CDW Corporation — FY2022 Form 10-K Summary
Business context and reporting period
CDW is a multi-brand IT products, solutions and services provider serving business, government, education and healthcare customers in the United States, the United Kingdom and Canada. This 10-K covers the fiscal year ended December 31, 2022; it is an annual report, not a standalone fourth-quarter report. Results include Sirius, acquired December 1, 2021, for all of 2022 but only from its acquisition date in 2021.
Financial performance and liquidity
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net sales | $23.749 billion | $20.821 billion | +14.1%; +15.2% constant currency |
| Gross profit / margin | $4.687 billion / 19.7% | $3.569 billion / 17.1% | +31.3%; margin +260 bps |
| Operating income / margin | $1.735 billion / 7.3% | $1.419 billion / 6.8% | +22.3% |
| Net income / margin | $1.115 billion / 4.7% | $989 million / 4.7% | +12.7% |
| Diluted EPS | $8.13 | $7.04 | +15.5% |
| Non-GAAP operating income / margin | $2.051 billion / 8.6% | $1.645 billion / 7.9% | +24.6% |
| Non-GAAP net income / diluted EPS | $1.342 billion / $9.79 | $1.119 billion / $7.97 | +19.9% net income |
| Cash from operations / free cash flow | $1.336 billion / $1.293 billion | $785 million / $477 million | Free cash flow up $816 million |
Gross margin improvement reflected more favorable product mix and rate, a higher mix of revenue reported net, and increased services sales and margins, including contributions from acquisitions. Selling and administrative expenses rose 37.3% to $2.951 billion, driven mainly by payroll, higher headcount and Sirius-related intangible amortization. Net interest expense increased 56.2% to $236 million, primarily due to debt issued to fund Sirius. The effective tax rate rose to 25.1% from 23.8%.
Hardware remained the largest category at 76.1% of sales, down from 80.6%; software grew to 15.5% from 13.5%, and services to 7.8% from 5.4%. Segment sales grew 26.5% in Corporate, 3.7% in Small Business, 4.5% in Public and 12.4% in Other. Within Public, Education declined 11.9%, while Government and Healthcare increased 19.4% and 22.7%, respectively.
Year-end cash was $315 million. Total debt was approximately $5.9 billion, with $519 million of inventory-financing obligations; reported net debt was $5.608 billion, down from $6.600 billion. The company prepaid $636 million of term debt during 2022 and had $1.1 billion of additional revolving-facility borrowing availability. It reported $6.564 billion of current assets and $4.947 billion of current liabilities. The cash conversion cycle improved to 21 days from 24.
Material changes, outlook and risks
- Growth was broad across segments, but the Corporate segment and acquired Sirius business were significant contributors. Education sales weakened, primarily in notebooks and mobile devices for K-12 customers.
- Management cited inflation, rising interest rates, geopolitical uncertainty and potential delays or pauses in customer technology spending as factors that could affect results. Customer priorities included digital transformation, security, hybrid/cloud solutions and endpoint technology.
- Management stated it believed liquidity and funding sources were adequate for at least the next year. The filing provides no specific revenue, earnings or margin guidance.
- Key risks include reliance on vendor and distributor relationships and incentives, supply-chain and product availability, competition and pricing pressure, customer credit and inventory obsolescence, cybersecurity and service-delivery risks, and economic or public-sector budget changes. Two distributors accounted for approximately one-third of U.S. purchases.
- Variable-rate debt was $857 million at year-end; rates had risen significantly during 2022. The company’s $1.3 billion of interest-rate caps matured at year-end, leaving no caps outstanding then.
- A subsidiary received a Department of Justice Civil Investigative Demand in a False Claims Act investigation concerning teaming agreements with OEMs. CDW is cooperating; the company said it could not assess the probability or range of loss. It stated it did not believe other ordinary-course proceedings presented a reasonably possible material loss beyond amounts recognized.
- The Sirius acquisition added substantial goodwill and intangible assets. The annual goodwill impairment assessment found no impairment. Management noted that anticipated acquisition benefits may take longer than expected or may not be fully realized.
Important facts for investors to verify
- How much reported growth and margin expansion reflect Sirius and other acquisitions versus organic performance, given the different comparison periods.
- Whether services and software growth can continue and offset lower hardware mix or declines in specific customer channels such as Education.
- Cash conversion, receivables collection and inventory levels, especially if customer demand or supplier availability changes.
- Debt repayment capacity, refinancing needs, variable-rate exposure and the effect of dividends and the expanded share-repurchase authorization on liquidity.
- Any developments in the DOJ investigation, and any changes in vendor incentives, distributor access or supply conditions.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2022.