CDW CORPORATION 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 10,000 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 . 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. 22
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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 can impact our customers' willingness to spend on information technology. Macroeconomic uncertainty persists as a result of the continued increase in inflation and the corresponding increase in interest rates driven by monetary policy. Additionally, social and geopolitical factors such as resurgences of COVID-19 and the ongoing military conflict betweenRussia andUkraine have resulted in business volatility and disruption, including supply constraints reflected in component availability and labor and logistical disruptions. The enhanced uncertainty in the current environment may result in a delay or pause on investments in technology by our customers. •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."
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Second Quarter Overview
The results of certain key business metrics are as follows:
Three Months Ended June 30,
(dollars in millions) 2022 2021
Net sales $ 6,145.8 $ 5,146.4
Gross profit 1,168.2 882.8
Operating income 435.3 369.9
Net income 279.3 274.1
Non-GAAP operating income 516.3 418.1
Non-GAAP net income 339.5 286.1
Average daily sales(1) 96.0 80.4
Net debt(2) 6,045.3 3,427.8
Cash conversion cycle (in days)(3) 19 21
(1) There were 64 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 June 30,
2022 2021
Dollars in Percentage of Dollars in Percentage of
Millions Net Sales Millions Net Sales
Net sales $ 6,145.8 100.0 % $ 5,146.4 100.0 %
Cost of sales 4,977.6 81.0 4,263.6 82.8
Gross profit 1,168.2 19.0 882.8 17.2
Selling and administrative expenses 732.9 11.9 512.9 10.0
Operating income 435.3 7.1 369.9 7.2
Interest expense, net (57.7) (0.9) (35.5) (0.7)
Other (expense) income, net (0.4) - 36.8 0.7
Income before income taxes 377.2 6.2 371.2 7.2
Income tax expense (97.9) (1.6) (97.1) (1.9)
Net income $ 279.3 4.6 % $ 274.1 5.3 %
Net sales
Total Net sales for the three months ended June 30, 2022 increased $999 million ,
or 19.4%, to $6,146 million , compared to the three months ended June 30, 2021 .
Net sales growth was primarily driven by the Corporate and Public segments and
our UK and Canadian operations. For additional information, see the "Segment
Results of Operations" below.
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Gross profit
Gross profit increased$285 million , or 32.3%, to$1,168 million for the three months endedJune 30, 2022 , compared to$883 million for the three months endedJune 30, 2021 . As a percentage of Net sales, Gross profit margin increased 180 basis points to 19.0% for the three months endedJune 30, 2022 . The increase in Gross profit margin was primarily driven by more favorable product mix and rate and higher mix of netted down revenue, primarily within software as a service, as well as increased gross profit from professional services as a result of the recent business acquisitions.
Selling and administrative expenses
Selling and administrative expenses increased$220 million , or 42.9%, to$733 million for the three months endedJune 30, 2022 , compared to$513 million for the three months endedJune 30, 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$435 million for the three months endedJune 30, 2022 , an increase of$65 million , or 17.7%, compared to$370 million for the three months endedJune 30, 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 endedJune 30, 2022 was$58 million , an increase of$22 million compared to$36 million for the three months endedJune 30, 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$98 million and$97 million for the three months endedJune 30, 2022 and 2021, respectively. The effective tax rate, expressed by calculating the income tax expense as a percentage of Income before income taxes, was 26.0% and 26.2% for the three months endedJune 30, 2022 and 2021, respectively. The lower effective tax rate for the three months endedJune 30, 2022 as compared to the same period in the prior year was primarily attributable to a prior year discrete deferred tax expense as a result of an increase in theUK corporate tax rate effective in 2023, partially offset by lower excess tax benefits on equity-based compensation and higher non-deductible expenses. 25
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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 June 30,
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 $ 2,660.7 43.3 % $ 1,983.3 38.5 % $ 677.4 34.2 %
Small Business 500.0 8.1 482.9 9.4 17.1 3.5
Public:
Government 609.5 9.9 513.4 10.0 96.1 18.7
Education 1,041.3 16.9 1,112.1 21.6 (70.8) (6.4)
Healthcare 592.2 9.6 455.2 8.8 137.0 30.1
Total Public 2,243.0 36.4 2,080.7 40.4 162.3 7.8
Other 742.1 12.2 599.5 11.7 142.6 23.8
Total Net sales $ 6,145.8 100.0 % $ 5,146.4 100.0 % $ 999.4 19.4 %
(1)There were 64 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 June 30,
