Unless otherwise indicated or the context otherwise requires, as used in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," the terms "we," "us," "the Company," "our," "CDW" and similar terms refer toCDW Corporation and its subsidiaries. "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with the unaudited interim Consolidated Financial Statements and the related notes included elsewhere in this report and with the audited Consolidated Financial Statements and the related notes included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 . This discussion contains forward-looking statements that are subject to numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements. See "Forward-Looking Statements" at the end of this discussion. OverviewCDW Corporation , a Fortune 500 company and member of the S&P 500 Index, is a leading multi-brand provider of information technology ("IT") solutions to small, medium and large business, government, education and healthcare customers in the US, theUK andCanada . Our broad array of offerings ranges from discrete hardware and software products to integrated IT solutions and services that include on-premise and cloud capabilities across hybrid infrastructure, digital experience and security. We are vendor, technology and consumption model "agnostic", with a solutions portfolio including more than 100,000 products and services from more than 1,000 leading and emerging brands. Our solutions are delivered in physical, virtual and cloud-based environments through approximately 9,900 customer-facing coworkers, including sellers, highly-skilled technology specialists and advanced service delivery engineers. We are a leading sales channel partner for many original equipment manufacturers ("OEMs"), software publishers and cloud providers (collectively, our "vendor partners"), whose products we sell or include in the solutions we offer. We provide our vendor partners with a cost-effective way to reach customers and deliver a consistent brand experience through our established end-market coverage, technical expertise and extensive customer access. OnDecember 1, 2021 , we completed the acquisition ofSirius Computer Solutions, Inc. ("Sirius"). The aggregate consideration paid, net of cash acquired, at the closing of the acquisition was approximately$2.4 billion , which is subject to the finalization of customary closing adjustments. Sirius is a leading provider of secure, mission-critical technology-based solutions and is one of the largest IT solutions integrators inthe United States , leveraging its services-led approach, broad portfolio of hybrid infrastructure solutions, and deep technical expertise of its 2,600 coworkers to support corporate and public customers. This strategic acquisition enhances our breadth and depth of services and solutions offerings. We have three reportable segments, Corporate, Small Business and Public. Our Corporate segment primarily serves US private sector business customers with more than 250 employees. Our Small Business segment primarily serves US private sector business customers with up to 250 employees. Our Public segment is comprised of government agencies and education and healthcare institutions in the US. We also have two other operating segments: CDWUK andCDW Canada , each of which do not meet the reportable segment quantitative thresholds and, accordingly, are included in an all other category ("Other"). The financial results of Sirius have been included in our Consolidated Financial Statements beginning on the acquisition date. These amounts are presented within the Corporate, Small Business and Public reportable segments. We may sell all or only select products that our vendor partners offer. Each vendor partner agreement provides for specific terms and conditions, which may include one or more of the following: product return privileges, price protection policies, purchase discounts and vendor incentive programs, such as purchase or sales rebates and cooperative advertising reimbursements. We also resell software for major software publishers. Our agreements with software publishers allow the end-user customer to acquire software or licensed products and services. In addition to helping our customers determine the best software solutions for their needs, we help them manage their software agreements, including warranties and renewals. A significant portion of our advertising and marketing expenses are reimbursed through cooperative advertising programs with our vendor partners. These programs are at the discretion of our vendor partners and are typically tied to sales or other commitments to be met by us within a specified period of time. 18
--------------------------------------------------------------------------------
Table of Contents
Trends and Key Factors Affecting our Financial Performance
We believe the following key factors may have a meaningful impact on our business performance, influencing our ability to generate sales and achieve our targeted financial and operating results:
