CDW Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; comparisons are year over year. CDW provides IT products, solutions and services to business, government, education and healthcare customers in the U.S., U.K. and Canada. Results include Sirius, acquired December 1, 2021, so comparisons reflect acquisition-related growth and costs.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $6,145.8m | $5,146.4m | $12,094.9m | $9,983.9m |
| Gross profit / margin | $1,168.2m / 19.0% | $882.8m / 17.2% | $2,272.3m / 18.8% | $1,678.0m / 16.8% |
| Operating income / margin | $435.3m / 7.1% | $369.9m / 7.2% | $822.2m / 6.8% | $693.3m / 6.9% |
| Net income | $279.3m | $274.1m | $529.5m | $506.7m |
| Diluted EPS | $2.04 | $1.93 | $3.87 | $3.56 |
Q2 sales rose 19.4% (20.5% constant currency); six-month sales rose 21.1% (21.9% constant currency). Q2 non-GAAP operating income was $516.3m, up 23.5%, with an 8.4% margin versus 8.1%; non-GAAP net income was $339.5m, up 18.7%. For six months, non-GAAP operating income was $978.4m, up 24.5%, and non-GAAP net income was $641.0m, up 19.7%. These are management-defined non-GAAP measures that exclude specified items, including acquisition-related amortization, equity compensation and integration costs.
Management attributed gross-margin improvement to product mix and rate, a higher proportion of netted-down revenue (particularly software as a service), and professional-services contributions. Higher payroll, coworker count, Sirius-related amortization and integration expenses increased selling and administrative costs. Q2 operating income rose 17.7%, slower than sales, while reported net income growth was modest; 2021 Q2 included $36.8m of other income, including a $36.0m gain on sale of an equity-method investment. Interest expense rose to $57.7m in Q2 and $113.7m for the half, mainly reflecting debt issued to fund Sirius.
Cash flow, debt and liquidity
- Six-month operating cash flow was $761.1m, versus $344.9m; cash and equivalents were $541.6m at June 30, up from $258.1m at year-end.
- Investing cash outflow was $91.6m, including $63.6m of capital expenditures and $28.0m of net acquisition spending. Financing cash outflow was $374.9m, including $135.0m of dividends and net repayments under the revolving facility; no shares were repurchased in the half.
- Total debt including current maturities was approximately $6.6bn; reported net debt was $6,045.3m, compared with $3,427.8m in Q2 2021. The company had $1.1bn of additional revolving-facility borrowing capacity and was in compliance with debt covenants.
- Current assets were $7,039.8m and current liabilities $5,415.6m. Cash conversion cycle was 19 days versus 21 days a year earlier; days sales outstanding increased to 64 from 56, while inventory days rose to 18 from 16.
Outlook, risks and unusual items
The filing provides no specific numerical full-year revenue or earnings guidance. Management described continuing customer demand for digital transformation, security, hybrid/cloud and endpoint solutions, while cautioning that economic uncertainty could delay or pause technology investment. Risks cited include inflation and higher interest rates, COVID-19 uncertainty, supply and labor/logistics disruption, geopolitical conditions including the Russia-Ukraine conflict, customer budget changes, currency movements, cybersecurity, competition, receivables and inventory exposure, and the ability to realize Sirius acquisition benefits.
A subsidiary received a DOJ Civil Investigative Demand in connection with a False Claims Act investigation concerning OEM teaming agreements. CDW is cooperating; because the matter is at an early stage, it cannot assess the likelihood or range of loss. The company stated it did not believe other ordinary-course proceedings presented a reasonable possibility of material loss beyond amounts recognized, while noting outcomes are inherently unpredictable. The Sirius purchase-price allocation remained preliminary. On August 3, 2022, the board declared a $0.50-per-share dividend payable September 9, 2022.
Investor verification priorities
- Separate organic performance from Sirius acquisition contribution, acquisition amortization and integration expenses.
- Assess whether improved gross margin and cash generation are sustainable, including working-capital movements and receivables transfers.
- Review debt-service exposure as interest rates rise, available revolver capacity, and the company’s net-debt trajectory.
- Track demand and sales trends by segment, particularly Corporate growth and continuing weakness in Education, alongside the pace of services and software growth.
- Monitor the DOJ investigation, finalization of Sirius purchase accounting, supply constraints and other disclosed macroeconomic and operational risks.