2022 2021
Dollars in Operating Dollars in Operating Percent Change
Millions Margin Millions Margin in Operating Income
Segments:(1)
Corporate $ 231.2 8.7 % $ 175.2 8.8 % 32.0 %
Small Business 47.0 9.4 44.0 9.1 6.8
Public 177.2 7.9 153.3 7.4 15.6
Other(2) 27.8 3.7 23.7 4.0 17.3
Headquarters(3) (47.9) nm* (26.3) nm* 82.1
Total Operating income $ 435.3 7.1 % $ 369.9 7.2 % 17.7 %
* 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 endedJune 30, 2022 increased$677 million , or 34.2%, compared to the three months endedJune 30, 2021 . This increase in Net sales, which also included the contribution from the acquisition of Sirius, was primarily driven by customers' priorities on digital transformation and continued focus on a hybrid work model. These factors resulted in higher Net sales across various categories, including software as a service, netcomm products, professional services, notebooks/mobile devices and enterprise storage. 26
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Corporate segment Operating income was$231 million for the three months endedJune 30, 2022 , an increase of$56 million , or 32.0%, compared to$175 million for the three months endedJune 30, 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 endedJune 30, 2022 increased$17 million , or 3.5%, compared to the three months endedJune 30, 2021 . This increase in Net sales was primarily driven by customers' priorities on digital transformation, resulting in higher Net sales in notebooks/mobile devices and professional services. Small Business segment Operating income was$47 million for the three months endedJune 30, 2022 , an increase of$3 million , or 6.8%, compared to$44 million for the three months endedJune 30, 2021 . Small Business segment Operating income increased primarily due to higher Gross profit dollars, partially offset by higher payroll. Public Public segment Net sales for the three months endedJune 30, 2022 increased$162 million , or 7.8%, compared to the three months endedJune 30, 2021 . This increase in Net sales, which also included the contribution from the acquisition of Sirius, was primarily driven by Healthcare and Government customers. Net sales to Healthcare customers increased by 30.1% primarily due to continued focus on digital transformation to enhance patient experiences, which resulted in increased Net sales in various product categories. Net sales to Government customers increased 18.7% primarily driven by Federal customers, which resulted in increased Net sales in professional services and netcomm products. These increases were partially offset by decreased Net sales to Education customers of 6.4% primarily driven by decreased Net sales in notebooks/mobile devices with K-12 customers. Public segment Operating income was$177 million for the three months endedJune 30, 2022 , an increase of$24 million , or 15.6%, compared to$153 million for the three months endedJune 30, 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 endedJune 30, 2022 increased$143 million , or 23.8%, compared to the three months endedJune 30, 2021 . This increase was driven by both ourUK and Canadian operations as customers continued to focus on digital transformation, resulting in increased Net sales in software as a service, notebooks/mobile devices and netcomm products. Other Operating income was$28 million for the three months endedJune 30, 2022 , an increase of$4 million , or 17.3%, compared to$24 million for the three months endedJune 30, 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 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.
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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$516 million for the three months endedJune 30, 2022 , an increase of$98 million , or 23.5%, compared to$418 million for the three months endedJune 30, 2021 . Three Months Ended June
30,
(dollars in millions) 2022
2021
Operating income, as reported$ 435.3 $
369.9
Amortization of intangibles(1) 40.7
24.4
Equity-based compensation 23.5
20.6
Acquisition and integration expenses 14.9 2.8 Other adjustments 1.9 0.4 Non-GAAP operating income$ 516.3 $ 418.1 Non-GAAP operating income margin 8.4 %
8.1 %
(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$340 million for the three months endedJune 30, 2022 , an increase of$54 million , or 18.7%, compared to$286 million for the three months endedJune 30, 2021 . Three Months Ended June 30, 2022 2021 Income before Income tax Income before Income tax (dollars in millions) income taxes expense(1) Net income income taxes expense(1) Net income As reported$ 377.2 $ (97.9) $ 279.3 $ 371.2 $ (97.1) $ 274.1 Gain on sale of equity method investment - - - (36.0) 8.8
(27.2)
Amortization of intangibles(2) 40.7 (10.6) 30.1 24.4 (1.8) 22.6 Equity-based compensation 23.5 (5.9) 17.6 20.6 (6.2) 14.4 Acquisition and integration expenses 14.9 (3.8) 11.1 2.8 (0.7) 2.1 Other adjustments 2.0 (0.6) 1.4 0.4 (0.3) 0.1 Non-GAAP$ 458.3 $ (118.8) $ 339.5 $ 383.4 $ (97.3) $ 286.1
(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.
