CDW Corporation — Q3 2021 Form 10-Q
Business context and period. CDW is a multi-brand IT solutions provider serving business, government, education and healthcare customers in the U.S., U.K. and Canada. This unaudited filing covers the three and nine months ended September 30, 2021; comparisons are with the same 2020 periods unless noted. Dollars are in millions except per-share amounts.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $5,300.0 | $4,756.4 | $15,283.9 | $13,511.3 |
| Gross profit / margin | $914.9 / 17.3% | $825.5 / 17.4% | $2,592.9 / 17.0% | $2,329.2 / 17.2% |
| Operating income / margin | $386.4 / 7.3% | $317.8 / 6.7% | $1,079.7 / 7.1% | $847.0 / 6.3% |
| Net income | $266.6 | $193.2 | $773.3 | $550.2 |
| Diluted EPS | $1.91 | $1.33 | $5.47 | $3.80 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $636.7 | $738.4 |
Material changes and operating trends
- Q3 sales rose 11.4% (10.7% on a constant-currency basis); nine-month sales rose 13.1%, or 13.7% on an average-daily-sales basis (12.6% constant currency). Q3 average daily sales were $82.8 versus $74.3.
- Q3 growth was led by Corporate (+24.5%), Small Business (+38.6%), and Other (+31.4%). Public sales fell 6.1%, including Government down 32.9%; Education increased 2.4% and Healthcare 30.9%. For nine months, Education led reported segment/channel growth, while Government declined 25.2%.
- Hardware represented 80.5% of Q3 sales; software 13.5% and services 5.4%. Services increased as a share of sales year over year. Management cited demand for mobile devices, video, collaboration, security, hybrid/cloud solutions and resumed infrastructure projects.
- Q3 gross margin slipped 10 basis points, primarily from lower product margin; operating margin improved 60 basis points, helped by lower intangible amortization and prior-year workforce-reduction costs. Nine-month gross margin declined 20 basis points, while operating margin rose 80 basis points, also reflecting lower bad-debt expense and operating expenses as a share of sales.
- Q3 GAAP operating income grew 21.6%; non-GAAP operating income increased 12.6% to $435.1 million, with an 8.2% margin versus 8.1%. Nine-month non-GAAP operating income rose 18.7% to $1,220.9 million; non-GAAP net income was $833.5 million versus $690.7 million. These are company-defined non-GAAP measures.
Cash, debt and liquidity
- Cash was $245.1 at September 30, 2021, down from $1,410.2 at year-end 2020. Total debt was approximately $4.1 billion; net debt was $3,821.1, versus $2,681.4 in Q3 2020. The company reported compliance with debt covenants.
- Cash from operations for the first nine months was $636.7, down $101.7 year over year. Working-capital use included $323.5 from receivables and $87.5 from inventory. The cash conversion cycle increased to 25 days from 16, with inventory days up four and payable days down five.
- Investing cash use was $369.9, including $339.7 for acquisitions. Financing cash use was $1,431.8, including $1,185.3 in share repurchases and $167.1 in dividends. The company had $1.2 billion of additional revolving-credit borrowing availability at quarter-end.
- Long-term debt, including current maturities, was reported as $4,066.2. The revolving facility was amended and extended to March 2026, with capacity increased to $1.6 billion. The company said it believed liquidity was adequate for at least the next year, including for the proposed Sirius acquisition.
Outlook, commentary, risks and unusual items
- The filing provides no specific numerical earnings or revenue guidance. Management described continuing COVID-19-related supply constraints, extended lead times and uncertainty, while noting customer investment priorities in digital transformation, security, hybrid work and cloud. It cautioned that pandemic effects and historical seasonality remain uncertain.
- On October 15, 2021, CDW agreed to acquire Sirius Computer Solutions for $2.5 billion in cash, subject to customary closing conditions and regulatory review, and expected closing in Q4 2021. A committed 364-day bridge facility of up to $2.5 billion was arranged if permanent financing was not available. Certain termination scenarios carry fees of $75 million or $125 million.
- CDW completed acquisitions of Amplified IT and Focal Point during 2021; preliminary purchase accounting included approximately $88 million and $37 million of acquired intangible assets, respectively. Their reported-period results were described as insignificant.
- Nine-month other income included a $36 million gain on sale of an equity-method investment. The prior-year period included a $27 million loss on debt extinguishment.
- A subsidiary received a September 2021 DOJ Civil Investigative Demand regarding a False Claims Act investigation into OEM teaming agreements. CDW is cooperating and said it could not yet assess the outcome or possible loss. The company also identified ordinary-course litigation, audits and indemnification matters, without believing a material excess loss was reasonably possible at quarter-end.
- Key risks include supply interruptions, economic and customer-spending uncertainty, vendor-partner relationships, competition, cybersecurity, receivables and inventory exposure, indebtedness, legal and regulatory matters, and completion and integration risks related to Sirius.
Key facts for investors to verify
- Whether supply constraints, product availability and the longer cash conversion cycle affect sales, margins and working capital.
- Whether the Sirius acquisition closes on expected terms and timing, how it is financed, and whether anticipated benefits are realized.
- Developments in the DOJ investigation, including any disclosure of a loss range or material outcome.
- Quality and sustainability of earnings growth, including product-margin pressure, acquisition-related adjustments, and the $36 million investment-sale gain.
- Cash generation, net debt, repurchases and dividends in light of the acquisition financing needs and the filing’s stated liquidity risks.