CDW Corporation — Q3 2022 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. CDW provides IT products, solutions and services to business, government, education and healthcare customers in the U.S., U.K. and Canada. The results include Sirius, acquired December 1, 2021, so year-over-year growth reflects both business performance and the acquisition.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $6,215.5m | $5,300.0m | $18,310.4m | $15,283.9m |
| Gross profit / margin | $1,233.2m / 19.8% | $914.9m / 17.3% | $3,505.5m / 19.1% | $2,592.9m / 17.0% |
| Operating income / margin | $466.4m / 7.5% | $386.4m / 7.3% | $1,288.6m / 7.0% | $1,079.7m / 7.1% |
| Net income / diluted EPS | $297.8m / $2.17 | $266.6m / $1.91 | $827.3m / $6.04 | $773.3m / $5.47 |
- Q3 sales increased 17.3%; gross profit rose 34.8%, and net income rose 11.7%. Nine-month sales increased 19.8%, gross profit 35.2%, and net income 7.0%.
- Selling and administrative expenses rose 45.1% in Q3 and 46.5% year to date, with higher payroll and coworker count, Sirius-related amortization and integration costs among the drivers. Net interest expense increased to $62.6m in Q3 from $36.4m and to $176.3m year to date from $107.5m.
- Management-reported non-GAAP operating income was $549.0m in Q3, up 26.2%, and $1,527.4m year to date, up 25.1%. Non-GAAP net income was $357.0m in Q3, up 19.8%, and $998.0m year to date, up 19.7%. These measures exclude specified items, including acquisition-related amortization, equity compensation and acquisition/integration expenses; they are not GAAP results.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $1,094.0m, versus $636.7m. Investing cash outflow was $125.2m, compared with $369.9m; financing cash outflow was $830.4m, compared with $1,431.8m. Cash increased $126.5m to $384.6m.
- Capital expenditures were $97.2m. Operating cash flow less capital expenditures was $996.8m, a simple calculation rather than a company-reported free-cash-flow measure.
- At September 30, total debt was approximately $6.2bn and cash was $384.6m; reported net debt was $5,773.2m. CDW prepaid $400m of its term loan in Q3 and $435.5m in the first nine months. The company reported compliance with debt covenants.
- CDW had $1.1bn of additional revolving-facility borrowing availability. The current ratio was approximately 1.29, based on current assets of $6,895.2m and current liabilities of $5,358.8m.
- The cash conversion cycle was 18 days, versus 25 days a year earlier. Cash and liquidity remain subject to working-capital needs and economic conditions.
Material changes and business drivers
- Q3 growth was broad-based, with Corporate sales up 24.7%, Public up 12.6%, Other (U.K. and Canada) up 18.1%, and Small Business up 5.2%. Within Public, Government sales rose 38.6% and Healthcare 27.7%, while Education fell 7.5%.
- Management attributed stronger gross margins to favorable product mix and rate, a higher mix of netted-down revenue, and growth and margins in services. Services revenue increased to $486.9m in Q3 from $286.9m; software revenue increased to $884.2m from $717.7m.
- Year-to-date sales growth was 20.8% on a constant-currency basis, versus reported growth of 19.8%. Hardware remained the largest category, representing 77.6% of nine-month sales.
- Q3 GAAP operating margin improved to 7.5% from 7.3%, while nine-month operating margin edged down to 7.0% from 7.1%. The nine-month net margin declined to 4.5% from 5.1%.
- Foreign-currency translation reduced nine-month comprehensive income: foreign currency translation loss was $97.9m, contributing to a $93.2m other comprehensive loss.
Outlook, risks and contingencies
- The filing provides no specific revenue, earnings or margin guidance. Management described customer priorities including digital transformation, security, hybrid/cloud solutions and endpoint technology, but cautioned that uncertainty may delay or pause technology investment.
- Risks highlighted include inflation and rising interest rates, economic and geopolitical volatility, supply and logistics disruptions, changes in customer technology spending and public-sector budgets, foreign-exchange movements, cybersecurity and service-delivery risks, and the ability to realize expected Sirius acquisition benefits. CDW also cited its debt burden and ability to generate cash to service debt.
- A subsidiary received a Department of Justice Civil Investigative Demand in a False Claims Act investigation concerning OEM teaming agreements. CDW is cooperating; it stated that it cannot assess the probability of an outcome or any possible loss range.
- CDW said it did not believe a material loss beyond amounts already recognized was reasonably possible for its other ordinary-course legal proceedings and matters, while noting that outcomes are inherently unpredictable.
- The board declared a $0.59-per-share quarterly dividend on November 2, 2022, payable December 9 to holders of record November 25. No shares were repurchased in the first nine months; $87.6m remained under the repurchase authorization at September 30.
Key facts for investors to verify
- Separate organic growth from Sirius acquisition contributions when assessing revenue and segment trends.
- Assess whether gross-margin gains and services growth can continue as payroll, amortization and integration costs rise.
- Monitor cash conversion, receivables, working-capital requirements, revolving-facility availability and debt-service costs amid rising rates.
- Track the DOJ investigation, finalization of Sirius purchase accounting, and any changes in acquisition-related costs or expected benefits.
- Review the assumptions and exclusions behind management’s non-GAAP measures and compare them with GAAP earnings and margins.