CDW Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing; it also provides unaudited fourth-quarter results. CDW is a multi-brand IT products, solutions and services provider serving business, government, education and healthcare customers in the U.S., UK and Canada.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $18.47 billion | $18.03 billion |
| Gross profit / margin | $3.21 billion / 17.4% | $3.04 billion / 16.9% |
| Operating income / margin | $1.18 billion / 6.4% | $1.13 billion / 6.3% |
| Net income | $788.5 million | $736.8 million |
| Diluted EPS | $5.45 | $4.99 |
| Cash from operations | $1.31 billion | $1.03 billion |
| Capital expenditures | $158.0 million | $236.3 million |
Sales rose 2.4%; gross profit increased 5.6%, operating income 4.0%, and net income 7.0%. Gross margin improvement reflected product margin and a greater mix of net-reported revenue, including software-as-a-service. Selling and administrative expenses increased 6.5%, including higher payroll and credit-loss provisions.
Fourth quarter: Net sales were $4.96 billion, gross profit $880.9 million, operating income $332.2 million and net income $238.3 million; diluted EPS was $1.65. In Q4 2019, the comparable figures were $4.54 billion, $777.5 million, $283.8 million, $185.6 million and $1.27, respectively.
Business mix and material changes
- Public segment sales rose 18.5% to $8.14 billion, led by Education (+43.4%) and Government (+18.2%). Education demand included devices and solutions for remote learning; Government growth included the Census project.
- Corporate sales declined 8.7% to $6.85 billion and Small Business declined 7.5% to $1.40 billion, primarily reflecting weaker hardware demand amid COVID-19. Healthcare sales fell 12.0% to $1.70 billion as customers faced budget pressure and delayed projects.
- Notebooks/mobile devices grew to $5.49 billion, or 29.7% of sales, from $4.34 billion, or 24.1%. Hardware overall was 80.2% of sales; software was 14.0% and services 4.9%.
- Operating income increased in Public to $678.2 million, while it declined in Corporate, Small Business and Other. Public operating margin rose to 8.3%; Corporate margin fell to 7.2%.
Cash, debt and liquidity
- Cash and cash equivalents were $1.41 billion at year-end, up from $154.0 million. Working capital was $2.06 billion. Operating cash flow was $1.31 billion.
- Long-term debt and finance lease obligations were reported at $3.93 billion, excluding $524.6 million of inventory-financing payables. Net debt, as defined by CDW as total debt less cash, was $2.52 billion, down from $3.16 billion.
- CDW reported $1.0 billion of additional borrowing availability under its U.S. revolving facility and £50 million ($68 million) under its UK facility. The company said it had adequate liquidity and funding for at least the next year and was compliant with debt covenants at year-end.
- During 2020, CDW issued $600 million of 4.125% notes due 2025 and $700 million of 3.25% notes due 2029, using proceeds primarily to refinance $600 million of 5.0% notes due 2025. Variable-rate debt was $1.5 billion; interest-rate caps covered $1.4 billion in notional principal at year-end.
- CDW repurchased 2.6 million shares for $341 million in 2020, suspending repurchases from March through October before resuming in November. Dividends declared totaled $1.54 per share.
Outlook, risks and unusual items
- No specific financial guidance for 2021 is provided in the filing. Management noted that COVID-19 continues to make demand, customer budgets, supply availability and seasonality uncertain; 2020 sales patterns differed from historical seasonality.
- Management described customer investment in remote work, education enablement, security, cloud, hybrid IT and digital transformation. It also cited uncertainty around government, healthcare and education budgets and the effects of the UK’s post-Brexit trade arrangements.
- COVID-19 drove a $30.9 million provision for credit losses in 2020, versus $0.8 million in 2019; the year-end allowance for credit losses was $29.6 million. Management said estimates may change as pandemic conditions evolve.
- Key risks include dependence on major vendors and distributors, competitive pricing and direct vendor sales, supply-chain constraints, customer credit and inventory obsolescence, cybersecurity and systems disruptions, public-sector contract compliance, foreign exchange, and substantial debt and variable interest rates. Six vendors accounted for approximately 60% of 2020 consolidated sales; Dell EMC and HP Inc. products accounted for approximately 25%.
- Legal proceedings and audits arise in the ordinary course. CDW reported no reasonable possibility of material loss beyond amounts already recognized, while noting outcomes remain uncertain. Ernst & Young issued unqualified opinions on the financial statements and internal controls.
- Non-GAAP net income was $954.4 million versus GAAP net income of $788.5 million; the reconciliation includes acquisition-related amortization, equity compensation, debt extinguishment losses, workforce-reduction charges and other adjustments. Investors should assess these exclusions alongside GAAP results.
Important facts for investors to verify
- Whether Public-sector growth, particularly education demand and the Census project, can offset weakness in Corporate, Small Business and Healthcare.
- Whether gross-margin gains persist as product mix, vendor incentives, pricing and net-reported software revenue change.
- Credit quality and collections, given the pandemic-related increase in the credit-loss provision and sizeable receivables.
- Debt maturities, refinancing costs, revolving-credit availability and exposure to variable rates and benchmark-rate transition.
- Vendor concentration, product availability and supply-chain constraints, as well as the sustainability of dividends and share repurchases.
- Quarterly trends and management’s subsequent outlook: this annual filing provides no numerical 2021 guidance.