•General economic conditions are a key factor affecting our results as they impact our customers' willingness to spend on information technology. The global spread of the coronavirus ("COVID-19") pandemic, including resurgences and the emergence of new variants, and most recently the ongoing military conflict betweenRussia andUkraine , continues to create macroeconomic uncertainty. This may continue manifesting itself through inflation, rising interest rates, business volatility and disruption, including supply constraints. The supply constraints are being caused by component availability and labor and logistical disruptions, resulting in extended lead times, unpredictability and higher costs. •Customers' top priorities continue to be digital transformation, security, hybrid and cloud solutions and end point solutions as hybrid environments become the future work model and drive demand for return to office and remote enablement capabilities. We have orchestrated solutions by leveraging client devices, accessories, collaboration tools, security, software and hybrid and cloud offerings to help customers build these capabilities and achieve their objectives. •Changes in spending policies, budget priorities and funding levels, including current and future stimulus packages, are key factors influencing the purchasing levels of Government, Healthcare and Education customers. As the duration and ongoing economic impacts of the COVID-19 pandemic remain uncertain, current and future budget priorities and funding levels for Government, Healthcare and Education customers may be adversely affected. •Technology trends drive customer purchasing behaviors in the market. Current technology trends are focused on delivering greater flexibility and efficiency, as well as designing IT securely. These trends are driving customer adoption of solutions such as those delivered via cloud, software defined architectures and hybrid on-premise and off-premise combinations, as well as the evolution of the IT consumption model to more "as a service" offerings, such as managed services. Technology trends could also change as customers consider the impact of the COVID-19 pandemic on their operations.
Key Business Metrics
We monitor a number of financial and non-financial measures and ratios on a regular basis in order to track the progress of our business and make adjustments as necessary. We believe that the most important of these measures and ratios include average daily sales, gross margin, operating margin, Net income, Non-GAAP operating income, Non-GAAP operating income margin, Non-GAAP income before income taxes, Non-GAAP net income, Net sales growth on a constant currency basis, Net income per diluted share, Non-GAAP net income per diluted share, free cash flow, return on working capital, Cash and cash equivalents, net working capital, cash conversion cycle and debt levels including available credit. These measures and ratios are closely monitored by management, so that actions can be taken, as necessary, in order to achieve financial objectives. In this section, we discuss Non-GAAP operating income, Non-GAAP operating income margin, Non-GAAP income before income taxes, Non-GAAP net income and Net sales growth on a constant currency basis, which are non-GAAP financial measures. We believe these measures provide analysts, investors and management with helpful information regarding the underlying operating performance of our business, as they remove the impact of items that management believes are not reflective of underlying operating performance. Management uses these measures to evaluate period-over-period performance as management believes they provide a more comparable measure of the underlying business. Certain non-GAAP financial measures are also used to determine certain components of performance-based compensation. For the definitions of Non-GAAP operating income, Non-GAAP operating income margin, Non-GAAP income before income taxes, Non-GAAP net income and Net sales growth on a constant currency basis and reconciliations to the most directly comparable US GAAP measure, see "Results of Operations - Non-GAAP Financial Measure Reconciliations." 19
--------------------------------------------------------------------------------
Table of Contents
Three Months Overview
The results of certain key business metrics are as follows:
Three Months Ended March 31, (dollars in millions) 2022 2021 Net sales$ 5,949.1 $ 4,837.5 Gross profit 1,104.1 795.2 Operating income 386.9 323.4 Net income 250.2 232.6 Non-GAAP operating income 462.1 367.7 Non-GAAP net income 301.5 249.4 Average daily sales(1) 94.4 76.8 Net debt(2) 6,211.8 3,052.1 Cash conversion cycle (in days)(3) 20
22
(1) There were 63 selling days for both the three months ended
(2) Defined as Total debt minus Cash and cash equivalents.
(3) Cash conversion cycle is defined as days of sales outstanding in Accounts receivable and certain receivables due from vendors plus days of supply in Merchandise inventory minus days of purchases outstanding in Accounts payable and Accounts payable-inventory financing, based on a rolling three-month average.
