June 1 and December 1 of each year, and payments commence on June 1, 2022. The net proceeds from the issuance were used to fund the Sirius acquisition and related transaction costs. The Bridge Facility was automatically terminated upon completing the acquisition of Sirius without using the Bridge Facility.
Also on December 1, 2021, the Company entered into the Revolving Loan Facility, a new five-year $1.6 billion senior unsecured revolving loan facility. The Revolving Loan Facility replaced the senior secured asset-based revolving credit facility (the “ABL Facility”). On the same date, the Company also entered into the Term Loan Facility, a new five-year $1.4 billion senior unsecured term loan facility. The Term Loan Facility replaced the senior secured term loan facility. The net loss recognized on extinguishment of the senior secured facilities was insignificant for the year ended December 31, 2021.
On March 26, 2021, the Company amended, extended and increased the size of the ABL Facility, prior to its extinguishment on December 1, 2021. On the same day, the Company early extinguished the remaining principal amount on the CDW UK term loan by drawing on the ABL Facility. The net loss recognized on extinguishment of CDW UK term loan was insignificant for the year ended December 31, 2021.
On August 13, 2020, the Company completed the issuance of $700 million aggregate principal amount of 3.250% Senior Notes due 2029 at par (“2029 Senior Notes”). Interest on the 2029 Senior Notes is payable semi-annually on February 15 and August 15 of each year, and payments commenced on February 15, 2021. The net proceeds from the issuance were primarily used to redeem all of the remaining $600 million aggregate principal amount of the 5.000% Senior Notes due September 2025 at a redemption price of 103.75% of the principal amount redeemed, plus accrued and unpaid interest to the date of redemption, to pay fees and expenses related to the issuance and redemption, and for general corporate purposes.
On April 21, 2020, the Company completed the issuance of $600 million aggregate principal amount of 4.125% Senior Notes due 2025 at par (“2025 Senior Notes”). Interest on the 2025 Senior Notes is payable semi-annually on May 1 and November 1 of each year, and payments commenced on November 1, 2020.
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
Total Debt Maturities
A summary of total debt maturities is as follows:
| Years ending December 31, | Debt Maturities | |||||||
| 2022 | $ | 102.7 | ||||||
| 2023 | 131.0 | |||||||
| 2024 | 689.3 | |||||||
| 2025 | 693.4 | |||||||
| 2026 | 2,488.1 | |||||||
| Thereafter | 2,800.0 | |||||||
| Total debt maturities | $ | 6,904.5 |
Fair Value
The fair values of the Senior Notes were estimated using quoted market prices for identical liabilities that are traded in over-the-counter secondary markets. The fair value of the Term Loan was estimated using dealer quotes for identical liabilities in markets that are not considered active. The Senior Notes and Term Loan were classified as Level 2 within the fair value hierarchy. The carrying value of the Revolving Loan approximates fair value.
The approximate fair values and related carrying values of the Company’s long-term debt, including current maturities and excluding unamortized discount and unamortized deferred financing costs, were as follows:
| December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Fair value | $ | 6,996.0 | $ | 4,077.9 | ||||||||||
| Carrying value | 6,904.5 | 3,954.4 |
10. Income Taxes
Income before income taxes was taxed under the following jurisdictions:
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Domestic | $ | 1,186.7 | $ | 934.3 | $ | 854.1 | ||||||||||||||
| Foreign | 111.1 | 68.0 | 95.6 | |||||||||||||||||
| Total | $ | 1,297.8 | $ | 1,002.3 | $ | 949.7 |
Components of Income tax expense (benefit) consist of the following:
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Current: | ||||||||||||||||||||
| Federal | $ | 235.6 | $ | 166.5 | $ | 224.7 | ||||||||||||||
| State | 52.9 | 49.2 | 56.1 | |||||||||||||||||
| Foreign | 27.4 | 18.3 | 20 | |||||||||||||||||
| Total current | 315.9 | 234.0 | 300.8 | |||||||||||||||||
| Deferred: | ||||||||||||||||||||
| Domestic | (8.7) | (18.8) | (83.0) | |||||||||||||||||
| Foreign | 2.0 | (1.4) | (4.9) | |||||||||||||||||
| Total deferred | (6.7) | (20.2) | (87.9) | |||||||||||||||||
