CDW Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022 unless stated otherwise. CDW provides IT products, solutions and services to business, government, education and healthcare customers in the U.S., U.K. and Canada.
Financial performance
- Revenue: $5.103 billion, down 14.2%; average daily sales fell 15.6%. The filing attributes the decline primarily to lower hardware sales as customers deferred or paused IT spending.
- Gross profit and margins: Gross profit was $1.089 billion, down 1.3%. Gross margin increased to 21.3% from 18.6%, driven primarily by improved product margin and a higher mix of netted-down revenue, particularly software.
- Operating results: Operating income was $355.3 million, down 8.2%; reported operating margin was 6.9% versus 6.5%. Selling and administrative expense rose 2.4% to $734.1 million.
- Net income and EPS: Net income was $230.1 million, down 8.0%; diluted EPS was $1.68 versus $1.83. Effective tax rate declined to 22.3% from 24.3%, primarily reflecting higher excess tax benefits on equity compensation.
- Non-GAAP measures: Non-GAAP operating income was $434.3 million, down 6.0%, with an 8.5% margin versus 7.8%. Non-GAAP net income was $278.7 million, down 7.6%, and non-GAAP diluted EPS was $2.03 versus $2.20. These measures exclude specified items, including acquisition-related amortization, equity compensation, acquisition and integration costs, and transformation costs.
- Cash flow: Operating cash flow was $365.4 million versus $380.8 million. Capital expenditures were $31.7 million. Company-defined free cash flow was $411.3 million versus $466.2 million; its calculation includes the net change in inventory financing.
- Liquidity and debt: Cash was $279.4 million at quarter-end, down from $315.2 million at year-end 2022. Total debt was approximately $5.8 billion; net debt was $5.516 billion, compared with $6.212 billion in Q1 2022. CDW reported $1.1 billion of additional revolving-facility borrowing availability and compliance with debt covenants. Inventory-financing obligations were $532 million.
- Capital returns: CDW repurchased 1.0 million shares for $200 million and paid $79.9 million in dividends during the quarter. The quarterly dividend was $0.59 per share; a subsequent $0.59 dividend was declared May 3, 2023.
Comparative and segment trends
- Hardware revenue fell to $3.688 billion from $4.682 billion; software revenue rose to $944.7 million from $798.4 million, and services revenue was $442.1 million versus $437.5 million.
- Sales declined across the Corporate segment (16.1%), Small Business (21.5%), Public (10.8%) and Other (11.7%). Public-sector weakness was concentrated in Education, down 26.3%; Government and Healthcare sales were broadly level with the prior year.
- Operating income declined across Corporate, Small Business and Public; Other operating income was approximately unchanged. Corporate and Small Business sales were particularly affected by weaker notebook and mobile-device demand.
- Cash conversion cycle improved to 18 days from 20 days in Q1 2022, mainly due to lower inventory days. Accounts receivable days increased to 72 from 67, while inventory days declined to 15 from 17.
Outlook, commentary and risks
- The filing provides no quantitative full-year revenue or earnings guidance. Management describes continued macroeconomic uncertainty, including inflation, higher interest rates and weaker economic growth, and says customers may delay, pause or reduce technology investment.
- Management cited customer focus on cost management and business optimization, shifting technology priorities, and uncertainty in government, healthcare and education budgets. Cloud, hybrid infrastructure, security and “as a service” offerings are identified as relevant customer trends.
- Higher payroll costs from increased coworker count, travel, software licenses and transformation investment weighed on expenses; lower performance-based compensation partly offset these increases.
- Risks highlighted include customer spending and budget changes, vendor-partner relationships, competition, cybersecurity and IT-system risks, accounts receivable and inventory exposure, supply interruptions, labor costs, foreign exchange, indebtedness and legal or regulatory matters.
- CDW reported a DOJ Civil Investigative Demand concerning a False Claims Act investigation into manufacturer teaming agreements. The company is cooperating and cannot assess the outcome or any potential loss. For other ordinary-course proceedings, it said it did not believe a material loss beyond amounts already recognized was reasonably possible, while noting outcomes are unpredictable.
- Quarterly results included $22.5 million of acquisition spending, $200 million of share repurchases and a $50 million voluntary term-loan prepayment. The company reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether customer IT-spending delays persist, particularly for notebooks and mobile devices, and whether software growth continues.
- Whether improved gross margin can be sustained as revenue mix and pricing change, while operating expenses remain elevated.
- How operating cash flow, receivables, inventory financing and the 18-day cash conversion cycle develop in subsequent quarters.
- Debt repayment capacity, variable-rate exposure, revolving-facility availability and the effects of continued dividends and share repurchases.
- Any developments in the DOJ investigation, other legal matters, or customer and public-sector budget conditions.