CDW Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. CDW provides IT products, solutions and services to business, government, education and healthcare customers in the U.S., U.K. and Canada.
Financial highlights
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $5,628.3 million | $6,215.5 million | $16,357.5 million | $18,310.4 million |
| Gross profit / margin | $1,227.7 million / 21.8% | $1,233.2 million / 19.8% | $3,498.6 million / 21.4% | $3,505.5 million / 19.1% |
| Operating income / margin | $478.4 million / 8.5% | $466.4 million / 7.5% | $1,245.9 million / 7.6% | $1,288.6 million / 7.0% |
| Net income | $315.5 million | $297.8 million | $808.2 million | $827.3 million |
| Diluted EPS | $2.32 | $2.17 | $5.92 | $6.04 |
| Operating cash flow | Not separately stated for the quarter | $1,062.2 million | $1,094.0 million |
- Q3 year-over-year: Sales declined 9.4%, while gross profit dollars fell 0.4%. Operating income rose 2.6%, net income 5.9% and diluted EPS 6.9%. Higher gross margin and lower selling and administrative expenses supported earnings despite lower sales.
- Nine-month year-over-year: Sales declined 10.7%, operating income 3.3% and net income 2.3%. Gross profit dollars were nearly flat; gross margin increased 2.3 percentage points. Adjusted free cash flow, a non-GAAP measure, increased to $1,112.9 million from $1,043.4 million; reported free cash flow decreased to $947.5 million from $996.8 million.
- Cash and liquidity: Cash was $440.7 million at September 30, versus $315.2 million at year-end 2022. The company reported $0.9 billion of additional borrowing availability under its revolving facility. Cash conversion cycle improved to 15 days from 18 days a year earlier.
- Debt: Long-term debt, including current maturities, was $5,701.5 million; the company reported net debt of $5,260.8 million. It prepaid $100 million of term-loan principal during the first nine months and reported compliance with debt covenants.
Material changes and business trends
- Management attributed weaker sales to economic uncertainty and customers reducing, delaying or reprioritizing technology spending. Q3 declines were concentrated in Corporate (13.6%), Small Business (23.0%) and Other, comprising U.K. and Canadian operations (16.7%). Public sales were nearly flat; education and healthcare grew modestly.
- Hardware sales declined, including notebooks and mobile devices, while software sales increased. Management cited improved product margins, lower notebook mix and a more favorable contribution from netted-down revenue, primarily software as a service.
- For the first nine months, corporate sales fell 15.1% and small business sales 21.7%; Public sales fell 2.5%. Public operating income increased 4.0%, while Corporate and Small Business operating income declined.
- Q3 net income included adjustments that CDW excludes from its non-GAAP results, including acquisition-related amortization, equity compensation, acquisition and integration costs, transformation initiatives and workplace optimization. The company reported Q3 non-GAAP operating income of $556.3 million and non-GAAP diluted EPS of $2.72; these measures are not directly comparable to GAAP results and reflect management’s exclusions.
Outlook, risks and contingencies
- The filing provides no specific numeric earnings or revenue guidance. Management expects customer spending and public-sector budgets to remain exposed to uncertain economic conditions, inflation, interest rates and changing priorities. It noted that historical seasonality, including stronger fourth-quarter Corporate sales, has been less consistent since 2020.
- Risks identified include reduced technology spending, vendor-partner relationships, competition, cybersecurity and IT system risks, labor costs, product supply and delivery disruptions, foreign exchange, credit and inventory exposure, indebtedness and legal or regulatory matters.
- CDW disclosed ordinary-course legal proceedings and audits, for which it did not believe a material loss beyond amounts recognized was reasonably possible as of September 30, 2023. A subsidiary is cooperating with a Department of Justice False Claims Act investigation concerning OEM teaming agreements; CDW said it cannot assess the probability of an outcome or any possible loss.
- Capital returns included $450 million of share repurchases and $238.4 million of dividends during the first nine months. On November 1, 2023, the board declared a quarterly dividend of $0.62 per share, subject to the stated record and payment dates.
Important facts for investors to verify
- Whether Corporate and Small Business demand stabilizes, and whether the pronounced sales declines persist.
- Whether gross-margin improvement can be sustained as product mix, software and services contributions change.
- Cash generation and working-capital trends, including accounts payable and inventory financing balances.
- Debt, variable-rate exposure and the company’s available revolver capacity; also consider that the $0.9 billion availability is subject to facility terms and reservations.
- Developments in the DOJ investigation and other legal matters, plus the assumptions and exclusions used in CDW’s non-GAAP measures.