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Net sales growth on a constant currency basis
Net sales increased$999 million , or 19.4%, to$6,146 million for the three months endedJune 30, 2022 , compared to the three months endedJune 30, 2021 . Net sales on a constant currency basis, which excludes the impact of foreign currency translation, increased$1,044 million , or 20.5%. Three Months Ended June 30, (dollars in millions) 2022 2021 % Change(1) Net sales, as reported$ 6,145.8 $ 5,146.4 19.4 % Foreign currency translation(2) - (44.9) Net sales, on a constant currency basis$ 6,145.8 $ 5,101.5 20.5 %
(1)There were 64 selling days for both the three months ended
(2)Represents the effect of translating the prior year results of CDWUK andCDW Canada at the average exchange rates applicable for the three months endedJune 30, 2022 . Six Months Overview
The results of certain key business metrics are as follows:
Six Months Ended June 30,
(dollars in millions) 2022 2021
Net sales $ 12,094.9 $ 9,983.9
Gross profit 2,272.3 1,678.0
Operating income 822.2 693.3
Net income 529.5 506.7
Non-GAAP operating income 978.4 785.8
Non-GAAP net income 641.0 535.5
Average daily sales(1) 95.2 78.6
Net debt(2) 6,045.3 3,427.8
Cash conversion cycle (in days)(3) 19 21
(1) There were 127 selling days for both the six 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.
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Results of Operations
Six Months Ended
Results of operations, in dollars and as a percentage of Net sales, are as
follows:
Six Months Ended June 30,
2022 2021
Dollars in Percentage of Dollars in Percentage of
Millions Net Sales Millions Net Sales
Net sales $ 12,094.9 100.0 % $ 9,983.9 100.0 %
Cost of sales 9,822.6 81.2 8,305.9 83.2
Gross profit 2,272.3 18.8 1,678.0 16.8
Selling and administrative expenses 1,450.1 12.0 984.7 9.9
Operating income 822.2 6.8 693.3 6.9
Interest expense, net (113.7) (0.9) (71.1) (0.7)
Other (expense) income, net (0.9) - 37.9 0.4
Income before income taxes 707.6 5.9 660.1 6.6
Income tax expense (178.1) (1.5) (153.4) (1.5)
Net income $ 529.5 4.4 % $ 506.7 5.1 %
Net sales
Total Net sales for the six months ended June 30, 2022 increased $2,111 million ,
or 21.1%, to $12,095 million compared to the six months ended June 30, 2021 . The
Net sales growth was driven by all operating segments. For additional
information, see the "Segment Results of Operations" below.
Gross profit
Gross profit increased$594 million , or 35.4%, to$2,272 million for the six months endedJune 30, 2022 , compared to$1,678 million for the six months endedJune 30, 2021 . As a percentage of Net sales, Gross profit margin increased 200 basis points to 18.8% for the six months endedJune 30, 2022 . The increase in Gross profit margin was primarily driven by more favorable product mix and rate and higher mix of netted down revenue, primarily within software as a service, as well as 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$465 million , or 47.3%, to$1,450 million for the six months endedJune 30, 2022 , compared to$985 million for the six months endedJune 30, 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$822 million for the six months endedJune 30, 2022 , an increase of$129 million , or 18.6%, compared to$693 million for the six months endedJune 30, 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 six months endedJune 30, 2022 was$114 million , an increase of$43 million compared to$71 million for the six months endedJune 30, 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. 30
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Income tax expense
Income tax expense was
The higher effective tax rate for the six months endedJune 30, 2022 as compared to the same period in the prior year was primarily attributable to lower excess tax benefits on equity-based compensation and higher non-deductible expenses, partially offset by a prior year discrete deferred tax expense as a result of an increase in theUK corporate tax rate effective in 2023.
