CDW Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; comparisons are with the same 2022 periods. CDW provides IT products, solutions and services to business, government, education and healthcare customers in the U.S., U.K. and Canada.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $5,626.1M | $6,145.8M | $10,729.2M | $12,094.9M |
| Gross profit | $1,181.5M | $1,168.2M | $2,270.9M | $2,272.3M |
| Operating income | $412.2M | $435.3M | $767.5M | $822.2M |
| Net income | $262.6M | $279.3M | $492.7M | $529.5M |
| Diluted EPS | $1.92 | $2.04 | $3.60 | $3.87 |
| Gross margin | 21.0% | 19.0% | 21.2% | 18.8% |
| Operating margin | 7.3% | 7.1% | 7.2% | 6.8% |
- Q2 sales fell 8.5%; six-month sales fell 11.3% (11.4% lower on an average-daily-sales, constant-currency basis). Q2 non-GAAP operating income was $529.8M and non-GAAP diluted EPS was $2.56; these measures exclude specified costs, including acquisition-related amortization, equity compensation and workplace optimization.
- Hardware represented 76.1% of Q2 sales, versus 76.9% a year earlier. Six-month hardware sales declined while software sales increased.
- Six-month operating cash flow was $593.6M, down from $761.1M. Capital expenditures were $71.3M; acquisitions used $75.5M. The company’s non-GAAP free cash flow was $683.9M, including a $161.6M adjustment for inventory-financing changes.
- Cash was $203.9M at June 30, versus $315.2M at year-end 2022. Total debt was approximately $5.8B and net debt was $5,559.3M. The revolving facility had $1.0B of additional borrowing availability, with $616M reserved for floorplan financing. CDW reported compliance with debt covenants.
Material changes and management commentary
- Management attributed weaker sales to economic uncertainty and customers delaying, reducing or reprioritizing technology spending. Corporate sales fell 15.6% and Small Business sales fell 20.8% in Q2; Public sales rose 2.3%, led by government. Six-month sales declined across all segments.
- Gross margin improved, mainly from lower notebook mix, improved product margins across categories and a greater mix of netted-down revenue, particularly software as a service. Selling and administrative expenses rose 5.0% in Q2, including costs from workforce and real-estate reductions and higher payroll, partly offset by lower discretionary spending.
- Q2 operating income declined 5.3% despite higher gross profit. For the six months, operating income declined 6.7%; higher variable interest rates partly offset the benefit of lower debt. CDW prepaid $50M of term debt and amended its credit facilities to transition from LIBOR to SOFR, effective for interest periods beginning after July 1, 2023.
- CDW repurchased approximately 2.1M shares for $396.1M and paid $159.3M in dividends in the first half. The board declared a further $0.59-per-share dividend, payable September 12, 2023.
- Management said it had adequate liquidity for at least the next year, while noting that operating cash generation depends on execution, economic conditions and working-capital management. The filing provides no numerical earnings or revenue guidance.
Risks, contingencies and unusual items
- Risks highlighted include inflation, higher interest rates, weaker technology demand and customer budgets, vendor and supply-chain dependence, competition, cybersecurity and IT-system risks, receivables and inventory exposure, labor costs, foreign exchange, and substantial indebtedness.
- A subsidiary is cooperating with a Department of Justice False Claims Act investigation concerning OEM teaming agreements. CDW said it cannot assess the probability or range of any potential loss. It did not believe other disclosed legal matters were reasonably likely to result in material losses beyond amounts recognized, if any; outcomes remain uncertain.
- Workplace optimization costs were $42.0M in Q2 and $42.9M for the first half, and were excluded from the company’s non-GAAP measures. Acquisitions used $75.5M of cash in the first half, compared with $28.0M in the prior-year period.
Investor verification priorities
- Track whether corporate and small-business demand stabilizes, and whether public-sector strength continues.
- Assess whether higher gross margins persist as product, channel and SaaS revenue mix changes.
- Review operating cash flow alongside working-capital movements and the use of inventory-financing arrangements; reconcile the company’s adjusted free-cash-flow measure.
- Monitor debt, variable-rate interest exposure, available revolver capacity and capital returns, including repurchases and dividends.
- Follow workplace optimization costs and the DOJ investigation; the filing does not quantify a potential loss for the investigation.