| Income tax expense | $ | 309.2 | $ | 213.8 | $ | 212.9 |
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
The reconciliation between the statutory tax rate expressed as a percentage of income before income taxes and the effective tax rate was as follows:
| Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||
| Statutory federal income tax rate | $ | 272.5 | 21.0 | % | $ | 210.5 | 21.0 | % | $ | 199.4 | 21.0 | % | ||||||||||||||||||||||||||
| State taxes, net of federal effect | 50.3 | 3.9 | 36.0 | 3.6 | 35.4 | 3.7 | ||||||||||||||||||||||||||||||||
| Excess tax benefit of equity awards | (30.1) | (2.3) | (28.8) | (2.9) | (26.8) | (2.8) | ||||||||||||||||||||||||||||||||
| Tax on foreign earnings | 1.7 | 0.1 | 1.0 | 0.1 | 2.1 | 0.2 | ||||||||||||||||||||||||||||||||
| Effect of tax law changes | 4.8 | 0.4 | (6.8) | (0.7) | — | — | ||||||||||||||||||||||||||||||||
| Other | 10.0 | 0.7 | 1.9 | 0.2 | 2.8 | 0.3 | ||||||||||||||||||||||||||||||||
| Effective tax rate | $ | 309.2 | 23.8 | % | $ | 213.8 | 21.3 | % | $ | 212.9 | 22.4 | % |
The tax effect of temporary differences that give rise to net deferred income tax liabilities is presented below. Reclassifications have been made to conform to current year presentation.
| December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Deferred tax assets: | ||||||||||||||
| Contract liabilities | $ | 45.3 | $ | 13.2 | ||||||||||
| Equity compensation plans | 22.7 | 20.1 | ||||||||||||
| Net operating loss and credit carryforwards, net | 28.9 | 22.9 | ||||||||||||
| Payroll and benefits | 37.6 | 21.8 | ||||||||||||
| Operating lease liabilities | 51.6 | 47.5 | ||||||||||||
| Accounts receivable | 18.0 | 26.0 | ||||||||||||
| Other | 20.5 | 15.9 | ||||||||||||
| Total deferred tax assets | 224.6 | 167.4 | ||||||||||||
| Deferred tax liabilities: | ||||||||||||||
| Acquisition-related intangibles | 322.2 | 76.5 | ||||||||||||
| Property and equipment | 47.6 | 39.9 | ||||||||||||
| International investments | — | 19.2 | ||||||||||||
| Operating lease right-of-use assets | 35.6 | 32.5 | ||||||||||||
| Other | 26.5 | 23.3 | ||||||||||||
| Total deferred tax liabilities | 431.9 | 191.4 | ||||||||||||
| Deferred tax asset valuation allowance | 17.0 | 16.9 | ||||||||||||
| Net deferred tax liabilities | $ | 224.3 | $ | 40.9 |
The Company has income tax net operating losses and other carryforwards of $39 million that do not expire and state and international tax credit carryforwards of $20 million, which expire at various dates from 2026 through 2027.
The Company is indefinitely reinvested in its UK business, and therefore will not provide for any US deferred taxes on the earnings of the UK business. The Company is not permanently reinvested in its Canadian business and therefore has recognized deferred tax liabilities of $2 million as of December 31, 2021 related to Canada withholding taxes on earnings of its Canadian business.
In the ordinary course of business, the Company is subject to review by domestic and foreign taxing authorities, including the Internal Revenue Service (“IRS”). In general, the Company is no longer subject to audit by the IRS or state, local, or foreign taxing authorities for tax years through 2014. Various taxing authorities are in the process of auditing income tax returns of the Company and its subsidiaries. The Company does not anticipate that any adjustments from the audits would have a material impact on its Consolidated Financial Statements.
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
Changes in the Company’s unrecognized tax benefits as of December 31, 2021, 2020 and 2019 were as follows:
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Balance as of January 1 | $ | 18.3 | $ | 17.7 | $ | 15.1 | ||||||||||||||
| Additions for tax positions related to current year | 0.1 | 0.1 | 2.6 | |||||||||||||||||
| Additions for tax positions related to prior year | — | 0.5 | — | |||||||||||||||||
| Balance as of December 31 | $ | 18.4 | $ | 18.3 | $ | 17.7 |
As of December 31, 2021, the Company had $18 million of unrecognized tax benefits that, if recognized, would have decreased income taxes and the corresponding effective income tax rate and increased net income. The impact of recognizing these tax benefits, net of the federal income tax benefit related to unrecognized state income tax benefits, would be approximately $15 million.