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:
Six Months Ended June 30,
2022 2021
Percentage Percentage Dollar Percent
(dollars in millions) Net Sales of
Total
Change(1)
Corporate $ 5,288.3 43.7 % $ 3,788.9 37.9 % $ 1,499.4 39.6 %
Small Business 1,024.0 8.5 915.6 9.2 108.4 11.8
Public:
Government 1,153.4 9.5 1,029.5 10.3 123.9 12.0
Education 1,944.1 16.1 2,055.4 20.6 (111.3) (5.4)
Healthcare 1,178.5 9.7 917.5 9.2 261.0 28.4
Total Public 4,276.0 35.3 4,002.4 40.1 273.6 6.8
Other 1,506.6 12.5 1,277.0 12.8 229.6 18.0
Total Net sales $ 12,094.9 100.0 % $ 9,983.9 100.0 % $ 2,111.0 21.1 %
(1)There were 127 selling days for both the six months ended
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Operating income by segment, in dollars and as a percentage of total Net sales, and the year-over-year percentage change are as follows:
Six Months Ended June 30,
2022 2021
Percent Change
Dollars in Operating Dollars in Operating in Operating
Millions Margin Millions Margin Income
Segments:(1)
Corporate $ 441.2 8.3 % $ 336.6 8.9 % 31.1 %
Small Business 93.7 9.2 86.8 9.5 7.9
Public 319.0 7.5 290.0 7.2 10.0
Other(2) 64.5 4.3 51.4 4.0 25.5
Headquarters(3) (96.2) nm* (71.5) nm* 34.5
Total Operating income $ 822.2 6.8 % $ 693.3 6.9 % 18.6 %
* 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 six months endedJune 30, 2022 increased$1,499 million , or 39.6%, compared to the six months endedJune 30, 2021 . This increase in Net sales, which also included the contribution from the acquisition of Sirius, was primarily driven by customers' priorities on digital transformation and continued focus on a hybrid work model. These factors resulted in higher Net sales across various categories, including notebooks/mobile devices, video, enterprise storage, software as a service and professional services. Corporate segment Operating income was$441 million for the six months endedJune 30, 2022 , an increase of$104 million , or 31.1%, compared to$337 million for the six months endedJune 30, 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 six months endedJune 30, 2022 increased$108 million , or 11.8%, compared to the six months endedJune 30, 2021 . This increase was primarily driven by customers' priorities on digital transformation, resulting in increased Net sales in notebooks/mobile devices, video, software as a service and professional services. Small Business segment Operating income was$94 million for the six months endedJune 30, 2022 , an increase of$7 million , or 7.9%, compared to$87 million for the six months endedJune 30, 2021 . Small Business segment Operating income increased primarily due to higher Gross profit dollars, partially offset by higher payroll.
Public
Public segment Net sales for the six months endedJune 30, 2022 increased$274 million , or 6.8%, compared to the six months endedJune 30, 2021 . This increase in Net sales, which also included the contribution from the acquisition of Sirius, was primarily driven by Healthcare and Government customers. Net sales to Healthcare customers increased by 28.4% primarily due to continued focus in digital transformation to enhance patient experiences, which resulted in increased Net sales in software as a service and professional services. Net sales to Government customers increased 12.0% primarily driven by State and Local customers, which resulted in increased Net sales in professional services and netcomm products. These increases were partially offset by decreased Net sales to Education customers of 5.4% primarily driven by decreased Net sales in notebooks/mobile devices with K-12 customers. 32
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Public segment Operating income was$319 million for the six months endedJune 30, 2022 , an increase of$29 million , or 10.0%, compared to$290 million for the six months endedJune 30, 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 six months endedJune 30, 2022 increased$230 million , or 18.0%, compared to the six months endedJune 30, 2021 . This increase was driven by both ourUK and Canadian operations as customers continued to focus on digital transformation, resulting in increased Net sales in notebooks/mobile devices, netcomm products and software as a service. Operating income was$65 million for the six months endedJune 30, 2022 , an increase of$14 million , or 25.5%, compared to$51 million for the six months endedJune 30, 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 six months
ended
Non-GAAP operating income
Non-GAAP operating income was$978 million for the six months endedJune 30, 2022 , an increase of$192 million , or 24.5%, compared to$786 million for the six months endedJune 30, 2021 . Six Months EndedJune 30 , (dollars in millions) 2022
2021
Operating income, as reported$ 822.2 $
693.3
Amortization of intangibles(1) 81.6
46.0
Equity-based compensation 44.6
36.4
Acquisition and integration expenses 26.6 6.4 Other adjustments 3.4 3.7 Non-GAAP operating income$ 978.4 $ 785.8 Non-GAAP operating income margin 8.1 %
7.9 %
(1)Includes amortization expense for acquisition-related intangible assets, primarily customer relationships, customer contracts and trade names.