Results of Operations
Three Months Ended
Results of operations, in dollars and as a percentage of Net sales, are as follows: Three Months Ended March 31, 2022 2021 Dollars in Percentage of Dollars in Percentage of Millions Net Sales Millions Net Sales Net sales$ 5,949.1 100.0 %$ 4,837.5 100.0 % Cost of sales 4,845.0 81.4 4,042.3 83.6 Gross profit 1,104.1 18.6 795.2 16.4 Selling and administrative expenses 717.2 12.1 471.8 9.7 Operating income 386.9 6.5 323.4 6.7 Interest expense, net (56.0) (0.9) (35.6) (0.7) Other (expense) income, net (0.5) - 1.1 - Income before income taxes 330.4 5.6 288.9 6.0 Income tax expense (80.2) (1.3) (56.3) (1.2) Net income$ 250.2 4.3 %$ 232.6 4.8 % Net sales Total Net sales for the three months endedMarch 31, 2022 increased$1,112 million , or 23.0%, to$5,949 million compared to prior year. This increase was driven by higher demand in hardware, services and software and includes the contribution from the acquisition of Sirius. For additional information, see the "Segment Results of Operations" below.
Gross profit
Gross profit increased$309 million , or 38.8%, to$1,104 million for the three months endedMarch 31, 2022 , compared to$795 million for the three months endedMarch 31, 2021 . As a percentage of Net sales, Gross profit margin increased 220 basis points to 18.6% for the three months endedMarch 31, 2022 . The increase in Gross profit margin was primarily driven by more 20
--------------------------------------------------------------------------------
Table of Contents
favorable product mix and rate, higher mix of net service contract revenue, primarily within software as a service, and increased Net sales and margins on professional services as a result of the recent business acquisitions.
Selling and administrative expenses
Selling and administrative expenses increased$245 million , or 52.0%, to$717 million for the three months endedMarch 31, 2022 , compared to$472 million for the three months endedMarch 31, 2021 . The increase was primarily driven by higher payroll consistent with higher Gross profit and higher coworker count, including the impact of the acquisition of Sirius, as well as higher intangible asset amortization and integration expenses from the acquisition of Sirius. Operating income Operating income was$387 million for the three months endedMarch 31, 2022 , an increase of$64 million , compared to$323 million for the three months endedMarch 31, 2021 . Operating income increased primarily due to higher Gross profit dollars, partially offset by higher payroll and higher intangible asset amortization and integration expenses from the acquisition of Sirius.
Interest expense, net
Interest expense, net, for the three months endedMarch 31, 2022 was$56 million , an increase of$20 million compared to$36 million for the three months endedMarch 31, 2021 . This increase was primarily driven by additional interest expense from the$2.5 billion aggregate principal amount of unsecured senior notes issued onDecember 1, 2021 , the net proceeds of which were used to fund the acquisition of Sirius. Income tax expense Income tax expense was$80 million and$56 million for the three months endedMarch 31, 2022 and 2021, respectively. The effective tax rate, expressed by calculating the income tax expense as a percentage of Income before income taxes, was 24.3% and 19.5% for the three months endedMarch 31, 2022 and 2021, respectively. The effective tax rate for the three months endedMarch 31, 2022 differed from the US federal statutory rate of 21.0% primarily due to state and local income taxes, partially offset by excess tax benefits on equity-based compensation. The effective tax rate for the three months endedMarch 31, 2021 differed from the US federal statutory rate of 21.0% primarily due to excess tax benefits on equity-based compensation, partially offset by state and local income taxes.