11. Leases
The Company has operating leases primarily for real estate, data centers and equipment. Remaining lease terms range from 1 to 15 years.
Supplemental Consolidated Balance Sheets information related to the Company’s operating leases is as follows:
| December 31, | ||||||||||||||||||||
| Classification on the Consolidated Balance Sheets | 2021 | 2020 | ||||||||||||||||||
| Assets | ||||||||||||||||||||
| Operating lease right-of-use assets | $ | 155.6 | $ | 130.8 | ||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Current | Accrued expenses and other current liabilities - Other | $ | 31.7 | $ | 25.6 | |||||||||||||||
| Long-term | Long-term operating lease liabilities | 184.2 | 169.0 | |||||||||||||||||
| Total lease liabilities | $ | 215.9 | $ | 194.6 | ||||||||||||||||
| December 31, | ||||||||||||||||||||
| Lease term and discount rate | 2021 | 2020 | ||||||||||||||||||
| Weighted average remaining lease term (years) | 9.0 | 10.3 | ||||||||||||||||||
| Weighted average discount rate | 3.81 | % | 3.98 | % | ||||||||||||||||
Operating lease expense for the years ended December 31, 2021, 2020 and 2019 was $50 million, $53 million and $93 million, respectively.
Maturities of operating lease liabilities are as follows:
| December 31, 2021 | ||||||||
| 2022 | $ | 39.4 | ||||||
| 2023 | 34.3 | |||||||
| 2024 | 28.9 | |||||||
| 2025 | 27.4 | |||||||
| 2026 | 24.1 | |||||||
| Thereafter | 106.3 | |||||||
| Total lease payments | $ | 260.4 | ||||||
| Less: Interest | (44.5) | |||||||
| Present value of lease liabilities | $ | 215.9 |
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
Supplemental cash flow information related to operating leases is as follows:
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | |||||||||||||||||
| Operating cash flows from operating leases | $ | 35.9 | $ | 35.8 | $ | 88.0 | |||||||||||
| Right-of-use assets obtained in exchange for lease obligations | |||||||||||||||||
| Operating leases(1) | $ | 49.8 | $ | 26.7 | $ | 110.2 |
(1)In 2021, primarily includes right-of-use assets acquired as a result of the Sirius acquisition.
12. Stockholders’ Equity
Share Repurchase Program
The Company has a share repurchase program under which it may repurchase shares of its common stock in the open market or through privately negotiated other transactions, depending on share price, market conditions and other factors. The share repurchase program does not obligate the Company to repurchase any dollar amount or number of shares, and repurchases may be commenced or suspended from time to time without prior notice.
During 2021, the Company repurchased 8.7 million shares of its common stock for $1,500 million. These repurchases occurred under the programs announced on February 7, 2019 and February 10, 2021 by which the Company’s Board of Directors authorized an increase to the Company’s share repurchase program by $1.0 billion and $1.25 billion, respectively. As of December 31, 2021, the Company has $88 million remaining under this program.
13. Equity-Based Compensation
Equity-based compensation expense, which is recorded in Selling and administrative expenses in the Consolidated Statements of Operations was as follows:
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Equity-based compensation expense | $ | 72.6 | $ | 42.5 | $ | 48.5 | ||||||||||||||
| Income tax benefit(1) | (12.2) | (7.7) | (9.8) | |||||||||||||||||
| Equity-based compensation expense, net of tax | $ | 60.4 | $ | 34.8 | $ | 38.7 |
(1)Represents equity-based compensation tax expense at the statutory tax rates. Excess tax benefits associated with equity awards are excluded from this disclosure and separately disclosed in Note 10 (Income Taxes).
The total unrecognized compensation cost related to non-vested awards was $111 million as of December 31, 2021 and is expected to be recognized over a weighted-average period of 2.1 years.
