CDW Corporation (CDW) — FY 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing, not a standalone fourth-quarter report. Dollar amounts are in millions unless otherwise stated.
Business context
CDW distributes IT products and provides technology solutions and services to business, government, education and healthcare customers in the U.S., U.K. and Canada. The company completed its acquisition of Sirius Computer Solutions on December 1, 2021, expanding its services, hybrid infrastructure, security and cloud capabilities. Sirius contributed $197 million of 2021 net sales after acquisition.
Financial results
| Metric | FY 2021 | FY 2020 | Change |
|---|---|---|---|
| Net sales | $20,820.8 | $18,467.5 | +12.7% |
| Gross profit / margin | $3,568.5 / 17.1% | $3,210.1 / 17.4% | +11.2%; margin down 0.3 pts |
| Operating income / margin | $1,419.0 / 6.8% | $1,179.2 / 6.4% | +20.3%; margin up 0.4 pts |
| Net income | $988.6 | $788.5 | +25.4% |
| Diluted EPS | $7.04 | $5.45 | +29.2% |
| Operating cash flow | $784.6 | $1,314.3 | Down $529.7 |
Net sales growth reflected stronger Corporate (+19.5%) and Small Business (+33.9%) demand, growth in Education (+18.8%), Healthcare (+12.8%) and Other (+24.0%), and a decline in Government sales (-27.6%). Hardware remained 80.6% of sales; notebooks/mobile devices were the largest category at 32.0%.
Gross margin eased mainly because of lower product margins and higher-margin configuration services in the prior year. Operating income rose as higher gross profit and lower intangible amortization and bad-debt expense more than offset higher payroll and acquisition/integration costs. The effective tax rate increased to 23.8% from 21.3%. Non-GAAP operating income was $1,645.4 million, with a 7.9% margin; non-GAAP net income was $1,118.9 million. These company-defined non-GAAP measures exclude specified items and are not directly comparable across issuers.
Cash, debt and capital allocation
- Cash and cash equivalents were $258.1 million at year-end, down from $1,410.2 million. Operating cash flow fell primarily amid a $616.8 million use of cash from accounts receivable and a $151.0 million use from inventory.
- Investing cash outflow was $2,769.6 million, including $2,705.6 million for acquisitions, net of cash acquired. Capital expenditures were $100.0 million.
- Total debt was approximately $6.9 billion and net debt was $6,600.4 million; inventory-financing obligations were a further $448.3 million. The company reported $1.0 billion of additional borrowing availability under its revolving facility and compliance with debt covenants.
- In connection with Sirius, CDW issued $2.5 billion of senior notes with maturities in 2026, 2028 and 2031, at stated coupons of 2.670%, 3.276% and 3.569%. It also put in place new five-year unsecured revolving and term loan facilities. Variable-rate debt was $1.7 billion at year-end; interest-rate caps cover part of the exposure.
- CDW repurchased 8.7 million shares for $1.5 billion in 2021 and paid $234.8 million in dividends. The quarterly dividend declared in February 2022 was $0.50 per share; future dividends and repurchases are discretionary and subject to debt restrictions and other factors.
- Working capital was approximately $1.38 billion, based on current assets of $6,478.1 million and current liabilities of $5,096.0 million. The cash conversion cycle lengthened to 24 days from 17 days.
Outlook, risks and unusual items
The filing provides no specific financial guidance or quantified forecast. Management described customer priorities including digital transformation, security, hybrid/cloud solutions and hybrid work. It also noted ongoing supply constraints, extended lead times and higher labor and logistics costs; pandemic-related uncertainty could continue to affect operations and customer spending.
- Sirius integration: Expected benefits may take longer than anticipated or may not be fully realized. Purchase accounting was preliminary, including $1.14 billion of identified intangible assets and $1.57 billion of goodwill; the customer-relationship valuation involved significant assumptions.
- Supply and vendor exposure: Product availability, distributor concentration and vendor terms could affect sales, costs and working capital. Ingram Micro and TD SYNNEX together represented over 30% of U.S. purchases; products from six named major vendors represented over 50% of consolidated sales.
- Leverage and rates: Debt service, restrictive covenants, refinancing needs and variable rates could constrain flexibility. LIBOR transition may affect certain borrowing and hedging arrangements.
- Other risks: Competition, cybersecurity and IT-system disruption, customer credit and inventory obsolescence, labor availability, public-sector budgets, foreign exchange, and COVID-19-related disruptions.
- Legal contingency: A subsidiary received a DOJ Civil Investigative Demand in September 2021 for information concerning OEM teaming agreements in a False Claims Act investigation. CDW was cooperating and could not assess the probability or range of loss. For other ordinary-course proceedings, it reported no reasonable possibility of material loss beyond amounts recognized.
- Unusual items: CDW recorded a $36.0 million gain on the sale of an equity-method investment. Acquisition and integration expenses were $54.3 million; Sirius transaction costs were $35 million. The 2021 statements included $197 million of Sirius sales and $9 million of Sirius net income.
The independent auditor issued an unqualified opinion on the financial statements and internal controls. Management and the auditor excluded Sirius from the 2021 internal-control assessment because of its recent acquisition; Sirius represented approximately 30% of consolidated assets and 1% of sales at year-end and for the year, respectively.
Most important facts for investors to verify
- Whether Sirius integration, retention and purchase-accounting assumptions support the expected services-led growth and returns.
- Whether operating cash generation improves as receivables, inventory and the cash conversion cycle normalize.
- How leverage, interest costs, covenant limits and remaining revolver availability evolve after the acquisition and shareholder distributions.
- Whether product supply, vendor/distributor concentration and gross-margin pressure persist.
- Any material developments in the DOJ investigation, including whether CDW can estimate a potential loss.
- Whether the company’s controls over Sirius are assessed and integrated in subsequent reporting periods.