The higher effective tax rate for the three months ended
21
--------------------------------------------------------------------------------
Table of Contents
Segment Results of Operations
Net sales by segment, in dollars and as a percentage of total Net sales, and the year-over-year dollar and percentage change in Net sales are as follows:
Three Months Ended
2022 2021 Percentage Percentage Dollar Percent (dollars in millions) Net Sales of Total Net Sales Net Sales of Total Net Sales Change Change(1) Corporate$ 2,627.6 44.2 %$ 1,805.6 37.3 %$ 822.0 45.5 % Small Business 524.0 8.8 432.7 8.9 91.3 21.1 Public: Government 543.9 9.1 516.1 10.7 27.8 5.4 Education 902.8 15.2 943.3 19.5 (40.5) (4.3) Healthcare 586.3 9.9 462.3 9.6 124.0 26.8 Total Public 2,033.0 34.2 1,921.7 39.8 111.3 5.8 Other 764.5 12.8 677.5 14.0 87.0 12.8 Total Net sales$ 5,949.1 100.0 %$ 4,837.5 100.0 %$ 1,111.6 23.0 %
(1)There were 63 selling days for both the three months ended
Operating income by segment, in dollars and as a percentage of total Net sales, and the year-over-year percentage change are as follows:
Three Months Ended March 31, 2022 2021 Percent Change Dollars in Operating Dollars in Operating in Operating Millions Margin Millions Margin Income Segments:(1) Corporate$ 210.0 8.0 %$ 161.4 8.9 % 30.1 % Small Business 46.7 8.9 42.8 9.9 9.2 Public 141.8 7.0 136.7 7.1 3.7 Other(2) 36.7 4.8 27.7 4.1 32.6 Headquarters(3) (48.3) nm* (45.2) nm* (7.1) Total Operating income$ 386.9 6.5 %$ 323.4 6.7 % 19.6 % * Not meaningful (1)Segment operating income includes the segment's direct operating income, allocations for certain Headquarters' costs, allocations for income and expenses from logistics services, certain inventory adjustments and volume rebates and cooperative advertising from vendors.
(2)Includes the financial results for our other operating segments, CDW
(3)Includes Headquarters' function costs that are not allocated to the segments.
Corporate
Corporate segment Net sales for the three months endedMarch 31, 2022 increased$822 million , or 45.5%, compared to the three months endedMarch 31, 2021 . This increase was primarily driven by the customers' priorities on digital transformation and return to office and includes the contribution from the acquisition of Sirius. These factors resulted in higher Net sales across 22
--------------------------------------------------------------------------------
Table of Contents
various categories, including notebooks/mobile devices, video, enterprise storage, software as a service and professional services.
Corporate segment Operating income was$210 million for the three months endedMarch 31, 2022 , an increase of$49 million , or 30.1%, compared to$161 million for the three months endedMarch 31, 2021 . Corporate segment Operating income increased primarily due to higher Gross profit dollars, partially offset by higher payroll and higher intangible asset amortization from the acquisition of Sirius. Small Business Small Business segment Net sales for the three months endedMarch 31, 2022 increased$91 million , or 21.1%, compared to the three months endedMarch 31, 2021 . This increase was primarily driven by customers' continued focus on remote enablement and implementing return to office strategies, resulting in increased Net sales in notebooks/mobile devices, video and software as a service.
Small Business segment Operating income was
Public
Public segment Net sales for the three months endedMarch 31, 2022 increased$111 million , or 5.8%, compared to the three months endedMarch 31, 2021 . This increase in Net sales, which also included the contribution from the acquisition of Sirius, was primarily driven by the impact of the customers' continued focus on digital transformation to enhance patient experiences in Healthcare, as well as improved performance with State and Local Government customers, which resulted in increased Net sales in professional services and software as a service, partially offset by decreased Net sales in notebooks/mobile devices with K-12 customers. Public segment Operating income was$142 million for the three months endedMarch 31, 2022 , which was an increase of$5 million , compared to$137 million for the three months endedMarch 31, 2021 . Public segment Operating income increased primarily due to higher Gross profit dollars, partially offset by higher payroll and higher intangible asset amortization from the acquisition of Sirius. Other Net sales in Other, which is comprised of results from ourUK and Canadian operations, for the three months endedMarch 31, 2022 increased$87 million , or 12.8%, compared to the three months endedMarch 31, 2021 . This increase was driven by both ourUK and Canadian operations as customers continued to focus on digital transformation and return to office, resulting in increased Net sales in various other hardware categories. Other Operating income was$37 million for the three months endedMarch 31, 2022 , an increase of$9 million , or 32.6%, compared to$28 million for the three months endedMarch 31, 2021 . Other Operating income increased primarily due to higher Gross profit dollars, partially offset by higher payroll.