2021 Long-Term Incentive Plan
During May 2021, the Company adopted the 2021 Long-Term Incentive Plan (“2021 LTIP”), which replaced the former 2013 Long-Term Incentive Plan in connection with the issuance of new equity awards (“2013 LTIP” and, together with the 2021 LTIP, the “LTIPs”). The 2021 LTIP provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, bonus stock and performance awards. The 2021 LTIP allows the Company to grant 6.6 million new shares of the Company’s common stock in addition to the number of shares that remained available for issuance under the 2013 LTIP, and undelivered shares subject to outstanding awards granted under the 2013 LTIP that become available for future awards under the 2021 LTIP. As of December 31, 2021, 8.1 million shares were available for issuance under the 2021 LTIP. Authorized but unissued shares are reserved for issuance in connection with equity-based awards.
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
Stock Options
The exercise price of a stock option granted is equal to the fair value of the underlying stock on the date of the grant. Stock options granted under the LTIPs have a contractual term of ten years and generally vest ratably over three years. To estimate the fair value of options granted, the Company uses the Black-Scholes option pricing model. The weighted-average assumptions used to value the stock options granted were as follows:
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Grant date fair value | $ | 40.83 | $ | 20.46 | $ | 19.26 | ||||||||||||||
| Volatility (1) | 30.00 | % | 25.50 | % | 20.00 | % | ||||||||||||||
| Risk-free rate (2) | 0.93 | % | 0.51 | % | 2.53 | % | ||||||||||||||
| Expected dividend yield | 1.03 | % | 1.52 | % | 1.23 | % | ||||||||||||||
| Expected term (in years) (3) | 5.6 | 6.0 | 6.0 |
(1)Based upon an assessment of the two-year and five-year historical and implied volatility for the Company’s selected peer group, adjusted for the Company’s leverage.
(2)Based on a composite US Treasury rate.
(3)Based on contractual term length and on historical experience of both exercised and unexercised options.
Stock option activity for the year ended December 31, 2021 was as follows:
| Options | Number of Options | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | ||||||||||||||||||||||
| Outstanding at January 1, 2021 | 3,965,452 | $ | 73.71 | |||||||||||||||||||||||
| Granted | 545,359 | 156.30 | ||||||||||||||||||||||||
| Forfeited/Expired | (58,446) | 109.68 | ||||||||||||||||||||||||
| Exercised(1) | (1,097,099) | 63.76 | ||||||||||||||||||||||||
| Outstanding at December 31, 2021 | 3,355,266 | $ | 89.76 | 6.66 | $ | 385.9 | ||||||||||||||||||||
| Vested and exercisable at December 31, 2021 | 1,959,076 | $ | 66.97 | 5.45 | $ | 270.0 | ||||||||||||||||||||
| Expected to vest after December 31, 2021 | 1,377,326 | $ | 121.56 | 8.35 | $ | 114.6 |
(1)The total intrinsic value of stock options exercised during the years ended December 31, 2021, 2020 and 2019 was $117 million, $94 million and $83 million, respectively.
Restricted Stock Units (“RSUs”)
Restricted stock units represent the right to receive unrestricted shares of the Company’s stock at the time of vesting. RSUs granted under the LTIPs vest either ratably over three years or cliff-vest at the end of three years. The fair value of RSUs is equal to the closing price of the Company’s common stock on date of grant.
RSU activity for the year ended December 31, 2021 was as follows:
| Number of Units | Weighted-Average Grant-Date Fair Value | |||||||||||||
| Non-vested at January 1, 2021 | 92,436 | $ | 107.88 | |||||||||||
| Granted (1) | 373,530 | 172.96 | ||||||||||||
| Vested (2) | (20,340) | 101.06 | ||||||||||||
| Forfeited | (8,102) | 160.90 | ||||||||||||
| Non-vested at December 31, 2021 | 437,524 | $ | 163.82 |
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
(1)The weighted-average grant date fair value of RSUs granted during the years ended December 31, 2021, 2020 and 2019 was $172.96, $112.55 and $103.24, respectively.
(2)The aggregate fair value of RSUs that vested during the years ended December 31, 2021, 2020 and 2019 was $2 million, $12 million and $4 million, respectively.
Performance Share Units (“PSUs”)
Performance share units represent the right to receive unrestricted shares of the Company’s stock at the time of vesting. PSUs granted under the LTIPs cliff-vest at the end of three years. The percentage of PSUs that shall vest will range from 0% to 200% of the number of PSUs granted based on the Company’s performance against a cumulative adjusted free cash flow measure and cumulative non-GAAP net income per diluted share measure over a three-year performance period.
