CDW (CDW) - 2022 Q4 - Annual Report

PART I This section provides an overview of the company's business, operations, risk factors, properties, legal proceedings, and executive officers Item 1. Business CDW is a leading IT solutions provider serving over 250,000 customers in a $460 billion market - CDW is a Fortune 500 and S&P 500 company, providing IT solutions to over 250,000 business, government, education, and healthcare customers in the US, UK, and Canada[8][523] - The company operates in a large and fragmented addressable market estimated at $460 billion annually, with CDW's Net sales of $23.7 billion in 2022 representing approximately 5% of this market[9] - CDW's business is divided into three reportable segments: Corporate, Small Business, and Public, with international operations in the UK and Canada categorized under "Other"[12] - The company partners with over 1,000 brands, including major players like Apple, Cisco, Dell EMC, HP Inc., and Microsoft, generating over $1.5 billion in Net sales from each of its five largest vendor partners in 2022[13][548] - The acquisition of Sirius Computer Solutions, Inc. in December 2021 significantly enhanced CDW's services and solutions capabilities in key growth areas[543] Item 1A. Risk Factors The company faces risks from vendor dependence, technological changes, cybersecurity, macroeconomic conditions, and substantial debt - CDW's business is highly dependent on relationships with key vendor partners and wholesale distributors, where loss or alteration could negatively impact product supply and cost[52][622] - The company faces significant competition and must keep pace with rapid technological innovation, such as cloud-based solutions, which could disrupt its business model[55][56][597] - Cybersecurity is a major risk, as the company handles sensitive data and faces threats from malicious attacks, potentially leading to legal liability, remediation costs, and reputational damage[59][86][60] - The company's success depends on attracting and retaining key personnel, including sales, services, and technical coworkers, with failure potentially harming vendor and customer relationships[61][88][113] - Macroeconomic conditions, including inflation, rising interest rates, and political instability, could cause customers to postpone or reduce technology spending[97][123] - As of December 31, 2022, the company had $5.9 billion of total debt, requiring a substantial portion of cash flow for debt service and compliance with restrictive covenants[108][155] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC as of the end of the fiscal year - There are no unresolved staff comments[190] Item 2. Properties As of December 31, 2022, CDW owned or leased approximately 2.4 million square feet of space, primarily in the US, UK, and Canada - The company owns or leases a total of 2.4 million square feet of space[149] - Owned properties include a 513,240 sq. ft. distribution center in North Las Vegas, NV, and a 442,400 sq. ft. combined office and distribution center in Vernon Hills, IL[149] Item 3. Legal Proceedings The company is involved in various legal proceedings, including a Civil Investigative Demand from the US Department of Justice related to a False Claims Act investigation - The company is party to various legal proceedings that arise in the ordinary course of business[192] - A subsidiary received a Civil Investigative Demand from the US Department of Justice (DOJ) on September 20, 2021, in connection with a False Claims Act investigation regarding teaming agreements with OEMs, with the company cooperating with the DOJ[104][657] Item 4. Mine Safety Disclosures This item is not applicable to the company's business operations - Not applicable[196] Information about our Executive Officers The report lists the executive officers of the company as of February 24, 2023, including their ages and positions Executive Officers | Name | Age | Position | | :--- | :--- | :--- | | Christine A. Leahy | 58 | Chair, President and Chief Executive Officer | | Sona Chawla | 55 | Chief Growth and Innovation Officer | | Christina M. Corley | 55 | Chief Commercial and Operating Officer | | Albert J. Miralles | 53 | Senior Vice President and Chief Financial Officer | | Carolyn Wiesenhahn | 51 | Chief People Officer and Senior Vice President, Coworker Services | PART II This section covers the market for the registrant's common equity, financial performance, and market risk disclosures Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities CDW's common stock is listed on Nasdaq, with the company continuing quarterly cash dividends and an active share repurchase program - The company's common stock is listed on the Nasdaq Global Select Market under the symbol "CDW"[201] - On February 8, 2023, the Board of Directors declared a quarterly cash dividend of $0.59 per share[227] - As of December 31, 2022, $87.6 million was available under the share repurchase program, which was increased by $750 million on February 8, 2023[229] Item 6. [RESERVED] This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations CDW's 2022 Net sales grew 14.1% to $23.7 billion, with gross profit up 31.3% and strong cash flow generation Key Financial Metrics | Financial Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $23,748.7 M | $20,820.8 M | 14.1% | | Gross profit | $4,686.6 M | $3,568.5 M | 31.3% | | Operating income | $1,735.2 M | $1,419.0 M | 22.3% | | Net income | $1,114.5 M | $988.6 M | 12.7% | | Non-GAAP operating income | $2,050.5 M | $1,645.4 M | 24.6% | | Net income per diluted share | $8.13 | $7.04 | 15.5% | | Non-GAAP net income per diluted share | $9.79 | $7.97 | 22.8% | Net Sales by Segment | Segment | 2022 Net Sales (M) | % Change vs 2021 | | :--- | :--- | :--- | | Corporate | $10,350.1 | 26.5% | | Small Business | $1,938.9 | 3.7% | | Public | $8,551.3 | 4.5% | | Other | $2,908.4 | 12.4% | - Gross profit margin increased by 260 basis points to 19.7% in 2022, driven by a more favorable product mix, a higher mix of netted down revenue, and increased sales and margins from services following recent acquisitions[268] - Free cash flow for 2022 was $1.3 billion, a significant increase from $476.7 million in 2021[262] - The cash conversion cycle improved to 21 days at the end of 2022, down from 24 days at the end of 2021, influenced by the Sirius acquisition and an increase in netted down revenue[219][300] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks relate to interest rate fluctuations and foreign currency exchange rates - The company's main market risks are from changes in interest rates and foreign currency exchange rates[171] - As of December 31, 2022, the company had $857 million of variable rate debt outstanding, exposing it to risk from interest rate increases[141] - Foreign currency risk stems from operations in the UK and Canada, with exposure primarily to the British pound and Canadian dollar, though the direct effect on operations has not been material[173] Item 8. Financial Statements and Supplementary Data This section presents audited consolidated financial statements with an unqualified opinion, detailing critical audit matters and financial notes - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements, confirming they are presented fairly in conformity with U.S. GAAP[15][177] - Critical Audit Matters identified were (1) Revenue recognition, due to judgment in determining principal vs. agent status and allocating transaction prices, and (2) Accounting for the Sirius acquisition, due to significant estimation in valuing customer relationship intangible assets[17][23][22] Consolidated Balance Sheet (As of Dec 31) | Consolidated Balance Sheet (As of Dec 31) | 2022 | 2021 | | :--- | :--- | :--- | | Total Current Assets | $6,564.0 M | $6,478.1 M | | Total Assets | $13,131.5 M | $13,199.4 M | | Total Current Liabilities | $4,947.1 M | $5,096.0 M | | Total Long-term Debt | $5,866.4 M | $6,755.8 M | | Total Liabilities | $11,528.2 M | $12,493.7 M | | Total Stockholders' Equity | $1,603.3 M | $705.7 M | Consolidated Statement of Operations (Year Ended Dec 31) | Consolidated Statement of Operations (Year Ended Dec 31) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net sales | $23,748.7 M | $20,820.8 M | $18,467.5 M | | Gross profit | $4,686.6 M | $3,568.5 M | $3,210.1 M | | Operating income | $1,735.2 M | $1,419.0 M | $1,179.2 M | | Net income | $1,114.5 M | $988.6 M | $788.5 M | - The acquisition of Sirius in 2021 for net consideration of $2.5 billion resulted in the allocation of $1.2 billion to identified intangible assets, primarily $1.1 billion for customer relationships[21][448] - As of December 31, 2022, the company had total debt of $5.9 billion, consisting of a term loan facility, revolving loan facility, and various senior notes with maturities ranging from 2024 to 2031[489] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any matter of accounting principles or practices, or financial statement disclosure - None[720] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[696] - Management's assessment concluded that the company's internal control over financial reporting was effective as of December 31, 2022[698][722] - There were no changes in internal control over financial reporting during the fourth quarter of 2022 that have materially affected, or are reasonably likely to materially affect, internal controls[723] Item 9B. Other Information The company reports no other information for this item - None[706] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - None[746] PART III This section incorporates by reference information on corporate governance, executive compensation, and related party transactions Item 10. Directors, Executive Officers and Corporate Governance Information regarding the company's directors, executive officers, and corporate governance practices is incorporated by reference - Information required for this item is incorporated by reference from the company's 2023 Proxy Statement[748] Item 11. Executive Compensation Details concerning executive compensation are incorporated by reference from the company's definitive proxy statement - Information required for this item is incorporated by reference from the company's 2023 Proxy Statement[708] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information about security ownership of certain beneficial owners, management, and related stockholder matters is incorporated by reference - Information required for this item is incorporated by reference from the company's 2023 Proxy Statement[730] Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference - Information required for this item is incorporated by reference from the company's 2023 Proxy Statement[749] Item 14. Principal Accountant Fees and Services Information concerning principal accountant fees and services is incorporated by reference from the company's definitive proxy statement - Information required for this item is incorporated by reference from the company's 2023 Proxy Statement[709] PART IV This section details the exhibits and financial statement schedules filed as part of the Form 10-K report Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K report - This item lists the consolidated financial statements and exhibits filed with the annual report[733][734] - Exhibits filed include various credit and indenture agreements, forms of equity award agreements, and certifications by the CEO and CFO[755][757] Item 16. Form 10-K Summary The company provides no summary for this item - None[760]