Non-GAAP Financial Measure Reconciliations
We have included reconciliations of Non-GAAP operating income, Non-GAAP
operating income margin, Non-GAAP income before income taxes, Non-GAAP net
income and Net sales growth on a constant currency basis for the three months
ended
Non-GAAP operating income excludes, among other things, charges related to the amortization of acquisition-related intangible assets, equity-based compensation and the associated payroll taxes, and acquisition and integration expenses. Non-GAAP operating income margin is defined as Non-GAAP operating income as a percentage of Net sales. Non-GAAP income before income taxes and Non-GAAP net income exclude, among other things, charges related to acquisition-related intangible asset amortization, equity-based compensation, acquisition and integration expenses, and the associated tax effects of each. Net sales growth on a constant currency basis is defined as Net sales growth excluding the impact of foreign currency translation on Net sales compared to the prior period. Non-GAAP operating income, Non-GAAP operating income margin, Non-GAAP income before income taxes, Non-GAAP net income and Net sales growth on a constant currency basis are considered non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a company's performance or financial condition that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented 23
--------------------------------------------------------------------------------
Table of Contents
in accordance with US GAAP. Non-GAAP measures used by management may differ from similar measures used by other companies, even when similar terms are used to identify such measures. We believe these measures provide analysts, investors and management with helpful information regarding the underlying operating performance of our business, as they remove the impact of items that management believes are not reflective of underlying operating performance. Management uses these measures to evaluate period-over-period performance as management believes they provide a more comparable measure of the underlying business. Certain non-GAAP financial measures are also used to determine certain components of performance-based compensation.
Non-GAAP operating income
Non-GAAP operating income was$462 million for the three months endedMarch 31, 2022 , an increase of$94 million , or 25.7%, compared to$368 million for the three months endedMarch 31, 2021 . As a percentage of Net sales, Non-GAAP operating income was 7.8% and 7.6% for the three months endedMarch 31, 2022 and 2021, respectively. Three Months Ended March 31, (dollars in millions) 2022 2021 Operating income, as reported$ 386.9 $ 323.4 Amortization of intangibles(1) 40.9
21.6
Equity-based compensation 21.1
15.8
Acquisition and integration expenses 11.7 3.6 Other adjustments 1.5 3.3 Non-GAAP operating income$ 462.1 $ 367.7 Non-GAAP operating income margin 7.8 %
7.6 %
(1)Includes amortization expense for acquisition-related intangible assets, primarily customer relationships, customer contracts and trade names.
Non-GAAP net income
Non-GAAP net income was$302 million for the three months endedMarch 31, 2022 , an increase of$52 million , or 20.9%, compared to$249 million for the three months endedMarch 31, 2021 . Three Months Ended March 31, 2022 2021 Income before Income tax Income before Income tax (dollars in millions) income taxes expense(1) Net income income taxes expense(1) Net income US GAAP, as reported$ 330.4 $ (80.2) $ 250.2 $ 288.9 $ (56.3) $ 232.6 Amortization of intangibles(2) 40.9 (10.6) 30.3 21.6 (5.4) 16.2 Equity-based compensation 21.1 (9.8) 11.3 15.8 (20.8) (5.0) Acquisition and integration expenses 11.7 (3.0) 8.7 3.6 (0.9) 2.7 Other adjustments 1.4 (0.4) 1.0 3.7 (0.8) 2.9 Non-GAAP$ 405.5 $ (104.0) $ 301.5 $ 333.6 $ (84.2) $ 249.4
(1)Income tax on non-GAAP adjustments includes excess tax benefits associated with equity-based compensation.
(2)Includes amortization expense for acquisition-related intangible assets, primarily customer relationships, customer contracts and trade names.