PSU activity for the year ended December 31, 2021 was as follows:
| Number of Units | Weighted-Average Grant-Date Fair Value | |||||||||||||
| Non-vested at January 1, 2021 | 421,164 | $ | 102.07 | |||||||||||
| Granted (1) | 147,133 | 154.37 | ||||||||||||
| Attainment adjustment (2) | 163,807 | 73.68 | ||||||||||||
| Vested (3) | (324,323) | 86.17 | ||||||||||||
| Forfeited | (20,577) | 105.34 | ||||||||||||
| Non-vested at December 31, 2021 | 387,204 | $ | 123.05 |
(1)The weighted-average grant date fair value of PSUs granted during the years ended December 31, 2021, 2020 and 2019 was $154.37, $102.96 and $101.33, respectively.
(2)During the year ended December 31, 2021, the attainment on PSUs vested at December 31, 2020 was adjusted to reflect actual performance.
(3)The aggregate fair value of PSUs that vested during the years ended December 31, 2021, 2020 and 2019 was $28 million, $24 million and $18 million, respectively.
14. Earnings Per Share
The numerator for both basic and diluted earnings per share is Net income. The denominator for basic earnings per share is the weighted-average shares outstanding during the period.
A reconciliation of basic weighted-average shares outstanding to diluted weighted-average shares outstanding is as follows:
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Basic weighted-average shares outstanding | 138.5 | 142.6 | 145.1 | |||||||||||||||||
| Effect of dilutive securities (1) | 2.0 | 2.2 | 2.7 | |||||||||||||||||
| Diluted weighted-average shares outstanding (2) | 140.5 | 144.8 | 147.8 |
(1) The dilutive effect of outstanding stock options, restricted stock units, performance share units and Coworker Stock Purchase Plan (“CSPP”) units is reflected in the diluted weighted-average shares outstanding using the treasury stock method.
(2) There were fewer than 0.1 million potential common shares excluded from diluted weighted-average shares outstanding for the years ended December 31, 2021, 2020 and 2019, respectively, as their inclusion would have had an anti-dilutive effect.
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
15. Coworker Retirement and Other Compensation Benefits
Profit Sharing Plan and Other Savings Plans
The Company has a profit-sharing plan that includes a salary reduction feature established under the Internal Revenue Code Section 401(k) covering substantially all coworkers in the US. In addition, coworkers outside the US participate in other savings plans. Company contributions to the profit sharing and other savings plans are made in cash and determined at the discretion of the Board of Directors. For the years ended December 31, 2021, 2020 and 2019, the amounts expensed for these plans were $46 million, $28 million and $38 million, respectively.
CSPP
The Company has a CSPP that provides the opportunity for eligible coworkers to acquire shares of the Company’s common stock at a 5% discount from the closing market price on the final day of the offering period. There is no compensation expense associated with the CSPP.
16. Commitments and Contingencies
The Company is party to various legal proceedings that arise in the ordinary course of its business, which include commercial, intellectual property, employment, tort and other litigation matters. The Company is also subject to audit by federal, state, international, national, provincial and local authorities, and by various partners, group purchasing organizations and customers, including government agencies, relating to purchases and sales under various contracts. In addition, the Company is subject to indemnification claims under various contracts. From time to time, certain customers of the Company file voluntary petitions for reorganization or liquidation under the US bankruptcy laws or similar laws of the jurisdictions for the Company’s business activities outside of the US. In such cases, certain pre-petition payments received by the Company could be considered preference items and subject to return to the bankruptcy administrator.
As of December 31, 2021, the Company does not believe that there is a reasonable possibility that any material loss exceeding the amounts already recognized for these proceedings and matters, if any, has been incurred. However, the ultimate resolutions of these proceedings and matters are inherently unpredictable. As such, the Company’s consolidated financial statements could be adversely affected in any particular period by the unfavorable resolution of one or more of these proceedings or matters.
A subsidiary of the Company received a Civil Investigative Demand dated September 20, 2021 from the Department of Justice (“DOJ”) in connection with a False Claims Act Investigation. The DOJ has requested information related to teaming agreements with OEMs. The Company is cooperating with the request and, given the early stage of the matter, the Company is currently unable to assess the probability of any outcome or the range of possible loss, if any.