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Non-GAAP net income
Non-GAAP net income was$641 million for the six months endedJune 30, 2022 , an increase of$105 million , or 19.7%, compared to$536 million for the six months endedJune 30, 2021 . Six Months Ended June 30, 2022 2021 Income before Income tax Income before Income tax (dollars in millions) income taxes expense(1) Net income income taxes expense(1) Net income As reported$ 707.6 $ (178.1) $ 529.5 $ 660.1 $ (153.4) $ 506.7 Gain on sale of equity method investment - - - (36.0) 8.8
(27.2)
Amortization of intangibles(2) 81.6 (21.2) 60.4 46.0 (7.2) 38.8 Equity-based compensation 44.6 (15.6) 29.0 36.4 (27.0) 9.4 Acquisition and integration expenses 26.6 (6.8) 19.8 6.4 (1.6) 4.8 Other adjustments 3.4 (1.1) 2.3 4.1 (1.1) 3.0 Non-GAAP$ 863.8 $ (222.8) $ 641.0 $ 717.0 $ (181.5) $ 535.5
(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.
Net sales growth on a constant currency basis
Net sales increased$2,111 million , or 21.1%, to$12,095 million for the six months endedJune 30, 2022 , compared to the six months endedJune 30, 2021 . Net sales on a constant currency basis, which excludes the impact of foreign currency translation, increased$2,171 million , or 21.9%. Six Months Ended June 30, (dollars in millions) 2022 2021 % Change(1) Net sales, as reported$ 12,094.9 $ 9,983.9 21.1 % Foreign currency translation(2) - (60.2) Net sales, on a constant currency basis$ 12,094.9 $ 9,923.7 21.9 %
(1)There were 127 selling days for both the six months ended
(2)Represents the effect of translating the prior year results of CDWUK andCDW Canada at the average exchange rates applicable for the six months endedJune 30, 2022 . 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 cash from operations and borrowings under our revolving loan facility. As ofJune 30, 2022 , we had$1.1 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 34
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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
We may from time to time repurchase one or more series of our outstanding unsecured senior notes, depending on market conditions, contractual commitments, our capital needs and other factors. Repurchases of our senior notes may be made by open market or privately negotiated transactions and may be pursuant to Rule 10b5-1 plans or otherwise.
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 six months endedJune 30, 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."
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
$0.50 May 4, 2022 May 25, 2022 June 10, 2022
On August 3, 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
on September 9, 2022 to all stockholders of record as of the close of business
on August 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.
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Cash Flows
Cash flows from operating, investing and financing activities are as follows:
Six Months Ended June 30,
(dollars in millions) 2022 2021
Net cash provided by:
Operating Activities $ 761.1 $ 344.9
Investing Activities
Capital expenditures (63.6) (38.5)
Acquisitions of businesses, net of cash acquired (28.0) (211.6)
Proceeds from sale of equity method investment - 36.0
Cash flows used in investing activities (91.6) (214.1)
Financing Activities
Net change in accounts payable - inventory financing 19.9 (150.1)
Financing payments for revenue generating assets - (46.1)
Other cash flows used in financing activities (394.8) (846.3)
Cash flows used in financing activities (374.9) (1,042.5)
Effect of exchange rate changes on cash and cash equivalents (11.1)
2.7
Net increase (decrease) in cash and cash equivalents $ 283.5 $ (909.0)
Operating Activities
Cash flows provided by operating activities are as follows:
Six Months Ended June 30,
(dollars in millions) 2022 2021 Change
Net income $ 529.5 $ 506.7 $ 22.8
Adjustments for the impact of non-cash items(1) 191.3 88.1 103.2
Net income adjusted for the impact of non-cash items 720.8
594.8 126.0
Changes in assets and liabilities:
Accounts receivable(2) (19.8) (140.5) 120.7 Merchandise inventory (109.7) (127.9) 18.2 Accounts payable-trade(3) 210.6 107.5 103.1 Other(4) (40.8) (89.0) 48.2 Cash flows provided by operating activities$ 761.1
(1)Includes items such as depreciation and amortization, deferred income taxes, provision for credit losses and equity-based compensation expense.