24
--------------------------------------------------------------------------------
Table of Contents
Net sales growth on a constant currency basis
Net sales increased$1,112 million , or 23.0%, to$5,949 million for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . Net sales on a constant currency basis, which excludes the impact of foreign currency translation, increased$1,124 million , or 23.3%.
Three Months Ended
Average Daily % (dollars in millions) 2022 2021 % Change Change(1) Net sales, as reported$ 5,949.1 $ 4,837.5 23.0 % 23.0 % Foreign currency translation(2) -
(12.6)
Net sales, on a constant currency basis$ 5,949.1 $ 4,824.9 23.3 % 23.3 %
(1)There were 63 selling days for both the three months ended
(2)Represents the effect of translating the prior year results of CDW
Seasonality
While we have not historically experienced significant seasonality throughout the year, sales in our Corporate segment, which primarily serves US private sector business customers with more than 250 employees, are typically higher in the fourth quarter than in other quarters due to customers spending their remaining technology budget dollars at the end of the year. Additionally, sales in our Public segment have historically been higher in the third quarter than in other quarters primarily due to the buying patterns of the federal government and education customers. Since the onset of the COVID-19 pandemic, we have experienced variability compared to historic seasonality trends. As uncertainty due to the pandemic remains, seasonality by channel is expected to continue to be different than historical experience.
Liquidity and Capital Resources
Overview
We finance our operations and capital expenditures with internally generated cash from operations and borrowings under our revolving loan facility. As ofMarch 31, 2022 , we had$1.0 billion of availability for borrowings under our revolving loan facility. Our liquidity and borrowing plans are established to align with our financial and strategic planning processes and ensure we have the necessary funding to meet our operating commitments, which primarily include the purchase of inventory, payroll and general expenses. We also take into consideration our overall capital allocation strategy, which includes dividend payments, assessment of debt levels, acquisitions and share repurchases. We believe we have adequate sources of liquidity and funding available for at least the next year; however, there are a number of factors that may negatively impact our available sources of funds. The amount of cash generated from operations will be dependent upon factors such as the successful execution of our business plan, general economic conditions and working capital management.
Long-Term Debt and Financing Arrangements
As of
For additional information regarding our debt and refinancing activities, see Note 7 (Debt) to the accompanying Consolidated Financial Statements.
Inventory Financing Agreements
We have entered into agreements with certain financial intermediaries to facilitate the purchase of inventory from various suppliers under certain terms and conditions. These amounts are classified separately as Accounts payable-inventory financing on the Consolidated Balance Sheets. We do not incur any interest expense associated with these agreements as balances are paid when they are due. For additional information, see Note 5 (Inventory Financing Agreements) to the accompanying Consolidated Financial Statements.
Share Repurchase Program
During the three months endedMarch 31, 2022 , we made no share repurchases. For additional information on our share repurchase program, see "Part II, Item 2, Unregistered Sales ofEquity Securities and Use of Proceeds." 25
--------------------------------------------------------------------------------
Table of Contents
Dividends
A summary of 2022 dividend activity for our common stock is as follows:
Dividend Amount Declaration Date Record Date Payment Date$0.50 February 9, 2022 February 25, 2022 March 10, 2022 OnMay 4, 2022 , we announced that our Board of Directors declared a quarterly cash dividend on our common stock of$0.50 per share. The dividend will be paid onJune 10, 2022 to all stockholders of record as of the close of business onMay 25, 2022 . The payment of any future dividends will be at the discretion of our Board of Directors and will depend upon our results of operations, financial condition, business prospects, capital requirements, contractual restrictions, any potential indebtedness we may incur, restrictions imposed by applicable law, tax considerations and other factors that our Board of Directors deems relevant. In addition, our ability to pay dividends on our common stock will be limited by restrictions on our ability to pay dividends or make distributions to our stockholders and on the ability of our subsidiaries to pay dividends or make distributions to us, in each case, under the terms of our current and any future agreements governing our indebtedness.
© Edgar Online, source