17. Segment Information
The Company’s segment information reflects the way the chief operating decision maker uses internal reporting to evaluate business performance, allocate resources and manage operations.
The Company has three reportable segments: Corporate, which is comprised primarily of private sector business customers with more than 250 employees in the US, Small Business, primarily servicing private sector business customers with up to 250 employees in the US, and Public, which is comprised of government agencies and education and healthcare institutions in the US. The Company has two other operating segments: CDW UK and CDW Canada, both of which do not meet the reportable segment quantitative thresholds and, accordingly, are included in an all other category (“Other”).
The Company has centralized logistics and headquarters functions that provide services to the segments. The logistics function includes purchasing, distribution and fulfillment services to support the Corporate, Small Business and Public segments. As a result, costs and intercompany charges associated with the logistics function are fully allocated to all of these segments based on a percent of Net sales. The centralized headquarters function provides services in areas such as accounting, information technology, marketing, legal and coworker services. Headquarters function costs that are not allocated to the segments are included under the heading of “Headquarters” in the tables below.
Segment information for Total assets and capital expenditures is not presented, as such information is not used in measuring segment performance or allocating resources between segments.
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
The segment information presented below includes the results of operations from Sirius since its acquisition on December 1, 2021.
Selected Segment Financial Information
Information about the Company’s segments for the years ended December 31, 2021, 2020 and 2019 is as follows:
| Corporate | Small Business | Public | Other | Headquarters | Total | |||||||||||||||||||||||||||||||||
| 2021: | ||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 8,179.7 | $ | 1,870.1 | $ | 8,183.6 | $ | 2,587.4 | $ | — | $ | 20,820.8 | ||||||||||||||||||||||||||
| Operating income (loss) | 697.3 | 167.7 | 606.7 | 115.8 | (168.5) | 1,419.0 | ||||||||||||||||||||||||||||||||
| Depreciation and amortization expense | (22.9) | (4.1) | (57.2) | (34.4) | (72.6) | (191.2) | ||||||||||||||||||||||||||||||||
| 2020: | ||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 6,846.0 | $ | 1,397.1 | $ | 8,137.7 | $ | 2,086.7 | $ | — | $ | 18,467.5 | ||||||||||||||||||||||||||
| Operating income (loss) | 489.5 | 99.0 | 678.2 | 65.9 | (153.4) | 1,179.2 | ||||||||||||||||||||||||||||||||
| Depreciation and amortization expense | (73.2) | (18.3) | (229.7) | (32.5) | (71.9) | (425.6) | ||||||||||||||||||||||||||||||||
| 2019: | ||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 7,499.0 | $ | 1,510.3 | $ | 6,864.8 | $ | 2,158.3 | $ | — | $ | 18,032.4 | ||||||||||||||||||||||||||
| Operating income (loss) | 585.1 | 107.5 | 475.0 | 101.6 | (135.6) | 1,133.6 | ||||||||||||||||||||||||||||||||
| Depreciation and amortization expense | (86.9) | (22.5) | (56.3) | (31.2) | (70.2) | (267.1) |
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
Geographic Areas and Revenue Mix
| Year Ended December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate | Small Business | Public | Other | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Geography**(1)** | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 8,165.4 | $ | 1,870.1 | $ | 8,183.6 | $ | 19.7 | $ | 18,238.8 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Rest of World | 14.3 | — | — | 2,567.7 | 2,582.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Net sales | 8,179.7 | 1,870.1 | 8,183.6 | 2,587.4 | 20,820.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Major Product and Services | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hardware | 6,427.9 | 1,587.9 | 6,827.1 | 1,926.7 | 16,769.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | 1,172.4 | 211.0 | 1,017.3 | 401.7 | 2,802.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Services | 510.1 | 49.1 | 321.5 | 245.4 | 1,126.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other(2) | 69.3 | 22.1 | 17.7 | 13.6 | 122.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Net sales | 8,179.7 | 1,870.1 | 8,183.6 | 2,587.4 | 20,820.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sales by Channel | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate | 8,179.7 | — | — | — | 8,179.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Small Business | — | 1,870.1 | — | — | 1,870.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Government | — | — | 2,155.6 | — | 2,155.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Education | — | — | 4,108.7 | — | 4,108.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Healthcare | — | — | 1,919.3 | — | 1,919.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | 2,587.4 | 2,587.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Net sales | 8,179.7 | 1,870.1 | 8,183.6 | 2,587.4 | 20,820.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Timing of Revenue Recognition | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Transferred at a point in time where CDW is principal | 7,332.3 | 1,734.7 | 7,634.3 | 2,288.7 | 18,990.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Transferred at a point in time where CDW is agent | 517.5 | 112.3 | 336.6 | 83.2 | 1,049.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Transferred over time where CDW is principal | 329.9 | 23.1 | 212.7 | 215.5 | 781.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Net sales | $ | 8,179.7 | $ | 1,870.1 | $ | 8,183.6 | $ | 2,587.4 | $ | 20,820.8 | |||||||||||||||||||||||||||||||||||||||||||||||||
(1)Net sales by geography is generally based on the ship-to address with the exception of certain services that may be performed at, or on behalf of, multiple locations. Such service arrangements are categorized based on the bill-to address.
