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CDW Avoids Discipline As Feds End Vendor Incentives Probe

Michael Novinson

The U.S. government doesn't plan to take any action against CDW after concluding a 19-month investigation into the company's vendor partner program incentives, the firm announced Tuesday.

Staff from the U.S. Securities and Exchange Commission informed CDW on Friday that it had concluded its probe and didn't intend to recommend an enforcement action.

The Lincolnshire, Ill.-based company, No. 5 on the CRN Solution Provider 500, said the investigation didn't have any impact on its financial condition or operating results beyond costs related to cooperating with the probe.

[RELATED: CDW Probed By Feds In Connection With Vendor Incentives]

CDW's stock price fell $0.09 (0.15%) to $57.58 in after-hours trading on Tuesday. Chief Financial Officer Ann Ziegler has stated on each of the company's past six earnings calls that she didn't expect the investigation to have a material impact on CDW.

"We’re gratified that the SEC concluded its investigation without recommending any enforcement actions," a spokeswoman said to CRN in an email. "CDW cooperated fully with the SEC throughout the process, and we are pleased to have resolved the matter."

CDW has stated in recent quarterly and annual reports filed with the SEC that it didn't believe the company had incurred any material loss from the investigation exceeding the amounts already recognized.

But the company also said that the ultimate resolutions of these proceedings and matters are inherently unpredictable, adding in a March 2017 filing that the SEC's investigation could result in substantial costs and expenses and significantly divert the attention of CDW's management regardless of the outcome.

CDW did not mention any particular vendor or vendors in any of its filings. The SEC declined to comment for this story.

CDW first learned of the investigation on Oct. 29, 2015, when the SEC requested pertinent documents. The company publicly disclosed the investigation in a quarterly report filed with the SEC on Nov. 6.

Vendor incentives reward resellers such as CDW for achieving vendor-specific outcomes in areas such as revenue growth, market share gains, marketing spend or resource allocation, Brian Alexander, Raymond James's director of equity research, wrote in a November 2015 research brief after CDW disclosed the investigation.

"The company has consistently stated in its quarterly filings that it did not anticipate any material impact related to the investigation, so [the outcome] was not a surprise to investors," Adam Tindle, an equity research associate analyst who now covers CDW for Raymond James, told CRN.

Alexander wrote in November 2015 that he was unsure of what prompted the SEC investigation since CDW had a long history of generating strong margins. Nothing in CDW's results leading up to November 2015 struck Alexander as out of the ordinary, he wrote at the time.

Success in generating strong results from vendor incentive programs has historically enabled CDW to generate operating margins above most of the peers, Alexander wrote two years ago. Vendor incentives are a very important contributor to reseller profitability, he said at the time.

Sales in CDW's most recent quarter jumped to $3.32 billion, up 6.7 percent from $3.12 billion the year prior. But net income plummeted to $57.6 million, down 26 percent from $77.8 million year-over-year.

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