CDW Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with the three months ended March 31, 2021 unless otherwise noted. 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 Computer Solutions, acquired December 1, 2021; its contribution affects year-over-year comparability.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $5,949.1 million | $4,837.5 million | +23.0% |
| Gross profit / margin | $1,104.1 million / 18.6% | $795.2 million / 16.4% | +38.8%; +220 bps |
| Operating income / margin | $386.9 million / 6.5% | $323.4 million / 6.7% | +19.6% |
| Net income | $250.2 million | $232.6 million | +7.6% |
| Diluted EPS | $1.83 | $1.63 | +12.3% |
| Operating cash flow | $380.8 million | $344.6 million | +$36.2 million |
- Non-GAAP operating income was $462.1 million, up 25.7%; non-GAAP operating margin was 7.8%, versus 7.6%. Non-GAAP net income was $301.5 million, up 20.9%. These are company-defined non-GAAP measures.
- Cash and equivalents were $386.9 million at March 31, 2022, versus $258.1 million at December 31, 2021. Operating cash flow exceeded capital expenditures of $41.3 million; investing cash outflow was $41.3 million.
- Total debt, including current maturities, was approximately $6.6 billion; reported net debt was $6,211.8 million. The company had $1.0 billion of additional revolving-facility borrowing capacity and was in compliance with debt covenants.
- Current assets were $6,870.8 million and current liabilities were $5,464.6 million. Inventory financing payables rose to $564.9 million from $448.3 million at year-end.
- Cash conversion cycle was 20 days, compared with 22 days a year earlier. The filing attributes changes in working capital partly to higher sales, inventory stocking and the Sirius acquisition.
Material changes and management commentary
- Sales growth reflected higher hardware, software and services demand as well as Sirius. Corporate sales rose 45.5%, Small Business 21.1%, Public 5.8%, and Other 12.8%. Within Public, Education sales fell 4.3%, while Healthcare rose 26.8%.
- Gross margin expansion was attributed primarily to product mix and rate, a higher mix of net service-contract revenue (especially software as a service), and stronger professional-services sales and margins, including acquisition contributions.
- Selling and administrative expense increased 52.0%, driven by payroll and higher coworker count, acquisition-related intangible amortization, and Sirius integration costs. Interest expense rose to $56.0 million from $35.6 million, primarily reflecting debt issued to fund Sirius.
- The effective tax rate increased to 24.3% from 19.5%, mainly due to lower excess tax benefits on equity-based compensation.
- Cash from operations increased year over year, while accounts receivable and inventory uses of cash increased. Financing cash outflow was $208.1 million, versus $643.5 million in Q1 2021; the prior period included substantial share repurchases and an acquisition. CDW made no share repurchases in Q1 2022.
Outlook, risks and contingencies
- The filing provides no quantified earnings or revenue guidance. Management said it believed liquidity and funding sources were adequate for at least the next year, while noting that operating cash generation depends on execution, economic conditions and working-capital management.
- Management highlighted uncertainty from COVID-19, inflation, rising interest rates, Russia-Ukraine conflict and related sanctions, supply and logistics constraints, component availability, and labor disruption. These factors may affect customer spending, costs, lead times and product availability.
- Other disclosed risks include vendor relationships, competition, cybersecurity and IT-system risks, accounts receivable and inventory exposure, labor costs, foreign exchange, public-sector contract compliance, debt service and restrictions, and whether Sirius integration achieves expected benefits. Seasonality has been less predictable since the pandemic.
- A subsidiary received a Department of Justice Civil Investigative Demand related to a False Claims Act investigation concerning OEM teaming agreements. CDW is cooperating; because the matter is at an early stage, it cannot assess the probability or range of possible loss. For other proceedings, CDW did not believe a material loss beyond amounts recognized was reasonably possible, but outcomes remain unpredictable.
- The Sirius acquisition consideration was approximately $2.4 billion, net of cash acquired. Purchase-price allocation remained preliminary and subject to finalization during the measurement period.
- On May 4, 2022, CDW announced a quarterly dividend of $0.50 per share, payable June 10, 2022 to holders of record May 25, 2022. Future dividends remain at the board’s discretion.
Important facts for investors to verify
- How much of reported growth and margin improvement reflects Sirius and acquisition-related effects versus comparable underlying performance.
- Whether supply constraints, inflation and customer demand materially affect sales, margins, inventory and working capital in subsequent quarters.
- Progress on Sirius integration, including integration costs, amortization and realization of expected benefits.
- Debt levels, variable-rate exposure, available revolving capacity and cash generation relative to dividend and debt-service commitments.
- Developments in the DOJ investigation, the possible financial exposure and any material changes in other legal or audit matters.