(2)The change is primarily due to collection performance, partially offset by higher sales activity in 2022.
(3)The change is primarily due to higher sales activity in 2022 and timing of payments.
(4)The change is primarily due to higher accrued liabilities, partially offset by higher contract assets in 2022.
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In order to manage our working capital and operating cash needs, we monitor our
cash conversion cycle, defined as days of sales outstanding in accounts
receivable plus days of supply in inventory minus days of purchases outstanding
in accounts payable, based on a rolling three-month average. Components of our
cash conversion cycle are as follows:
June 30,
(in days) 2022 2021
Days of sales outstanding (DSO)(1) 64 56
Days of supply in inventory (DIO)(2) 18 16
Days of purchases outstanding (DPO)(3) (63) (51) Cash conversion cycle
19 21
(1)Represents the rolling three-month average of the balance of Accounts
receivable, net at the end of the period, divided by average daily Net sales for
the same three-month period. Also incorporates components of other miscellaneous
receivables.
(2)Represents the rolling three-month average of the balance of Merchandise inventory at the end of the period divided by average daily Cost of sales for the same three-month period.
(3)Represents the rolling three-month average of the combined balance of Accounts payable-trade, excluding cash overdrafts, and Accounts payable-inventory financing at the end of the period divided by average daily Cost of sales for the same three-month period.
The cash conversion cycle decreased to 19 days atJune 30, 2022 , compared to 21 days atJune 30, 2021 . The overall decrease was impacted by the acquisition of Sirius. In addition, netted down revenue has an unfavorable impact to DSO and a favorable impact to DPO as the corresponding receivables and payables reflect the gross amounts due from customers and due to vendors while the corresponding sales and cost of sales are reflected on a net basis. The increase in DIO was primarily due to higher stocking positions driven by customer demand.
Investing Activities
Net cash used in investing activities decreased$123 million for the six months endedJune 30, 2022 compared toJune 30, 2021 . This decrease was primarily due to the acquisition ofAmplified IT LLC in 2021, partially offset by increased capital expenditures in 2022 due to increased investment in our information technology systems and proceeds received from the sale of an equity method investment in 2021.
Financing Activities
Net cash used in financing activities decreased$668 million for the six months endedJune 30, 2022 compared toJune 30, 2021 . This decrease was primarily due to the absence of share repurchases in 2022 and increased volume through our inventory financing arrangements, partially offset by net repayments on our revolving loan facility. For additional information regarding the inventory financing agreements and debt activities, see Note 5 (Inventory Financing Agreements) and Note 7 (Debt) to the accompanying Consolidated Financial Statements.
Issuers and Guarantors of
Each series of our outstanding unsecured senior notes (the "Notes") are issued byCDW LLC andCDW Finance Corporation (the "Issuers") and are guaranteed byCDW Corporation ("Parent") and certain of eachCDW LLC's direct and indirect, 100% owned, domestic subsidiaries (the "Guarantor Subsidiaries" and, together with Parent, the "Guarantors"). All guarantees by Parent and the Guarantors are joint and several, and full and unconditional; provided that guarantees by the Guarantor Subsidiaries are subject to certain customary release provisions contained in the indentures governing the Notes.
The Notes and the related guarantees are the Issuers' and the Guarantors' senior unsecured obligations and are:
•structurally subordinated to all existing and future indebtedness and other liabilities of our non-guarantor subsidiaries and;
•rank equal in right of payment with all of the Issuers' and the Guarantors' existing and future unsecured senior debt.
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The following tables set forth Balance Sheet information as ofJune 30, 2022 andDecember 31, 2021 , and Statement of Operations information for the six months endedJune 30, 2022 and for the year endedDecember 31, 2021 . The financial information includes the accounts of the Issuers and the accounts of the Guarantors (the "Obligor Group "). The financial information of theObligor Group is presented on a combined basis and the intercompany balances and transactions between theObligor Group have been eliminated.
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