(2)Includes items such as delivery charges to customers.
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
| Year Ended December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate | Small Business | Public | Other | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Geography**(1)** | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 6,823.6 | $ | 1,397.1 | $ | 8,137.7 | $ | 20.8 | $ | 16,379.2 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Rest of World | 22.4 | — | — | 2,065.9 | 2,088.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Net sales | 6,846.0 | 1,397.1 | 8,137.7 | 2,086.7 | 18,467.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Major Product and Services | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hardware | 5,289.2 | 1,156.1 | 6,844.0 | 1,544.1 | 14,833.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | 1,088.3 | 189.3 | 982.8 | 320.6 | 2,581.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Services | 400.8 | 31.5 | 269.8 | 211.8 | 913.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other(2) | 67.7 | 20.2 | 41.1 | 10.2 | 139.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Net sales | 6,846.0 | 1,397.1 | 8,137.7 | 2,086.7 | 18,467.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sales by Channel | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate | 6,846.0 | — | — | — | 6,846.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Small Business | — | 1,397.1 | — | — | 1,397.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Government | — | — | 2,978.5 | — | 2,978.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Education | — | — | 3,458.1 | — | 3,458.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Healthcare | — | — | 1,701.1 | — | 1,701.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | 2,086.7 | 2,086.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Net sales | 6,846.0 | 1,397.1 | 8,137.7 | 2,086.7 | 18,467.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Timing of Revenue Recognition | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Transferred at a point in time where CDW is principal | 6,140.7 | 1,301.3 | 7,477.4 | 1,835.5 | 16,754.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Transferred at a point in time where CDW is agent | 457.4 | 84.5 | 292.5 | 61.6 | 896.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Transferred over time where CDW is principal | 247.9 | 11.3 | 367.8 | 189.6 | 816.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Net sales | $ | 6,846.0 | $ | 1,397.1 | $ | 8,137.7 | $ | 2,086.7 | $ | 18,467.5 | |||||||||||||||||||||||||||||||||||||||||||||||||
(1)Net sales by geography is generally based on the ship-to address with the exception of certain services that may be performed at, or on behalf of, multiple locations. Such service arrangements are categorized based on the bill-to address.
(2)Includes items such as delivery charges to customers.
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
| Year Ended December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate | Small Business | Public | Other | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Geography**(1)** | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 7,485.7 | $ | 1,510.3 | $ | 6,864.8 | $ | 32.5 | $ | 15,893.3 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Rest of World | 13.3 | — | — | 2,125.8 | 2,139.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Net sales | 7,499.0 | 1,510.3 | 6,864.8 | 2,158.3 | 18,032.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Major Product and Services | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hardware | 5,963.7 | 1,264.7 | 5,624.9 | 1,628.9 | 14,482.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | 1,069.2 | 196.0 | 1,019.6 | 300.2 | 2,585.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Services | 395.8 | 28.5 | 199.0 | 217.6 | 840.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other(2) | 70.3 | 21.1 | 21.3 | 11.6 | 124.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Net sales | 7,499.0 | 1,510.3 | 6,864.8 | 2,158.3 | 18,032.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sales by Channel | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate | 7,499.0 | — | — | — | 7,499.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Small Business | — | 1,510.3 | — | — | 1,510.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Government | — | — | 2,519.3 | — | 2,519.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Education | — | — | 2,411.6 | — | 2,411.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Healthcare | — | — | 1,933.9 | — | 1,933.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | 2,158.3 | 2,158.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Net sales | 7,499.0 | 1,510.3 | 6,864.8 | 2,158.3 | 18,032.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Timing of Revenue Recognition | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Transferred at a point in time where CDW is principal | 6,818.7 | 1,423.1 | 6,410.2 | 1,900.6 | 16,552.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Transferred at a point in time where CDW is agent | 446.1 | 80.0 | 248.5 | 59.6 | 834.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Transferred over time where CDW is principal | 234.2 | 7.2 | 206.1 | 198.1 | 645.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Net sales | $ | 7,499.0 | $ | 1,510.3 | $ | 6,864.8 | $ | 2,158.3 | $ | 18,032.4 | |||||||||||||||||||||||||||||||||||||||||||||||||
(1)Net sales by geography is generally based on the ship-to address with the exception of certain services that may be performed at, or on behalf of, multiple locations. Such service arrangements are categorized based on the bill-to address.
(2)Includes items such as delivery charges to customers.
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data, unless otherwise noted)
The following table presents Net sales by major category for the years ended December 31, 2021, 2020 and 2019. Categories are based upon internal classifications.
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||
| Net Sales | Percentage of Total Net Sales | Net Sales | Percentage of Total Net Sales | Net Sales | Percentage of Total Net Sales | ||||||||||||||||||||||||||||||
| Notebooks/Mobile Devices | $ | 6,659.4 | 32.0 | % | $ | 5,486.2 | 29.7 | % | $ | 4,344.9 | 24.1 | % | |||||||||||||||||||||||
| Netcomm Products | 1,950.9 | 9.4 | 1,955.0 | 10.6 | 2,189.1 | 12.1 | |||||||||||||||||||||||||||||
| Desktops | 1,203.6 | 5.8 | 1,132.4 | 6.1 | 1,547.3 | 8.6 | |||||||||||||||||||||||||||||
| Video | 1,605.0 | 7.7 | 1,190.8 | 6.4 | 1,272.9 | 7.1 | |||||||||||||||||||||||||||||
| Enterprise and Data Storage (Including Drives) | 992.1 | 4.8 | 947.4 | 5.1 | 1,147.6 | 6.4 | |||||||||||||||||||||||||||||
| Other Hardware | 4,358.6 | 20.9 | 4,121.6 | 22.3 | 3,980.4 | 22.1 | |||||||||||||||||||||||||||||
| Total Hardware | 16,769.6 | 80.6 | 14,833.4 | 80.2 | 14,482.2 | 80.4 | |||||||||||||||||||||||||||||
| Software(1) | 2,802.4 | 13.5 | 2,581.0 | 14.0 | 2,585.0 | 14.3 | |||||||||||||||||||||||||||||
| Services(1) | 1,126.1 | 5.4 | 913.9 | 4.9 | 840.9 | 4.7 | |||||||||||||||||||||||||||||
| Other(2) | 122.7 | 0.5 | 139.2 | 0.9 | 124.3 | 0.6 | |||||||||||||||||||||||||||||
| Total Net sales | $ | 20,820.8 | 100.0 | % | $ | 18,467.5 | 100.0 | % | $ | 18,032.4 | 100.0 | % |
(1)Certain software and services revenues are recorded on a net basis for accounting purposes. As a result, the category percentage of net revenues is not representative of the category percentage of gross profits.
(2)Includes items such as delivery charges to customers.
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2021, 2020 and 2019
(dollars in millions)
| Allowance for credit losses: | Balance at Beginning of Period | Charged to Costs and Expenses | Deductions (1) | Balance at End of Period | ||||||||||||||||||||||
| Year Ended December 31, 2021 | $ | 29.6 | $ | (5.4) | $ | (3.8) | $ | 20.4 | ||||||||||||||||||
| Year Ended December 31, 2020 | 7.9 | 30.9 | (9.2) | 29.6 | ||||||||||||||||||||||
| Year Ended December 31, 2019 | 7.0 | 2.2 | (1.3) | 7.9 | ||||||||||||||||||||||
(1) Primarily includes write-offs of uncollectible accounts.
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